Two researchers from the Ethereum Foundation (EF) proposed earlier this year to slow down the rate at which new Ether (ETH) tokens are issued. It was a deliberate strategy to lessen the incentives for new investors, or “stakers,” who lock tokens onto the blockchain in order to bolster network security.
The profits these investors intend to get in the form of staking yields depend heavily on the newly produced ETH.
According to the researchers’ reasoning, there are now enough stakers on the blockchain to effectively secure it, and any further increases in participation could actually allow quickly expanding third-party staking platforms like Lido to gain unwelcome domination.
Since the overall quantity of the cryptocurrency wouldn’t increase as quickly, the suggested reforms would also strengthen ether as a medium of exchange by effectively reducing its rate of inflation.
The destruction of a portion of the transaction fees, or “burn,” roughly balances the creation of new ETH. Transaction fees rise exponentially as a result of an increase in transactions, which also results in a spike in the quantity of ETH destroyed.
The pace at which rewards are now given out is 166 times the square root of the total amount of ETH pledged. According to this formula, ETH is created more quickly when staking rises.
However, some community members are now pushing back, wondering whether altering Ether’s tokenomics is actually necessary and, more importantly, whether the Ethereum Foundation has an excessive amount of influence over code updates on the decentralized network.
Ansgar Dietrichs and Caspar Schwarz-Schilling, both EF researchers, first presented the idea in February. It proposes adjusting the blockchain’s settings to ensure that the yearly ETH issuance does not above 0.4%, which is a step decrease from the existing 1.5% effective limit.
Reducing the incentives for newcomers may make sense as leading Ethereum researchers are content with the quantity of stakers that are now attempting to safeguard the network. Also, the modification would spare ETH investors from further dilution.
The researchers stated that the present rate of supply “dilutes ETH holders beyond what is necessary for security.” They calculated that the plan would result in about a third less ETH staking yields.
The idea, according to some Ethereum community members, is moving too quickly and hasn’t given enough time for outside input. “If it’s not broke, don’t fix it,” is what Coinbase Cloud protocol specialist Viktor Bunin stated on the social media network X.
Diminished ETH staking yield
The primary mechanism that keeps the Ethereum network safe is ETH staking: Users can deposit (“stake”) ETH with the network in exchange for yield and to assist in running the chain thanks to Ethereum’s “proof-of-stake” consensus architecture.
Dietrichs and Schwarz-Schilling’s main worry is that an excessive number of ETH tokens are being staked on the network through outside liquid staking services like Lido, which are crypto protocols that stake on users’ behalf and then issue derivative assets known as “liquid staking tokens” (LSTs) that correspond to the underlying deposits of their users.
The EF researchers express fear that LSTs, such as the most traded asset on Ethereum outside of the ETH token itself, Lido’s stETH token, may eventually displace the native currency of the blockchain as the de facto money of the network, weakening the security of the entire system.
Ethereum’s security model depends on ETH’s value to function, and the main motivation behind the new proposal is the fear that ETH’s price might drop in comparison to other assets if it were to lag behind LSTs.
Expanding on the original suggestion, Mike Neuder, another researcher at the EF, explained that stakers will need to “rely on exogenous rewards for profitability” as the “real yield from staking goes to zero.”
Ethereum’s economic model might be improved by lowering the ETH issuance rate because it would make ETH scarcer and possibly more valuable.
However, some community members are contesting the claim that Ethereum’s economic model will be strengthened by altering the blockchain’s tokenomics.
Co-founder of the cryptocurrency investing business DBA Jon Charbonneau stated on X that “these tweaks try to solve an unsolvable problem of fundamental tradeoffs in PoS.” “Proof-of-stake,” or PoS, is the name of the fundamental procedure or “consensus mechanism” that keeps the blockchain safe.
Important players in the Ethereum ecosystem, particularly at the Ethereum Foundation, responded sceptically to the doubts.
However, staking token protocols may have undue power over the Ethereum network. The network’s governance and decentralization are at risk because of this.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
