Ethereum network struggles to keep pace with surging demand for staking feature


17th September 2023 – (Hong Kong) One year after the successful upgrade known as the Merge, which aimed to make the Ethereum network more energy-efficient, the popular cryptocurrency’s commercial highway is facing challenges due to its own success.

The implementation of the Merge resulted in a smooth transition to a new system for ordering transactions on the blockchain. As part of this upgrade, participants were offered the opportunity to earn a yield on tokens used to support the network. The staking feature, in which Ether tokens are locked up in digital wallets to facilitate transactions and earn rewards, has experienced a surge in demand, potentially overwhelming the network.

Data tracker Staking Rewards reveals that approximately 20% of all circulating Ether, equivalent to around $41.5 billion, has already been staked. If the current pace continues, this figure could reach 50% by May and 100% by December 2024, according to a paper authored by Tim Beiko, an Ethereum developer coordinator, and another individual known as Dapplion.

The driving force behind this demand is the desire to earn reliable returns in the crypto space, as most token prices remain below their record highs from late 2021. Currently, Ether owners can earn a yield of approximately 4% through staking.

However, concerns have arisen regarding the potential consequences of excessive staking. The worst-case scenario would be a lack of available Ether for actual transactions on the network, putting the safety and functionality of Ethereum at risk. At the very least, the strain on the transaction ordering process would intensify.

To address this issue, Ethereum developers are taking steps to slow down the influx of staking. On September 14, they agreed to limit the number of new validators, who operate staking wallets, allowed to join the network every six minutes. This change will be incorporated into the next major software upgrade later this year. By implementing this adjustment, it is expected that Ethereum will not reach the point of having 100% of all circulating Ether staked for several years.

Matt Nelson, a product manager at Ethereum infrastructure builder Consensys, explained that the goal is to buy time and provide developers with an opportunity to find long-term solutions. The paper suggests that adjusting validator rewards may be necessary to discourage excessive staking beyond a certain point.

It’s worth noting that most Ether holders do not stake their tokens directly but rely on various services such as Kraken, Lido, and Coinbase Global Inc. These services pool the tokens and distribute the rewards. Lido, which issues a separate token that can be traded on exchanges while Ether is staked, currently holds approximately 33% market share, according to data service Dune.

Jim McDonald, the chief technology officer at Attestant, one of the leading Ethereum staking providers, highlighted that this surge in staking solidifies the position of existing staking providers in the market.