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.
Implications For Ethereum Price
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…