Ethereum Proposal: Reduction of Staking Rewards Threatens Small Validators and Lido

A technical proposal on Ethereum (ETH), led by researcher Justin Drake and titled EIP-8361 , envisions a gradual reduction and eventual elimination of staking rewards for network validators. Currently, these rewards play a key role in the security and decentralization of Ethereum, a network operating under proof-of-stake (PoS) since the The Merge upgrade in 2022. While the network shows stable activity, with gas fees around 1.11 gwei according to the latest on-chain data, this proposal could disrupt the staking ecosystem. What happened The EIP-8361 proposal suggests an initial 50% reduction in staking rewards, from 3.2% to about 1.6% per year, followed by a gradual elimination over five years. According to Justin Drake’s calculations, large operators like Lido (LDO) , which controls about 32% of Ethereum’s staked supply, would have sufficient margins to absorb this decline thanks to economies of scale and additional revenue streams. In contrast, individual stakers and small validators could face more frequent penalties for non-compliant behavior, as their profit margins shrink to zero. More than 100,000 validators could see their income halved, though no precise figures have been provided on their exact number. The proposal is still under discussion within the Ethereum community, with a vote expected in the next three to six months for potential inclusion in a network upgrade. Why it matters Staking on Ethereum relies on an incentive mechanism where validators lock up ETH to secure the network and validate transactions, in exchange for rewards. A reduction in these rewards could diminish the attractiveness of staking, particularly for small actors, and encourage greater centralization in the hands of large pools like Lido. The proposal also aligns with a broader goal of reducing ETH emissions to combat token inflation, a goal partially achieved with the EIP-1559 upgrade, which burns a portion of transaction fees. Economically, this proposal could exert selling pressure on ETH’s price in the short term, as stakers reduce their positions to offset the decline in income. Staking protocols like Lido (LDO) could see their revenues drop, potentially affecting their valuation. Conversely, liquid staking solutions, such as stETH, could gain traction, offering users the ability to earn yields while contributing to network security. Adoption of this proposal could also bolster the case for increased adoption of Ethereum ETFs, as institutional investors seek alternatives to generate yields on their ETH holdings without relying on direct staking. What to watch Community vote : The EIP-8361 proposal is expected to go to a vote in the next three to six months. The results could determine the future of staking on Ethereum and influence the network’s decentralization. Reactions from staking pools : Announcements from Lido or other major players about their post-reward-reduction strategies will be a key indicator of the proposal’s real-world impact. Centralization and security : A reduction in rewards could favor large staking pools, reducing network decentralization. Enhanced security audits may be necessary to mitigate this trend. Adoption and opposition : The proposal must still be validated by the Ethereum community, and opposition could emerge, particularly from small validators or decentralization advocates. Ecosystem impact : A sharp reduction in rewards could destabilize the network by incentivizing validators to leave or adopt risky behaviors to compensate for losses.