Ethereum Core Developers have officially approved EIP-7514 for inclusion in the upcoming Dencun upgrade which is set to take place in late 2023. The Ethereum Improvement Proposal (EIP) aims to slow down the growth rate of ETH staking, giving the Ethereum community more time to devise a better validator reward scheme.

The main change introduced by EIP-7514 is the establishment of a constant value of 8 as the Max Epoch Churn Limit, which is the upper limit for the validator activation queue. Previously, this churn limit was calculated based on the total number of validators divided by 65536, which currently equates to about 12 per epoch.

The decision to approve EIP-7514 was made during an Ethereum Core Dev Meeting, as announced by Tim Beiko in a tweet: “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 emphasizes the significance of this change and provides insights into the consensus among Core Developer teams. Dankrad Feist, a Researcher at the Ethereum Foundation, explained the rationale behind the approval, stating:

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 continuous rise in the staking ratio could lead to a reduction in the amount of liquid ETH available for trading. If the staking ratio approaches 100%, it could create a scarcity of supply, potentially driving up the price of ETH. However, Ethereum developers are not advocating for this scenario due to possible technical and security implications.

EIP-7514 indirectly impacts the ETH price by influencing its supply side, but immediate and direct effects on the price are not expected. Instead, any potential impact on the price is likely to manifest over a longer period of time.

The motivation behind EIP-7514, as explained on GitHub, is to “mitigate the negative externalities of a very high level of total ETH supply staked before a proper solution is implemented.” If the deposit queue remains consistently full, the share of ETH supply staked will reach 50% by May 2024, 75% by September 2024, and 100% by December 2024.

It is worth noting that despite the relatively modest returns, further capital staking is not necessarily discouraged, especially considering the frequently significant and unpredictable returns from MEV. Therefore, EIP-7514 serves as a temporary measure to buy time for the community to discuss and develop comprehensive solutions to the emerging challenges.

ETH Price Gains Momentum

At the time of writing, ETH is trading at $1,628. On Monday, the ETH price bounced off the 78.6% Fibonacci retracement level at $1,536. To maintain upside momentum, breaking above the 20-day EMA at $1,639 and subsequently surpassing the 61.8% Fibonacci level at $1,665 is crucial.

Featured image from iStock, chart from TradingView.com

Summary

The Ethereum Core Developers have approved EIP-7514, a proposal aimed at slowing down the growth rate of ETH staking. The main change brought by EIP-7514 is the establishment of a constant value for the Max Epoch Churn Limit. This decision indirectly affects the ETH price by influencing its supply side, potentially creating a scarcity of available ETH for trading. However, immediate and direct effects on the price are not expected. The approval of EIP-7514 serves as a temporary measure, providing the Ethereum community with more time to develop comprehensive solutions to the challenges posed by the increasing staking ratio.

FAQs

What is EIP-7514?

EIP-7514 is an Ethereum Improvement Proposal that aims to slow down the growth rate of ETH staking by setting a constant value for the Max Epoch Churn Limit.

What is the Max Epoch Churn Limit?

The Max Epoch Churn Limit is the upper limit for the validator activation queue. Previously, it was calculated based on the total number of validators divided by 65536.

How does EIP-7514 impact the ETH price?

EIP-7514 indirectly affects the ETH price by manipulating its supply side. If the staking ratio gets close to 100%, it could create a scarcity of available ETH for trading, potentially influencing the price positively. However, immediate and direct effects on the price are not expected.

What are the long-term implications of EIP-7514?

EIP-7514’s long-term implications involve the growth of staking and supply side management. It provides the Ethereum community with more time to devise comprehensive solutions to the challenges posed by the increasing staking ratio.