Reasons Not to Reduce Ethereum Staking Rewards to Zero Now

The Ethereum community is heated over the EIP Tapered Issuance Burn (TIB), which aims to lower staking yields to as low as zero. With the changing Ethereum network and the reorganization of validator roles, the inflation model must eventually change. However, there are doubts about whether TIB is the best solution.

Summary

• A proposal called TIB (EIP-8363, Tapered Issuance Burn) has been submitted to burn part of the rewards so that the net yield for validators reaches zero when the staking ratio hits 50%. This comes just two days before the review schedule for the upcoming hard fork, Hegotá, and the community is criticizing both the content of the proposal and the lack of prior consultation.

• While the burning applies equally to everyone at the protocol level, it is not neutral in the real validator market. As yields decrease, solo stakers and independent operators are pushed out first, concentrating the validator set among a few large operators, which could disrupt the entire on-chain economy that uses staking yields as a benchmark interest rate.

• Nevertheless, Ethereum's issuance model must change at some point. This is because the role and cost structure of validators at the network level are being reorganized. However, the order of operations is incorrect. We should first reach a consensus on how the role of future validators will change and what security budget is needed for that role before designing the reward structure.

1. Introduction: An Old Debate Suddenly Becomes Reality

The debate over Ethereum's issuance has been ongoing for a long time. Discussions regarding the dilution of ETH assets created by staking rewards have been ongoing since 2024 (these debates are well summarized on issuance.wtf). The question of whether increasing staking truly makes the network safer is not new at all.

However, on August 4, 2026, just two days before the ACDC call discussing the review agenda for the next hard fork, Hegotá, a radical proposal to adjust the mechanism related to Ethereum's issuance was submitted: TIB (EIP-8363, Tapered Issuance Burn) (the initially submitted number 8361 was already assigned to another proposal, so it has been suggested to change it to 8363).

Since then, the Ethereum community has been flooded with counterarguments. There are debates about the economic and security effects of the proposal, but the manner in which a proposal to change the monetary policy of the network was presented without prior consultation has also been criticized.

This article will introduce the background and operation of TIB, the logic of its proposers, and then clarify our position. To summarize our stance, we agree that the issuance structure of Ethereum should change in the long term. However, we oppose the form and timeline proposed by TIB.

2. EIP-8363 Tapered Issuance Burn

2.1 Background: ETH Issuance Without a Brake

Under the current issuance curve, the yield for a single validator on the consensus layer is inversely proportional to the square root of the total active stake. As staking increases, the yield for each validator decreases, but the newly issued ETH, meaning inflation, continues to rise. According to the proposers' calculations, even if all ETH is staked, about 1.5% nominal yield remains. In short, the current issuance curve is effective in encouraging minimal staking participation, but there is no explicit mechanism to stop the increase at the top.

This situation has suddenly become a reality because staking is increasing very rapidly. By April 2026, the staking ratio exceeded about one-third of the total supply, and the validator entry queue has been saturated at maximum capacity for months. Approximately 1.75 million ETH is added monthly, with a monthly staking ratio increase of about 1.5 percentage points, and even under conservative assumptions, it is projected that by January 2028, 70 million ETH, more than 55% of the total supply, could be staked. The entry of institutions like Ethereum DAT and staking ETFs is a major cause, and this trend is expected to grow rather than shrink.

Source=ValidatorQueue

2.2 Operation: Burning Part of Validator Rewards

TIB is not a proposal to change the reward curve itself. It calculates and pays out the rewards for attestations, block proposals, and sync committee rewards according to the current method. Then, for each epoch, it burns a portion of the idealized reward assigned to validators based on the total staking rate.

It is important to note that the burning occurs based on the assigned duties regardless of whether they are performed. If the duties are performed, part of the received rewards is burned, and if the duties are not performed properly, penalties are added to the burn. Since the amount burned is the same regardless of whether the duties are performed, there is a preserved micro-incentive to maintain nodes and vote correctly. The net reward for validators who perform their assigned duties correctly becomes zero at the saturation point. In other words, when the total staking of the network reaches the saturation point, one must perform their duties well to achieve zero, and failing to do so only increases the penalties.

Source=pintail.xyz

The burn rate is determined by the total active stake D and the saturation balance D_sat.

Source=Jang Hyuk-soo, Populus Tech Researcher

D_sat is approximately 60.25 million ETH, about half of the supply at the time of the proposal. The reason for using a fixed balance as a constant instead of a dynamic ratio of 50% is that the consensus layer does not directly know the total supply of ETH, and if the supply changes later, the actual saturation ratio will gradually drift, which is a limitation. As staking increases, the burn rate gradually rises, and the net yield becomes zero at a staking ratio of 50%. The total issuance peaks at about 0.5% of the annual supply at a staking ratio of approximately 19.8% and then decreases to zero at 50%. This 50% is not a specific target ratio but merely the saturation point where issuance incentives are completely extinguished. According to the TIB proposal, the actual balance is expected to form below 50%, where the risk premium required by stakers meets the net yield.

