EIP-8361 could make 5x ETH staking loops unprofitable

EIP-8361 proposes to scale a burn of validator consensus rewards as the total amount of staked ETH rises. The draft would reduce consensus issuance from about 2.6% to roughly 1.2% over an 18-month phase-in, a reduction of about 54%. At a saturation point of 60.25 million ETH staked, the proposal would cancel consensus issuance for correctly performing validators. Priority fees and MEV revenue are excluded from the burn and are currently estimated at up to 0.20%.

Validator consensus issuance serves as the base yield for liquid staking tokens such as Lido’s stETH and Rocket Pool’s rETH, for restaking products, and for lending markets that price rates around staking returns. Those products and strategies will need to reprice if the consensus yield falls to about 1.2% under the full burn curve.

The change alters the economics of a common leveraged loop. In that strategy, a user deposits a liquid staking token as collateral, borrows WETH, converts the WETH into more staked ETH and repeats. At today’s roughly 2.6% consensus yield and a WETH borrow rate near 1.5%, an unlevered holder of a liquid staking token sees a positive spread of about 1.1 percentage points. Under the proposal’s full curve, that spread would flip to about negative 0.3 percentage points before leverage. With five times leverage, a position that previously generated daily income would, by the same math, incur daily losses while it remained open.

If many loop positions unwind, WETH borrowing demand would fall and utilization on lenders such as Aave, Morpho and Spark would decline. Lower utilization typically compresses lender APYs and tends to reduce borrowing costs. Borrowing costs would need to fall substantially below current levels before a 1.2% staking yield would restore a meaningful positive spread for leveraged staking.

Protocol founders and builders have flagged risks to staking-linked products. Aave founder Stani Kulechov warned that unpredictable or near-zero consensus yield could weaken institutional ETH demand, solo staking, ETH borrowing and ETH-denominated DeFi. Mike Silagadze of ether.fi wrote that the change could threaten staking-linked DeFi and reduce confidence in Ethereum’s monetary-policy setting. Jérôme de Tychey, an author of the proposal, wrote that the Proposed for Inclusion stage is meant to open debate and that the update would still require separate upgrade steps. He noted the 18-month phase-in and normal upgrade scheduling give the market roughly two years to adjust and pointed to a validator entry queue running near capacity. He added that if entries remain saturated, staked ETH could exceed 70 million by Jan. 1, 2028, above 55% of supply.

Analysts and builders describe two possible sequences for market adjustment. In one, loopers unwind gradually, WETH utilization and borrowing costs fall enough to restore a smaller positive spread and markets reprice around the lower base yield. In the other, the yield cut arrives before borrowing costs can adjust, leading to widespread unwinds, reduced demand for ETH-denominated yield products, and a rotation of capital into stablecoins or other chains.

If enacted, the burn schedule would follow a fixed timeline while borrowing costs and other market rates would change at market speed. The balance between lower issuance and lower income for holders will determine how staking, lending and leveraged strategies adjust over time.