The Ethereum community is in a fierce debate due to the fast increase of liquid staking and restaking protocols. This proposal seeks to curtail the rapid growth of the staking pool by modifying Ethereum’s monetary policy. It aims to protect its function as a decentralized digital currency.
During recent months, there has been an unprecedented explosion in demand for services that offer liquid staking and restaking. Glassnode data shows that 31.4 million ETH, which is about 26% of the total supply, are actively staked in Ethereum’s Proof-of-Stake mechanism. Especially in this month, when innovative Eigenlayer Restaking was introduced in June 2023 and Liquid Restaking in the first quarter of 2024 became a reality.
Disruption of Ethereum’s Proof-of-Stake Protocol
Originally designed as an automated system, Ethereum’s Proof-of-Stake protocol intended for validator rewards to decline as more ETH was staked. However, yield-enhancing innovations like Liquid Staking, Restaking, and Liquid Restaking have disrupted this equilibrium, fueling an insatiable demand for staking that transcends the original vision.
Liquid Restaking providers have emerged as a driving force behind this trend, accounting for a remarkable 27% of newly staked ETH since the beginning of 2024. In contrast, deposits from Liquid Staking providers have waned since mid-March. Eigenlayer, a pioneering Restaking protocol, has witnessed a meteoric rise, with its total value locked surpassing 14.2 million ETH (approximately $13 billion).
Alarmingly, more than 61% of Eigenlayer’s assets are native staked ETHs, whereas the rest comprises Liquid Staking Tokens such as Lido’s stETH that stands at 21.5%. Moreover, a stunning 63% of deposits into Eigenlayer originate from Liquid Restaking providers showing an increasing preference for these hyper yielding instruments.
Ethereum Foundation researchers fear Ethereum may stop functioning as money if it is not careful; therefore, they have suggested setting a limit to annual issuance so as to control the growth rate in the staking pool. This way, new users get less incentives to stake, hence slowing down the expansion and lessening the impact made by liquid staking and restaking protocols. However, these proposals have met significant opposition from within the community, with many questioning whether there is any need for another monetary policy change in Ethereum.
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