According to a recent report by Olga Kharif for Bloomberg, one year after Ethereum’s significant software upgrade known as the Merge, the network is now facing challenges arising from its own success. The upgrade was a smooth transition to a more energy-efficient system, but the burgeoning popularity of its staking feature is raising concerns about network performance.
Bloomberg reports that the Merge led Ethereum to a more energy-efficient way of processing transactions. One of the key incentives offered was the ability to stake Ether (ETH) tokens, a feature that has seen a surge in demand. This rising popularity is now causing worries about the network’s capacity.
Data from Staking Rewards, as cited by Bloomberg, shows that about 20% of all Ether tokens, valued at roughly $41.5 billion, are currently staked. If this trend continues, according to an Ethereum Improvement Proposal (EIP-7514) co-authored by Ethereum core developers coordinator Tim Beiko, up to 50% of all Ether could be staked by May and potentially 100% by December 2024.
The proposal states:
“This proposal aims to mitigate the negative externalities of very high level of total ETH supply staked before a proper solution is implemented. In other words, this proposal accepts the complexities of changing the rewards curve and is meant only to slow down growth.
“In the event that the deposit queue stays 100% full, the share of ETH supply staked will reach 50% by May 2024, 75% by September 2024, and 100% by December 2024. While rewards decrease as the validator set size increases, at 100% of ETH supply staked, yearly consensus rewards alone (excluding MEV/transaction fees) for validators still represent ~1.6% of their stake. This small yield does not necessarily dissuade additional capital staking due to the often much higher and unpredictable yields from MEV. As such, the equilibrium point of the validator set size can be close to its maximum possible. Liquid staking tokens (LSTs) also contribute to this, given stakers can use them as they use unstaked ETH.
“As the levels of ETH staked increase, more strain is put on the consensus layer. A larger number of validators leads to an increase in gossip messages, as well as a growing Beacon state size. Additionally, as the amount of stake grows, it’s unclear how much marginal security benefits come from additional economic weight.“
Per Bloomberg’s report, the appeal of staking has grown because it’s one of the few reliable ways to earn returns in the crypto market. With most tokens still trading below their late 2021 highs, Bloomberg says Ether owners can earn around 4% by staking.
To mitigate these risks, Ethereum developers have apparently agreed to cap the number of new validators, who operate the staking wallets, that can join the network every six minutes. This change will be part of the next major Ethereum software upgrade later this year. This action should delay the point at which 100% of all circulating Ether is staked.
Jim McDonald, CTO at Attestant, one of the largest Ethereum staking providers, indicated to Bloomberg that the current situation could cement the market position of existing staking providers, making it challenging for new players to enter the market.
Featured Image via Midjourney
