Ethereum’s Staking Feature Raises Concerns About Network Performance
One year after Ethereum’s software upgrade, known as the Merge, the network is facing challenges due to its own success. The Merge transitioned Ethereum to a more energy-efficient system, but the increasing popularity of its staking feature is causing concerns about network performance.
Rising Popularity of Staking
Ethereum’s staking feature allows users to stake Ether (ETH) tokens, and this feature has seen a surge in demand. According to data from Staking Rewards, approximately 20% of all Ether tokens, valued at around $41.5 billion, are currently staked. If this trend continues, up to 50% of all Ether could be staked by May and potentially 100% by December 2024.
Proposal to Address High ETH Supply Staked
An Ethereum Improvement Proposal co-authored by Ethereum core developers coordinator Tim Beiko aims to address the high level of ETH supply staked. The proposal suggests slowing down growth and states that if the deposit queue remains full, 50% of ETH supply will be staked by May 2024 and 100% by December 2024.
Challenges with Increased Staking
As the levels of ETH staked increase, strain is put on the consensus layer. A larger number of validators leads to increased gossip messages and a growing Beacon state size. It is also unclear how much additional security benefits come from additional economic weight.
Mitigating Risks
To mitigate these risks, Ethereum developers have agreed to cap the number of new validators joining the network every six minutes. This change will be implemented in the next major Ethereum software upgrade later this year. By limiting new validators, the point at which 100% of all circulating Ether is staked will be delayed.
Earning Returns through Staking
Staking has become appealing to Ethereum users as it offers a reliable way to earn returns in the crypto market. With most tokens trading below their late 2021 highs, staking Ether can provide around a 4% return.
Market Impact
The current situation could solidify the market position of existing staking providers, making it difficult for new players to enter the market.
Hot Take: Ethereum’s Staking Success Poses Network Performance Challenges
While Ethereum’s Merge upgrade successfully improved energy efficiency, the growing popularity of its staking feature is causing concerns about network performance. With a significant portion of Ether tokens already staked and a potential for 100% staked by December 2024, strain is being put on the consensus layer. To address this, Ethereum developers have proposed measures to slow down growth and limit new validators. However, this situation may favor existing staking providers and hinder new entrants. Despite these challenges, staking remains an attractive option for earning returns in the crypto market.
Featured Image via Midjourney
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