Grayscale: Time to Reform Ethereum’s Staking Model
- Core Thesis: Grayscale’s Head of Research points out that Ethereum’s current staking reward model faces dual structural issues: reduced token burn due to activity migrating to L2s and a staking threshold approaching zero. Proposing a staking reward cap curve, if implemented, would reduce supply growth, enhance scarcity, and be bullish for ETH’s long-term price.
- Key Elements:
- L1 transaction fees continue to decline as activity shifts to L2s, leading to lower token burn and a shift in ETH’s net supply from deflationary to inflationary.
- The activation of withdrawals and the proliferation of liquid staking tokens have pushed the marginal cost of staking towards zero, potentially leading to nearly all ETH being staked, creating unnecessary dilution and centralization risks.
- The community is discussing a reward model that only incentivizes staking up to a certain proportion (e.g., setting a cap or inflection point), beyond which no additional rewards are given, thereby reducing nominal staking yields.
- Grayscale believes this could control long-term inflation, reduce tail risks, and strengthen ETH’s narrative as a digital store of value, analogous to the bullish logic of commodity production cuts.
- The current ~3% annualized staking yield is equivalent to only a single day’s price movement in ETH (annualized volatility around 60%), meaning price fluctuations have a far greater impact on investment returns than staking rewards.
Original Author: Zach Pandl, Head of Research at Grayscale
yuan w Compiled by: TechFlow
Overview: Zach Pandl, Head of Research at Grayscale, points out that Ethereum's current staking reward model faces two structural issues: L2 activity is diverting traffic, leading to a decline in token burns and an increase in net issuance; and the barrier to staking is approaching zero, which could eventually lock nearly all ETH into staking. The community is discussing setting a staking reward cap curve, which Grayscale believes would be beneficial for ETH's price in the long term.
The Ethereum community is considering modifying the network's staking reward model, with the core idea being to only incentivize staking up to a certain threshold, beyond which no additional rewards would be given. If implemented, nominal staking yields would decrease. However, Grayscale believes this is positive for ETH's price in the long run for two reasons: first, controlling ETH inflation, and second, strengthening the narrative of ETH as a store of value asset.
Driving this reform discussion are two overlapping issues.
Weakened Token Burns, Rising Net Issuance
ETH's supply is determined by the difference between new issuance and token burns. Currently, the Ethereum L1 burns all base transaction fees; higher fees mean more ETH is burned, suppressing supply growth.
Recent years have disrupted this balance. As more activity migrates to L2 networks, L1 transaction fees and consequent token burns have declined, and net issuance has begun to rise.
Figure Note: Exhibit 1 — Drivers of ETH supply change since PoS. After the Dencun upgrade, the cumulative burn (green line) has flattened, while cumulative issuance (orange line) continues to rise, causing the net ETH supply change (dark line) to turn from negative to positive. Source: Coin Metrics, Grayscale Investments, data as of May 9, 2026.
To make matters worse, the Ethereum L1 is now actively choosing to scale to compete with high-throughput chains like Solana. Pandl bluntly states: L1 transaction fees are likely to remain low for the foreseeable future, causing token burns to stay low and net supply growth to widen further.
Marginal Cost of Staking is Nearly Zero
When Ethereum first launched staking, users could not withdraw their assets; staked ETH was locked, offering poor liquidity and thus carried a risk premium. Now that withdrawals are enabled, liquidity has improved significantly, and the risk premium has evaporated.
More critically, Liquid Staking Tokens (LSTs), Exchange Traded Products (ETPs), and corporate ETH treasuries have all joined the staking ecosystem. The marginal cost of staking ETH is now close to zero. As long as the network continues to provide marginal rewards to stakers, nearly all ETH could eventually end up staked.
Staking is necessary for the Ethereum protocol's normal operation, but an excessively high staking ratio could be counterproductive.
Two risks emerge. First, unnecessary dilution. Rising net issuance without a meaningful increase in network security is like a country overspending on defense without any benefit to national security. Second, the tail risk of centralization, where a few entities dominate staking activities. Due to the network effects of service providers, this possibility exists.
Setting a Staking Reward Cap Curve
One solution is to shift to a reward model that only incentivizes staking up to a certain level.
Figure Note: Exhibit 2 — Alternative staking reward curves Ethereum might consider. Under the current model (dark line), annualized issuance grows linearly with the amount staked; Options A/B/C propose caps or inflection points at various staking levels, causing issuance to flatten or even decline after the staking ratio exceeds a certain threshold. Source: Coin Metrics, Grayscale Investments, data as of April 26, 2026; options are hypothetical.
Grayscale believes this change is beneficial for ETH's market value in the long term. ETH is a commodity with functional utility, not a financial claim like stocks or bonds, and should not be priced solely based on cash flows. Updating the staking reward model would reduce supply growth and enhance ETH's scarcity. For commodities, reduced supply is positive for price, and the same logic applies to ETH.
Reducing network tail risks and controlling long-term inflation could also increase demand for unstaked ETH as a digital store of value asset.
Another easily overlooked perspective: the impact of ETH's price volatility on investment returns far outweighs staking yields. The current annualized staking yield of about 3% is roughly equivalent to one day's price fluctuation magnitude for ETH (with an annualized volatility of ~60% over the past 360 days, translating to a daily volatility of ~3%).
Conclusion: Ethereum may modify its staking reward model to control long-term supply growth and reduce specific tail risks. If implemented, Grayscale believes this would be positive for ETH's price.
