Ethereum Core Developers have officially approved EIP-7514 for inclusion in the upcoming Dencun upgrade scheduled for late 2023. This Ethereum Improvement Proposal (EIP) is primarily intended to slow the growth rate of ETH staking, thereby increasing the Ethereum community gets extra time to build. an improved validator reward scheme.
The main change brought about by this EIP is setting the Max Epoch Churn Limit, the upper limit of the validator activation queue, to a constant value of 8. Previously, the churn limit was calculated by “The total number of validators/65536 ” which today corresponds to approximately 12 per era.
The decision followed an Ethereum Core Dev Meeting, as described in a tweet by Tim Beiko: “Another Ethereum #AllCoreDevs wrap-up: we discussed 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 Specifications PR to be updated in the coming days to reflect all of this.”
Beiko’s statement underlined the importance of this change and provided insight into the consensus among the Core Developer teams. Dankrad Feist, researcher at the Ethereum Foundation, outlined the importance of the approval. Feist stated:
My reasoning for why I am in favor of EIP-7514. It is currently unclear whether (especially liquid) staking will continue to grow indefinitely. In the event that the withdrawal queue does not clear in the coming months, the lower churn limit will give the Ethereum community the time needed to research, discuss and implement solutions.
Implications for the Ethereum price
The continued increase in the stake ratio could result in a decreasing amount of liquid ETH available for trading. If the stake ratio approaches 100%, it could cause a supply shortage, positively affecting the ETH price. However, based on the information presented, Ethereum developers do not advocate this scenario due to potential technical and security implications.
EIP-7514 therefore indirectly affects the ETH price by manipulating the supply side, although no immediate direct effects on the price are expected. Instead, any potential impact on price would likely materialize over a longer period of time.
The motivation behind EIP-7514, as detailed on GitHub, is to “mitigate the negative externalities of a very high level of total ETH supply before a proper solution is implemented.” If the deposit queue remains 100% full, the share of ETH supply will reach 50% in May 2024, 75% in September 2024, and 100% in December 2024.
Notably, the modest returns do not necessarily discourage further capital investment, especially given MEV’s often substantial and erratic returns. Therefore, EIP-7514 serves as an interim measure, giving the community time 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, the long-term implications, especially in terms of driving growth and supply-side management, could be significant. The community and investors alike will be closely watching the aftermath of the implementation of this EIP in the Dencun upgrade.
ETH price builds momentum
At the time of writing, ETH was trading at $1,628. On Monday, ETH price bounced off the 78.6% Fibonacci retracement level at $1,536. A break above the 20-day EMA at $1,639 and consequently above the 61.8% Fibonacci level at $1,665 is crucial to maintain upside momentum.
Featured image from iStock, chart from TradingView.com
