EIP-7521: A Look into Ethereum’s Proposed Validator Upgrades and Their Impact

EIP-7521, or MaxEB, represents a suite of proposed enhancements aimed at refining Ethereum’s staking dynamics. Currently under discussion, these upgrades are designed to expand the operational capabilities of validators on the Ethereum network by adjusting key parameters and introducing new functionalities. 

As Ethereum continues to evolve, understanding the implications of these changes is crucial for anyone involved in the network’s staking processes. This introduction will unpack the potential upgrades within EIP-7521, including a significant, optional increase to the maximum effective balance parameter and a reduction in the initial slashing penalty, alongside other strategic modifications designed to optimize validator operations and network efficiency. This article dives into the details and potential impacts of these proposed changes on Ethereum’s future.

What is the Ethereum EIP-7521 Upgrade?

EIP-7521, also referred to as MaxEB, is a handful of proposed upgrades. The more significant pieces include:

• Allowing validators the option of increasing the MAX_EFFECTIVE_BALANCE parameter from 32 ETH to 2,048 ETH. This does not change the minimum balance of 32 ETH required to activate a validator, but it would increase MAX_EFFECTIVE_BALANCE. A validator’s balance is important as it determines the rewards (and penalties) it receives for performing duties (or failing to perform duties), the likelihood of being chosen for certain duties, like block proposal, and slashing penalties. Currently, Ethereum “stops counting” after 32 ETH – MAX_EFFECTIVE_BALANCE; in other words, a validator does not earn any additional rewards by having a balance greater than 32 ETH. This is why any amount above 32 ETH is automatically swept and then sent to the validator’s withdrawal address. It is worth emphasizing – this change is optional.
• Reducing the initial slashing penalty from 1/32 of a validator’s balance to 1/4096. When a validator is slashed, a sequence of events begins. The first event is 1/32 of their balance is immediately burnt. The rationale for this change relates to removing barriers for higher balance validators – the fact that slashing penalties are proportional to a validator’s balance can cause some to avoid higher balance validators. Also, some research indicates higher balance validators could suffer larger penalties (see here).
• The ability to consolidate existing validators.
• To increase MAX_EFFECTIVE_BALANCE validators will need to update their credentials to 0x02, or obtain a so-called COMPOUNDING_WITHDRAWAL_PREFIX. This process involves sending a signed transaction with the validator pubkey in question to a smart contract. Note that this is also a pre-requisite for consolidating validators. The takeaway is that an ‘0x02 validator’ is one that has a max effective balance of 2,048 ETH, and both ‘0x00’ and ‘0x01 validators’ have a max effective balance of 32 ETH. 

A separate, but equally important upgrade is EIP-7002 – execution layer partial withdrawals and exits. For validators that choose to increase MAX_EFFECTIVE_BALANCE,automatic withdrawal sweeps would cease until a validator’s balance exceeds 2,048 ETH. To allow validators some flexibility EIP-7002 would allow the manual triggering of partial withdrawals (as well as exits).

Why is EIP-7521 Being Included in Pectra?

The original choice for maxEB of 32 ETH is technical debt from a prior design approach wherein the execution layer would be broken up into shards, for more see EIP-7251 rationale section.

Beyond this, there is a large amount of networking overhead on Ethereum. The network stands close to 1,000,000 validators and approximately 10,000 nodes. There have been issues discovered in testing once the validator set size gets close to 2,000,000 (see here). This is why EIP-7514 was included in the Deneb+Cancùn (Dencùn) upgrade – to slow the rate of validator growth, capping the activation rate at eight validators per epoch.

Slowing the rate of activations and holding it constant allows the core community (Ethereum Foundation and Core Devs) more time to find a solution. EIP-7521 (MaxEB) is a potential solution.

For more information regarding the MaxEB upgrade, you can refer to the official EIP website.

When is the Ethereum Pectra Upgrade Going to Happen?

The timing for the Pectra upgrade is subject to change but the latest estimate is around April 8th.

What do Ethereum Stakers Need to Know?

There is nothing stakers need to do, but there are some new options with MaxEB.

For instance, if validators opt to update their credentials, i.e., increase maxEB from 32 to 2,048 ETH, it should be understood that the partial rewards sweep will now occur at 2,048 ETH for them; if validators do not update their credentials partial rewards sweeps will continue above 32 ETH as they do today. Stakers will be able to trigger a partial withdrawal from the execution layer (EL), but there will be some cost associated with doing so.

