Ethereum's 'Rate Cut' Debate: Is EIP-8363 a Golden Window for Staking?

As we enter the era of compound interest, discussions about actively lowering future returns are changing the staking logic of Ethereum.

While the Federal Reserve has yet to reach a conclusion on whether to raise or lower interest rates, Ethereum staking, the "on-chain financial benchmark interest rate," has already begun discussions about a "rate cut."

The recently widely discussed EIP-8363 proposes a rather counterintuitive new issuance mechanism: as the ETH staking ratio continues to rise, the proportion of destruction in validator rewards will gradually increase, and when the overall staking ratio approaches 50%, the destruction will completely offset the issuance rewards.

In other words, when the overall ETH staking ratio reaches 50%, the annualized yield for staking will drop to nearly 0!

Of course, this does not mean that the total yield from staking will strictly drop to zero, as validators may still earn execution layer fees, MEV, and other income. However, for the issuance rewards that currently account for the vast majority of staking returns, this undoubtedly comes close to a "cutting off the fuel at the source."

A single stone stirs up a thousand waves.

As of the time of writing, over 40 million ETH have already participated in staking, close to about 35% of the total supply, and the protocol layer APR has already dropped to about 2.6%. Thus, a question that once seemed somewhat distant has suddenly been placed before Ethereum:

With an increasing number of ETH willing to participate in staking, is there still a need for Ethereum to continue encouraging more ETH to enter staking through new issuance?

1. Is Ethereum starting to worry about "too much staking"?

To understand this, we first need to review the different stages that Ethereum staking has gone through.

As is well known, when the PoS mechanism was first launched, the most important goal was simply to get enough ETH to willingly enter the Beacon Chain, establishing a sufficiently high economic security for the entire network.

To achieve this, the protocol rewarded validators with new issuance while designing a dynamic yield curve: early participants in staking could earn higher returns, while as more ETH entered staking, the yield would gradually decrease.

This is why the early staking APR of Ethereum was once much higher than it is today, and has now dropped to about 2.6%. Theoretically, this mechanism itself has an "automatic brake" built in.

After all, as yields decrease, there will always be those who feel it is no longer worthwhile, ultimately allowing the entire staking market to find a balance at some level. However, the core starting point of EIP-8363 is precisely the belief that this brake may not be heavy enough.

According to the current issuance curve, even as more ETH enters staking, the consensus layer yield for validators still has an implicit lower limit of about 1.5%. Therefore, theoretically, it is possible that even if only a little over 1% yield remains, a large amount of capital would still be willing to enter.

As an increasing proportion of ETH is handed over to trading platforms, custodians, LST protocols, and professional operators, the marginal contribution of additional staking to economic security will become smaller and smaller. However, the risks of staking centralization, governance capture, and a large amount of ETH being controlled by a few operating entities may increase accordingly.

At the same time, staking rewards essentially come from the new issuance of ETH. The higher the staking ratio, the higher the issuance cost the protocol pays for network security; ETH holders who do not participate in staking will need to bear the corresponding dilution.

Thus, the problem EIP-8363 aims to solve is actually whether it is still necessary to spend more ETH to purchase additional security with increasingly lower marginal value when the network has already bought enough security?

Of course, the solution it proposes is not yet a confirmed monetary policy for Ethereum, and there is considerable controversy within the community. One very realistic counterargument is that if yields are pushed too low, the first to feel "it is not worthwhile" and exit may be the Solo Stakers who need to bear hardware, electricity, and operational costs.

In contrast, large institutions, due to economies of scale, MEV income, or product demand, may have more ability to stay, which could ultimately lead to a situation where "the staking rate has decreased, but the remaining participants are more concentrated," clearly conflicting with the proposal's intention to improve decentralization and resistance to capture.

Around this point, the community is still in ongoing discussions, whether EIP-8363 will ultimately be implemented and in what form is still undecided.

However, it at least releases a very clear signal that Ethereum has begun to rethink a question that was rarely considered in the past—whether the returns from staking are too generous.

2. While preparing for a "rate cut," staking has just entered the era of compound interest

Interestingly, while Ethereum discusses lowering long-term staking returns, the efficiency of funds in staking itself has just undergone a significant upgrade.

This is the EIP-7251 brought by Pectra (see extended reading "When 8 million ETH Start to 'Move': After the Pectra Era, Will Staking Experience Structural Changes?").

Simply put, Ethereum's native staking previously could not automatically compound interest; it could only earn on the principal (32 ETH), but the interest would not automatically accumulate into the principal for further earnings. EIP-7251 allows native staking to truly form a "principal generates ETH → rewards enter principal → more ETH generates new ETH" compounding cycle for the first time.

In fact, from a one- or two-year perspective, the difference in numbers between a yield of over 2% with or without compounding is not that significant.

But where it really plays a role is time.

