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Ethereum's Proposed Reward Curve Change

Ethereum's Proposed Reward Curve Change

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Ethereum researchers propose capping staking rewards at 67 million ETH to reduce inflation and counter Lido's growing dominance.
What: The proposal changes Ethereum's staking reward curve from uncapped square-root growth to a dampened curve that peaks at 67 million staked ETH and declines beyond, cutting daily issuance from 2,700 ETH to much lower levels.
Why it matters: The change addresses Ethereum's inflation problem (currently issuing far more than burning) and aims to prevent liquid staking tokens like Lido's stETH from displacing ETH as the network's base monetary asset.
Takeaway: Monitor the proposal's progress if you hold ETH or use liquid staking protocols, as it could significantly impact staking yields and LST economics.
Deep dive
  • Ethereum currently issues ~2,700 ETH daily to validators while only burning ~90 ETH via EIP-1559, creating significant net inflation
  • The proposal replaces the uncapped square-root issuance formula with a dampened curve using factor 1 + D/k where k ≈ 67 million ETH
  • Staking rewards would peak when 67 million ETH is staked, then decline as more ETH is staked beyond that threshold
  • Researcher Anders Elowsson estimates two-thirds of the issuance cut removes deadweight costs (hardware, risk, taxes, opportunity costs) that validators face
  • The remaining one-third effectively redistributes value from stakers back to all ETH holders through reduced inflation
  • Lido's Dima Gusakov claims the change would effectively kill liquid staking tokens (LSTs) by making staking less attractive
  • The proposal's supporters argue Lido's ~30% share of all staked ETH represents the real systemic risk to Ethereum
  • StETH's growth trajectory could potentially displace ETH as Ethereum's base monetary asset if left unchecked
  • The debate highlights tension between maximizing staking participation and maintaining ETH's monetary premium
Decoder
  • LST (Liquid Staking Token): A tradeable token representing staked ETH, allowing users to earn staking rewards while maintaining liquidity
  • stETH: Lido's liquid staking token that represents staked ETH and can be used in DeFi protocols
  • EIP-1559: Ethereum upgrade that burns a portion of transaction fees, reducing ETH supply
  • Issuance schedule: The formula determining how much new ETH is created and distributed to validators as staking rewards
  • Deadweight costs: Economic inefficiencies and expenses (hardware, risk, taxes) that don't create productive value
  • Base monetary asset: The fundamental unit of account and store of value within the Ethereum ecosystem
Original article

Ethereum's proposed staking reward curve change, co-authored by EF researchers Anders Elowsson, Ansgar Dietrichs, and Caspar Schwarz-Schilling, replaces the uncapped square-root issuance schedule with a dampened curve (factor: 1 + D/k, k = ~67M ETH) that peaks at that staking level and declines beyond, reducing daily validator issuance from the current ~2,700 ETH against only ~90 ETH burned via EIP-1559. Elowsson estimates that two-thirds of the issuance reduction eliminates deadweight costs accruing to validators (hardware, risk, taxes, and opportunity cost), while one-third redistributes surplus from stakers to all ETH holders. Lido's Dima Gusakov argues the change kills LSTs, but the article counters that Lido's ~30% share of staked ETH is the primary systemic risk, with stETH's growth trajectory threatening to displace ETH as Ethereum's base monetary asset.

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