A New Proposal Would Reduce the Amount of Staking on Ethereum. Here's What It Means for Investors.

Staking Ethereum (CRYPTO: ETH) pays about 2.6% a year in yield. About 35% of the coin's supply was staked as of Aug. 18. On Aug. 4, a group of six researchers filed a draft Ethereum Improvement Proposal (EIP), EIP-8363, to taper that yield dramatically.

The chain's core developers declined to advance the proposal just two days later, but the fight over EIP-8363 started is still running, and it's worth understanding. Here's what you need to know.

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This would change staking economics tremendously

The first fact to appreciate is that staking rewards on Ethereum are created by freshly minting new Ether coins.

Effectively, that makes it a transfer of value, as stakers who validate on-chain transactions get paid in coins and, at the same time, everyone else's value is diluted to pay them. EIP-8363 would change that paradigm to charge validators a deduction on every duty they perform, and then destroy those coins. The deduction would climb with the staked total, eventually hitting 100% at a sum of 60.2 million Ether staked. The proposed change would phase in during an 18-month span.

For holders who don't stake, the appeal is obvious here.

New issuance of Ether would peak at 0.5% of the circulating supply per year, at about 20% staked, which is a level Ethereum passed long ago, and then fall away. Every burned coin lifts each remaining holder's proportional claim, and that could be bullish because scarcity is a big part of what gives a coin its value.

It wouldn't benefit everyone

Businesses built around harvesting staking yield are the obvious opponents of the proposal.

In particular, Aave founder Stani Kulechov calculated that all-in validator income would fall by 48% at a 39 million Ether staked base. His sharper point is that cutting the return by so much could filter out everyone who was previously staking for money, thereby disincentivizing crypto exchanges, digital asset treasuries, and fund sponsors who currently stake large volumes of the coin.

Then there's the proposed tax. The phase-in would double a reward multiplier and then burn half of it, so credited rewards from staking would double while the actual cash flowing to stakers would not. Thus, in places where staking is taxed on receipt of assets (even if it's only momentary) rather than the sale of the coins generated from staking rewards, taxable income would double, too.

Not every skeptic is defending yield. Lido, the largest staking service, posted on X (formerly Twitter) on Aug. 14 that it favors Ether issuance reform, but that this draft has not cleared the bar for risk review.

Separately, Ethereum is not alone here in its struggles to rework its validator economics. Solana validators are also currently weighing a proposal to double the rate at which new coin creation tapers off. The fact that these two chains are facing the same question at the same time indicates that holder-friendly tokenomics (and staker-friendly tokenomics) is an emerging battle front in the crypto sector, so don't expect these debates to resolve anytime soon.

But where does this leave the coin?

EIP-8363 was left out of the list of proposals to be considered in the Hegota upgrade package scheduled for next year, and no client team has backed it. But there hasn't been any actual decisions about inclusion, either. Hegota's scope stays open until Nov. 8, and the upgrade is not expected before mid-2027, so it's still possible that this issue will resurface in a different form or under a different proposal name.

Investors should probably refrain from investing in coins or projects that are heavily reliant on income from staking Ether until this issue is settled. Likewise, don't get too attached to the yield on your Ether today, because it's very likely to change in the long run, most probably to the downside.

Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Aave, Ethereum, Lido DAO, and Solana. The Motley Fool has a disclosure policy.