Assuming a user originally plans to hold ETH for three years, five years, or even longer, starting to participate in staking from day one and continuously reinvesting the generated ETH into the principal will magnify the difference over time.

For ordinary users using LST, while "compound interest" is not a new concept, many LSD/LST products have already allowed users to indirectly enjoy the accumulation of staking rewards. However, the Pectra upgrade makes automatic compounding a capability supported by the protocol itself for the first time, rather than relying on external products, which will undoubtedly further enhance the capital efficiency of the entire staking infrastructure.

Therefore, looking at EIP-8363 and Pectra together creates a seemingly contradictory yet actually reasonable combination: Ethereum is striving to make "how to stake" more efficient, but that does not mean it still hopes to use more ETH issuance to continuously enhance the economic incentives for "why to stake."

The former addresses capital efficiency, while the latter addresses how much cost the protocol should pay for security.

Because of this, future Ethereum staking may exhibit an increasingly obvious trend: the mechanisms will become more mature, compounding will become more convenient, but the yield obtained solely from protocol issuance may actually decrease.

This change at the protocol layer is also gradually being transmitted to the product experience of ordinary users. For example, imToken has planned to further support the "automatic compounding" of ETH native staking, allowing the new capabilities brought by Pectra to not only stay at the level of validators and large staking institutions but also gradually enter the wallet entry that ordinary long-term holders can directly use.

3. Is now actually a golden window for staking?

This brings us back to the question that ordinary ETH holders truly care about.

If future staking APR may continue to decline, does that mean one should "take advantage of the current high returns and hurry in"?

Here, we need to eliminate a common misunderstanding: participating in staking now does not lock in today's yield of about 2.6-3%.

Because Ethereum's staking is not a long-term bond with a fixed coupon rate after purchase; even if EIP-8363 is ultimately implemented, or Ethereum modifies the issuance curve in other ways in the future, the yields for validators will also change accordingly.

So the so-called "window" is not about rushing to grab a 2.6% long-term certificate of deposit before Ethereum "cuts rates."

What is truly valuable is the time cost.

Assuming a user has a certain amount of ETH and originally plans to hold it for five years. If they do not participate in staking in the first year and only decide to start in the second year, it will not make the second year's yield higher, nor can they make up for the ETH rewards missed in the first year. More importantly, the rewards that could have been earned in the first year also lose the opportunity to continue compounding over the next four years.

If the long-term direction of Ethereum staking is indeed to gradually increase the staking ratio and decrease the yield, then this issue will become even more apparent. The later one starts, the less compounding time they may enjoy, and the lower the base yield.

This is where the argument that "now may be a window" truly stands, in other words, it is a time window.

Especially for users who are already prepared to hold ETH long-term and have no significant liquidity needs in the short term, the decision-making process for staking may also need to undergo some changes.

Moreover, I personally believe that EIP-8363 is a trial balloon; regardless of how the community decides later, the overall trend of Ethereum's token economics is destined to shift from coarse incentives to more refined and restrained issuance designs.

Of course, this does not mean that all ETH should be staked, as any yield comes with costs and risks:

• Running a native validator oneself can maximize control and native protocol rewards, but requires at least 32 ETH and entails costs such as node operation, offline penalties, slashing, and daily maintenance;
• Staking-as-a-Service can delegate technical work to professional operators but increases reliance on service providers;
• Liquid staking has a lower capital threshold and better liquidity; for example, users can directly access services like Lido through self-custody wallets like imToken while managing their own wallets and participating in ETH staking, but it also increases risks related to smart contracts, governance, and LST price deviations;
• Centralized exchanges are simpler but imply higher custody and centralization assumptions;

Therefore, for users who may sell ETH in the short term, need to frequently move funds, or are unwilling to bear these additional risks, changing their asset structure for a few percentage points of yield may not be worthwhile.

However, if the premise changes to "this ETH is originally intended to be held long-term," then the answer to the question may start to become different.

In conclusion

Looking back at the changes in Ethereum staking over the past few years, it is actually quite interesting.

The completion of the Beacon Chain and The Merge marked the underlying transition from PoW to PoS, Shapella solved the issue of "can ETH be withdrawn after being staked," and cleared key obstacles for the further development of the liquid staking market; with Pectra, native validators have begun to possess automatic compounding and higher capital efficiency.

And today’s EIP-8363 has further transformed the question into how much new ETH Ethereum should pay for staking when the number of participants is already sufficient.

From "finding ways to get more people to stake" to "starting to worry about whether too much staking has occurred," this itself indicates a change in the stage of Ethereum Staking.

The world changes, and progress is made day by day; this is also a question that a market must inevitably answer as it transitions from early expansion to maturity.

Future staking may become increasingly convenient, mature, and resemble a standardized ETH underlying yield infrastructure, but it may not necessarily become more profitable. For those truly prepared to hold ETH long-term, this may also be another insight left by EIP-8363:

**As yields themselves begin to become increasingly scarce, the truly precious aspect of compounding is time.

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