Key takeaways
- Ethereum staking saw unprecedented growth, but this caused problems for the network, leading to the proposal of EIP-7514 to resolve the issues.
- EIP-7514 suggests capping the growth rate of validators in order to slow down the rate of ETH staking and prevent the network from being overwhelmed.
- Although EIP-7514 is a short-term solution, it allows the Ethereum developer community to find long-term solutions to resolve staking issues and ensure network stability.
Ethereum staking was introduced to improve network security and stability and has since seen unprecedented growth, with the current percentage of ETH staked exceeding 20% of the total ETH supply.
While it was intended to improve the network, the consequences of excessive staking were not seriously considered during its implementation, and this now poses a problem for the Ethereum network. Ethereum's high staking volume is such a problem that its developers are considering EIP-7514, a proposal that changes how Ethereum staking works.
So, what is Ethereum EIP-7514 and how will it solve the Ethereum staking problem?
Why is Ethereum staking a problem?
Ethereum crypto staking involves validators locking up certain ETH in a special contract for a certain period of time. In return, they are rewarded with an annual fee of around 3.9%, and the more a validator stakes, the higher the long-term rewards. This incentive makes it attractive for potential validators to join the network.
Now imagine Ethereum as a busy hive. When people stake their ETH, which is like buying a ticket to join the hive, they become worker bees (validators).
More worker bees mean more commotion in the hive. While a bustling hive can be a sign of a strong, healthy network, too much can lead to traffic jams, making it difficult for all the bees to do their jobs efficiently.
As more and more ETH is staked, the pressure on the consensus layer amplifies due to an increase in the number of validators. This leads to an increase in messages and a growing Beacon channel (the ledger of player accounts). Although higher participation improves network security, the additional benefits diminish as the level of participation skyrockets.
Additionally, if the trend continues unbridled, almost the entire ETH supply could be staked, which despite the drop in rewards does not deter further stakes due to the yields high and unpredictable Extractable value from miner (MEV) and the call of liquid staking tokens.
This development highlights the need for critical evaluation to ensure the longevity and stability of Ethereum.
What is EIP 7514 and how will it solve Ethereum staking issues?
EIP-7514 responds to the skyrocketing levels of ETH staked by proposing a change in the growth rate of the validator. Instead of the existing exponential growth, this suggests a shift to a linear model by capping the churn limit of epochs.
Epoch Churn Limit is a setting that controls the number of validators that can join or leave the network within a specific time frame, also called an epoch, which lasts 6.4 minutes and involves adding 32 new validator slots every the 12 seconds. Introducing an epoch cap means that the network will slow down the speed at which new validators can join the network, thereby slowing down ETH staking.
If implemented, this will prevent the Ethereum network from reaching a point where half of the total ETH supply is staked by May 2024 and potentially 100% by December 2024, as predicts Dankrad Feist, lead developer of Ethereum. Ethereum.org.
This solution is essential because such high staking levels could potentially disrupt the network balance and exacerbate the pressure on the consensus layer.
The potential impact of EIP 7514 on Ethereum
The EIP 7514 proposal is not a long-term solution, given that the impact of staking was not fully understood when it was introduced to the Ethereum blockchain. However, it works as a short-term solution.
Introducing a hard cap on the validator churn limit significantly reduces the number of new validators that can join each epoch, increasing the time it would take for staked ETH to account for significant portions of the network.
Of course, this would happen assuming the validator activation queue remains full and staking demand is not affected by the change.
While this solution does not fully resolve the underlying issue, it gives the Ethereum developer community ample time to find long-term solutions to the staking issues. Some suggested long-term solutions include reducing rewards to make staking less attractive, introducing MEV burn, tackling Lido monopoly by making it easier for liquid staking parties to enter, and increasing staking by validator.
However, these solutions are untested and, given the ever-evolving nature of blockchain technology, which always introduces new challenges, implementing them without a clear understanding of their impact could trigger second-order effects unprecedented.
Community response and ongoing discussions
The response from the Ethereum community to EIP-7514 has been mixed, with both support and concerns regarding the proposal.
On the one hand, this is seen as a pragmatic step to manage the rapid growth of staking, thereby avoiding potential strain on the network, and therefore a necessary measure before an upgrade that could address the problem more robustly. On the other hand, concerns have been expressed about the rushed nature of the proposal.
There is a call for further debate and exploration of alternative solutions that address the issue of high levels of ETH being staked without compromising other aspects of the network.
The Ethereum Dencun upgrade, likely to be implemented in 2024, will feature EIP-7514 as the focal point of discussions with the community, anticipating how the implementation of this proposal will unfold.
Future Implications of EIP-7514
The conversation around EIP-7514 highlights the dynamic nature of Ethereum governance and the community's proactive approach to addressing emerging challenges. At the very least, EIP-7514 could set a precedent for addressing unforeseen challenges, but it cannot be considered without examining the long-term implications.