The design philosophy can be said to resemble EIP-1559. If the deducted amounts were redistributed to other validators or foundations, new beneficiary groups and governance competition would arise, so the logic is that burning, which does not belong to anyone, is the most neutral.

There is also a shock-absorbing mechanism. The burn curve will be applied from the first day of activation, but if it is activated as is, yields will plummet, so the BASE_REWARD_FACTOR will start at 128 and linearly decrease to 64 over 18 months. Since the rewards, penalties, and burn criteria are all scaled together with this factor, it is claimed that the relative incentives between duties will be maintained even during the transition period. If the preparation period for the fork is extended, the market will have about two years to adapt.

2.3 Arguments for the Proposal: Less Staking Means More Security

The first argument from the proposers is security. If tens of millions of ETH are already locked as slashing collateral, the marginal security provided by additional stakes is small. On the other hand, the costs associated with new incoming stakes being concentrated among exchanges, custodians, and large staking operators increase. As ETH and validation authority move into large custodial structures, the last safety mechanism of the Ethereum social layer, which could remove captured validator sets through a fork, also weakens.

The second argument is the monetary nature of ETH. Inflation imposes a dilution cost on all ETH holders who do not stake. In a structure where the choice is forced to "stake or be diluted," the higher the staking ratio, the more advantageous it becomes to hold LST (liquid staking tokens) or custodial products rather than native ETH, leading to increased dependence on issuers from the most neutral and trustless assets of the ecosystem. If economic security is defined as the number of stakes multiplied by the value of ETH, then reducing dilution to maintain the monetary premium is also a claim of security.

Interestingly, the proposers use the protection of solo stakers as a justification. The current issuance curve is gradually pushing solo stakers out due to increasing dilution, taxation on nominal returns, and continuously declining yields. The introduction of TIB would cap dilution and ensure that 100% of the execution layer profits remain with block proposers, preventing legitimate voters from suffering losses.

Clearly, there is a problem, but doing nothing is also not neutral. Maintaining the current issuance structure indirectly supports the increase in staking and inflation. The arguments regarding the adjustment of Ethereum's issuance deserve serious consideration.

3. However, TIB is overly hasty and not neutral

Before discussing this, I must clarify that the company I belong to, Populus, operates Ethereum validators and is directly affected by the reduction in validator profits. This means that this article is written with vested interests in mind. What I will discuss is not an argument against adjusting Ethereum's issuance. We must first verify what results issuance adjustments create in the validator market structure and the ecosystem built upon it, and TIB skips that verification.

3.1 The Premise is Flawed

The most fundamental issue lies in the premise. The proposition "staking will not stop as long as rewards are positive" simplifies demand to a function of expected returns. In reality, staking demand is intertwined with liquidity, taxes, regulations, custody, collateral usability, and risk preferences. As many community members have pointed out, just because there are positive yield assets does not mean all assets will gravitate towards them, much like cash and government bonds can coexist.

The 55% staking rate proposed for 2028 by TIB proposers is merely one possible scenario, not a definitive future. Additionally, setting the saturation point that determines the burn rate at half the supply (60.25 million ETH) is not a natural law but a policy value determined by humans. Before establishing specific policies like TIB, community consensus on matters such as how much economic security Ethereum needs is necessary. Can we set the security budget of the world's largest on-chain financial network with a "minimum survival security" approach?

3.2 The Non-neutrality of Burning

The burning mechanism operates uniformly at the protocol level, but in reality, the cost structures of participants differ, making it non-neutral. The costs incurred in operating a validator arise in dollars, not ETH. For those actually running validators, most costs occur monthly and are fixed, regardless of revenue. Costs for server and data center rentals, dedicated lines and traffic, monitoring and alert systems, 24/7 on-call personnel, and various security certifications and audit costs are all paid in dollars (or in our case, Korean won), not ETH.

In this situation, solo stakers or independent operators are most sensitive to declining yields. In contrast, large custodians, exchanges, ETF operators, and major LST operators can absorb shocks through economies of scale, cross-subsidization, and strategic loss acceptance. Some may treat staking not as a profit-making venture but as a cost to secure custody and trading clients. Therefore, the conclusion that lowering yields will first halt the growth of large operators does not hold.

In the Ethereum Magicians thread discussing the TIB proposal, there are many opinions suggesting that independent operators may exit first, worsening the number of actual operational entities and the Nakamoto coefficient. There is also a balloon effect where ETH that exits due to cost issues moves to riskier or more centralized custodial yield products. If a concentrated set of validators causes problems, and the only remaining means is social slashing, the last deterrent becomes a constant means of correcting issues created by the system itself. A proposal aimed at protecting solo stakers should not create a structure that pushes solo stakers and independent operators out of the market first.

