A new proposal sparking debate within the Ethereum community foresees a significant reduction in staking rewards. Under Ethereum Improvement Proposal 8361 (EIP-8361), the plan is to reduce validator yields from 2.6% to 1.2%. This represents a reduction of approximately 54% and will be implemented gradually over 18 months. The aim of the proposal is to reduce the supply by burning a portion of validator rewards as the total amount of ETH staked increases.
Impacts on DeFi
This proposal would require repricing Ethereum’s liquid staking, leveraged cycles, and lending markets, all built on staking yield. If WETH borrowing costs remain high, these cycles could unravel, making leveraged ETH borrowing unprofitable. Aave founder Stani Kulechov noted that such a cut could weaken institutional ETH demand and solo staking. Mike Silagadze of Ether.fi argued that the proposal threatens staking-related DeFi and confidence in Ethereum’s ability to set its own monetary policy.
The Future of Staking Cycles
The proposal could impact cycles where users stake more ETH by using liquid staking tokens as collateral and borrowing WETH. With today’s 2.6% yield and a WETH borrowing rate of around 1.5%, the unleveraged spread is positive at 1.1%. However, this spread becomes negative when the yield drops to 1.2%, making it costly for users when leverage is applied. Kulechov noted that this could reduce demand for ETH borrowing and lead to lower lending rates on platforms like Aave, Morpho, and Spark.
DeFi Protocols and Staking Returns
Silagadze predicts that yields on liquid staking tokens, such as Lido’s stETH and Rocket Pool’s rETH, will also decline. Restaking tokens may have to rely more heavily on incentive and point programs to maintain their advantages. Platforms like Pendle may repricing ETH yields by trading them directly. Automated ETH vaults may have to reduce their leverage or take on more risk to defend their strategies. Solo stakers will face lower rewards with fixed operating costs.
