Ethereum Core Developers have officially approved EIP-7514 for inclusion in the upcoming Dencun upgrade which is slated for late 2023. This Ethereum Improvement Proposal (EIP) primarily aims to decelerate the growth rate of ETH staking, thereby providing the Ethereum community additional time to craft an improved validator reward scheme.
The main modification brought by this EIP is setting the Max Epoch Churn Limit, the validator activation queue upper limit, to a constant value of 8. Previously, the churn limit was calculated by taking “The total number of validators/65536,” which at present equates to about 12/epoch.
The decision followed an Ethereum Core Dev Meeting, as described in a tweet by Tim Beiko: “Wrapped up another Ethereum #AllCoreDevs: we covered devnet updates, additions to Dencun, and had a full overview of Reth. […] EIP-7514 will be part of the Dencun upgrade! Expect the EIP and associated CL specs PR to be updated to reflect all of this in the coming days.”
Beiko’s statement underscored the importance of this change and provided insights into the consensus among Core Developer teams. Dankrad Feist, a Researcher at the Ethereum Foundation, outlined the importance of the approval. Feist stated:
My reasoning on why I’m for EIP-7514. It is currently unclear if (especially liquid) staking will keep growing indefinitely. In the case that the withdrawal queue does not empty over the next few months, the lower churn limit will give the Ethereum community the time needed to research, debate and implement solutions.
The staking ratio’s continual rise could result in a diminishing amount of liquid ETH available for trading. Should the staking ratio near 100%, it might produce a supply scarcity, thereby influencing the ETH price positively. However, from the information presented, Ethereum developers are not advocating for this scenario due to potential technical and security implications.
EIP-7514, therefore, indirectly impacts the ETH price by manipulating its supply side, though immediate, direct effects on the price aren’t anticipated. Instead, any potential influence on price would likely manifest over an extended period.
The motivation behind EIP-7514, as detailed on GitHub, is to “mitigate the negative externalities of very high level of total ETH supply staked before a proper solution is implemented.” If 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.
Remarkably, the modest returns don’t necessarily deter further capital staking, especially with the frequently substantial and erratic returns from MEV. Therefore, EIP-7514 serves as an interim measure, buying time for the community to deliberate and develop comprehensive solutions to the emerging challenges.
In summary, while the immediate effects of EIP-7514 on the ETH price remain to be seen, its long-term implications, especially in terms of staking growth and supply side management, could be substantial. The community and investors alike will closely monitor the aftermath of this EIP’s implementation in the Dencun upgrade.
At press time, ETH was trading at $1,628. On Monday, ETH price bounced off the 78.6% Fibonacci retracement level at $1,536. A breakout above the 20-day EMA at $1,639 and consequently above the 61.8% Fibonacci level at $1,665 is critical to maintain upside momentum.
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