Likewise, consolidations will be triggered from the EL and there will be a cost associated with this action.

Each staker will need to think through the benefits and drawbacks of increasing their maxEB and/or consolidation and make a decision accordingly.

Some considerations with increasing maxEB and/or consolidating:

• Validators that opt in to the new 0x02 credentials (“compounding withdrawal prefix”) will begin compounding and, all else equal, will earn more rewards than they would have otherwise. For one validator, at a reward rate of 3.48%, this amounts to about 6.0% over the course of 10 years, or 0.6% annualized.
• The ability to compound, or deploy additional ETH could be hindered if validators are consolidated in a haphazard manner (i.e., if you consolidate to the new MAX_EFFECTIVE_BALANCE of 2,048 ETH).
• Consolidation will likely simplify reporting.
  • An important note is to understand the implications of consolidating validators and their effects on any data being tracked regarding said validators.
• Although the initial slashing penalty is greatly reduced (as per above), should a consolidated validator commit a slashable offense, the penalty will be higher than it otherwise would have been.
  • A question here is if the validator is any more likely to be slashed if they consolidate than had they left the validators unconsolidated. This is a difficult question and more analysis is likely required. For instance, Maxim Merkulov has written an in depth analysis, in addition to a piece written by Dapplion. That said, having a greater number of validators, as opposed to one larger, consolidated one, does allow some warning if a slashable event occurs. That is, having on validator of many slashed gives an operator the chance to shutdown the others to contain the risk, unlike having one large, consolidated one.

• Each staker will need to understand tax considerations for the decisions they make. If receiving rewards is a taxable event in a staker’s jurisdiction, care must be taken with increasing maxEB/ the consolidation decision. In other words, there could be some advantage to not receiving CL rewards automatically.

• On the reward side, validators should be indifferent between consolidation and leaving unconsolidated.
  • To see this we need to break down the reward types and analyze how these change with a greater balance (for more on Ethereum rewards see Figment’s article on how to evaluate ethereum staking service Providers. piece):
    • CL Rewards – attestations
      • There is no difference between consolidating validators and leaving them unconsolidated in terms of attestation rewards. The key in determining attestation rewards is get_base_reward.
      • The important point to recognize is that the validator’s balance has a multiplicative effect on the calculation. This means that all else equal, two validators with a balance of 32 ETH have the same expected attestation rewards as one validator with 64 ETH.
      • The relevant sections of the Ethereum specs are:
        • get_base_reward
        • get_base_reward_increment
        • Incentivization weights
    • CL Rewards – proposals
      • Overall, CL proposal rewards are not expected to differ based on the decision to consolidate or not. Although these rewards are not dependent on balance, the probability of being selected to propose is proportional to balance – a validator with 32 ETH is twice as likely to be selected to propose as a validator with 16 ETH.
      • The relevant sections of the Ethereum specs are:
        • process_attestation
        • process_sync_aggregate
        • compute_proposer_index (for the probability)
    • CL Rewards – sync committee
      • As with proposals, sync committee rewards are not expected to differ based on the decision to consolidate or not. Sync committee rewards are not dependent on the validator’s balance, but the likelihood of being chosen to the sync committee does.
      • The relevant sections of specs:
        • process_sync_aggregate
        • get_next_sync_committee_indices (for the probability)

• EL Rewards
  • EL rewards are not expected to differ based on the consolidation decision. Like proposals and sync committee rewards, EL rewards are not determined by a validator’s balance, but the likelihood of being chosen to propose does depend on a validator’s balance.

This list is a sample of some of the considerations involved when thinking about consolidating validators.

Conclusion 

EIP-7521, or MaxEB, signifies a transformative step forward in Ethereum’s journey to optimize its validator mechanics and enhance overall network performance. By allowing validators to increase the maximum effective balance and adjusting slashing penalties, this suite of upgrades is set to significantly alter the landscape for ETH stakers, offering new opportunities for rewards and network participation. 

As Ethereum continues to evolve with these proposed changes, stakers should consider the potential for increased flexibility and the strategic implications of consolidation on their holdings. As we await further details, stakers are encouraged to stay informed and prepare for the changes that MaxEB will bring to the Ethereum ecosystem. 

The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as, legal, business, tax or investment advice. Figment undertakes no obligation to update the information herein.