Aave founder revolts against proposal to cap Ethereum staking incentives at 50% of supply​

Ethereum (ETH) community members have pushed back against a new proposal that seeks to change the network's staking issuance policy by gradually reducing staking rewards as the number of staked ETH approaches 50% of total supply.

EIP-8361 aims to curb Ethereum's rising staking ratio

The proposal EIP-8361, titled Tapered Issuance Burn, was submitted on Tuesday by President of Ethereum France Jerome De Tychey, alongside other developers, including Pintail, Dapplion, Ladislaus0x and Justin Drake.

The proposal argues that Ethereum's current issuance curve continues to incentivize staking even as the percentage of ETH locked in validators rises. Tychey noted that Ethereum’s staking ratio surpassed one-third of total ETH supply in April and continues to increase monthly.

The developers warn that if the current trend continues, more than 70 million ETH could be staked by January 2028, representing more than 55% of the total supply under their worst-case projection.

EIP-8361 proposes introducing a new permanent parameter called the "SATURATION_BALANCE," set at approximately half of Ethereum's supply. Under the proposal, a portion of each validator's idealized duty rewards would be deducted and burned, with the burn fraction increasing from zero to 100% as the staking ratio approaches the 50% threshold.

The proposal noted that the mechanism would cause net staking yields to taper linearly toward zero at a 50% staking ratio. The aim is to allow the staking market to settle below 50% based on the risk premium demanded by participants.

“ETH supply growth will be bounded and more predictable. Combined with the EIP-1559 and Blob burn, the supply will more often decrease,” Tychey wrote on X.

The proposal also highlighted that excessive staking could create security and monetary risks for Ethereum. It stated that lower real yields could eventually push solo stakers out of the network while concentrating validator activity among custodians and staking providers.

Growing issuance also acts as a dilution cost for ETH holders who do not stake. The proposal warns that at high staking ratios, liquid staking tokens and other derivatives could increasingly replace ETH as the ecosystem's underlying working asset.

Aave founder warns proposal could hurt ETH adoption and DeFi

Some Ethereum community members showed strong opposition to the proposal, including Aave founder Stani Kulechov, who stated that the proposal is harmful to the network.

"Unfortunately this proposal doesn't achieve the outcome it tries to achieve and is actually hurtful for Ethereum," Kulechov wrote on X.

He argued that the proposal could make Ethereum staking yields unpredictable and potentially uneconomical for many participants, particularly institutional investors and solo stakers.

He also raised concerns about the proposal's potential impact on decentralized finance (DeFi). Kulechov stated that removing staking rewards above the 50% threshold could make ETH borrowing strategies less viable and weaken some borrowing and yield use cases within DeFi.

"Ethereum should not be punished for its growth," he stated.

He further highlighted that investors seeking yield could shift capital from ETH into other yield-generating assets, including stablecoins, potentially reducing ETH's role within the DeFi ecosystem. Kulechov added that the proposal should not be allowed to move forward.

ETH trades at $1,863, up 0.8% in the past 24 hours at the time of writing.