3.3 Asymmetry in Operating Profits

TIB is a proposal that only affects rewards at the consensus layer. Actual revenues generated at the execution layer, such as priority fees and MEV, remain unchanged. As consensus rewards decrease, the proportion of MEV in total revenue increases. Of course, access to MEV in a PBS structure is equitable. The problem is that while issuance rewards are given to all validators in a sustainable form, MEV is akin to a lottery concentrated in a few high-value blocks.

For large operators running validators or staking pools, this volatility averages out. However, for solo stakers who have opportunities to propose blocks only a few times a year, the entire yield becomes dependent on luck. Moreover, as the impact of consensus layer rewards diminishes, it is also important to note that they become more sensitive to other ongoing changes, such as ePBS or MEV burning, which can influence execution layer rewards.

3.4 Impact on On-chain Economy

There are also issues arising from outside the protocol. The yield from ETH staking is not just a problem for infrastructure operators like validators. The staking APY serves as a benchmark interest rate for the entire on-chain economy. Changes in interest rates in the lending market, leveraged staking loops, fixed-income protocols, and structured products are all directly linked to this staking yield.

Additionally, LST is the base of DeFi money legos. If the yield of LST, the largest collateral in major lending markets, converges to zero, collateral demand, loop strategies, and related liquidity will be restructured in a chain reaction, and there is also the possibility of large-scale liquidation of leveraged staking positions near zero yields. Stani Kulechov, the founder of Aave, criticized this proposal, stating that it makes staking yields unpredictable and could render them completely uneconomical in some cases. The perspective of the TIB proposal is limited to validator incentives. There is a lack of analysis on the impact it may have on the on-chain economic ecosystem based on staking yields.

3.5 Procedural Issues

As mentioned earlier, this proposal was submitted just two days before the ACDC call on August 6. It can be seen as an attempt to get it on the review list (PFI). In fact, PFI is not a confirmation of inclusion but a stage to initiate review, and PFI is merely a procedural step to start discussions. Being on the PFI does not mean it will be definitively applied. However, submitting a proposal that affects monetary policy, validator market structure, and the entire DeFi ecosystem without sufficient prior research to align with the fork schedule can undermine procedural trust in itself.

3.6 Uncertainty and Institutional Funds

There are also issues from the perspective of institutional investors. Under the current curve, staking yields move relatively predictably along the square root of the total stake. This predictability has allowed institutions designing products based on expected cash flows, such as staking ETFs or Ethereum DATs, to enter ETH staking.

However, the burn rate proposed by TIB introduces much greater yield volatility and uncertainty. Their yields become much more sensitive to the entry of other participants than before. For institutional investors who prefer predictable cash flows, the fact that ETH staking may become an asset with unpredictable yields and could, in some cases, be uneconomical is a problem.

The emergence of TIB is fundamentally rooted in the surge of institutional staking from entities like DAT and ETFs. However, this proposal seeks to address the issue by driving away that very institutional demand. While it may achieve the goal of curbing staking through TIB, it must not conflict with the broader ecosystem's efforts to anchor institutional assets and payment rails onto Ethereum.

4. The Ethereum Issuance Model Must Change Eventually... A Matter of Order

The critique that the current issuance curve lacks explicit limits is valid. Avoiding the long-standing debate over issuance volume is not the solution; rather, I believe that the issuance model must inevitably change at some point. The current issuance curve is designed based on the premise of the validator model from the early Beacon Chain, where all validators participate in verification through re-execution and perform similar roles with a uniform unit of 32 ETH.

That premise is crumbling, and it is highly likely to change completely within a few years. In the Lean Ethereum roadmap, L1 zkEVM will shift the work of validators from re-execution to the verification of zero-knowledge proofs (ZK proofs) created by provers. ePBS will separate block building from proposals, Lean consensus will simplify signature aggregation with ZK, and the minimum stake will drop from the current 32 ETH to 1 ETH.

As roles change and diversify, the capital costs, operating expenses, security risks, and revenue sources associated with each role will also change. With the consensus and execution structure being reconfigured in this way, we cannot remain forever trapped in an issuance curve designed based on the cost structure of 2020. Therefore, changing the reward structure requires a more macro-level design than TIB. In a decentralized network like Ethereum, monetary policy and security budgets are difficult to reverse once applied. The suggestion to independently reduce issuance volume first sounds quite irresponsible.

However, the interests tied to the Ethereum network and the asset ETH are becoming increasingly complex. If left as is, the debate over issuance volume may never reach a conclusion due to numerous conflicting interests. The more institutional entry accelerates, the more challenging it will become. Perhaps the radical nature and timing of this TIB proposal is a strategy to break that deadlock and place the issue of issuance adjustment at the center of the debate. In fact, the entire Ethereum community is currently discussing their positions and opinions regarding ETH issuance volume.

I oppose the current form of the TIB proposal and the schedule targeting Hegota. At the same time, I support discussions on redesigning the issuance model and will actively participate in future discussions as a validator operator.

Inflation ultimately represents a cost to security. At this point, it is essential to reach a consensus on what roles validators will play in the evolving Ethereum network and how much security budget will be allocated to those roles.

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