On Thursday, September 14, Ethereum protocol developers made a last-minute decision to include an additional code change in the forthcoming Cancun/Deneb upgrade as a stopgap to the issue of validator set size growth. The short timeframe under which this decision was made has sparked controversy in the Ethereum community. Anthony Sassano, the creator of Ethereum-focused media site The Daily Gwei, said the decision “needed a lot more discussion, research, and thought.” Ryan Berckmans, founder of Ethereum payments app 3cities, tweeted that in his view the situation was not urgent enough to warrant a change to the Cancun/Deneb upgrade.

Christine Kim is a Vice President on the Research team at Galaxy Digital. This op-ed, part of CoinDesk’s “Staking Week,” is based on information and data from a Galaxy Research report called “Paths Toward Reducing Validator Set Size Growth.” To read the full report, visit galaxy.com/research.

Though it only took one week for Ethereum protocol developers to come to consensus about making a change to Cancun/Deneb, the larger issue of Ethereum’s validator set size growth has been a major topic of discussion and concern among developers for months. On July 13, when the proposal to cap the validator churn limit in Cancun/Deneb was first raised by “Dapplion,” a pseudonymous developer for the Lodestar client, on ACDC #113, developers acknowledged the time-sensitive nature of the matter. “The [validator attestation] aggregation is almost at its capacity today. If we drop more validators on the network, it can really get worse,” said Mikhail Kalinin, a developer for the Teku client, on the call.

During testing for a new Ethereum test network called Holesky, developers noticed that at 2.1mn validators, which was three times the size of Ethereum’s mainnet validator set at the time, the testnet struggled to finalize due to an excessive number of attestations (messages) being propagated through Ethereum’s peer-to-peer network. Eventually, developers settled on designing Holesky to support two times the size of Ethereum’s mainnet validator set, or 1.4 million validators. Once Holesky launches, it will be an invaluable resource for developers to monitor and assess both the health of Ethereum, as well as future code changes, on a large validator set.

However, the rate at which Ethereum’s validator set size is growing will soon make Holesky’s value obsolete. As of September 15, 2023, there are 806,759 active validators on Ethereum. Since the activation of staked ETH withdrawals in the Shanghai/Capella upgrade on April 12, the number of active validators has increased 43%. Without developer intervention, the number of Ethereum validators is set to exceed 1 million by the end of this year, assuming the maximum number of validators are activated on Ethereum, and no validators exit the network. Ethereum mainnet will reach a validator set size of 1.4 million under these same assumptions by March 2023.

Ethereum Improvement Proposal (EIP) 7514 caps the growth of the validator set to eight validator entries per epoch (~6.4 mins). The addition of EIP 7514 to Cancun/Deneb buys developers a few more months to address the issue of validator set size growth, as the following chart shows:

Notice from the chart, though, that this upgrade only buys developers roughly two more months of time before Ethereum’s validator set size grows beyond the size of its largest testnet Holesky. Projections about the validator set featured in the chart above are based on two key assumptions. The first assumption is that Cancun/Deneb is activated in January 2024. The second assumption is that the staking appetite by Ethereum holders is sustained above the maximum churn for the next several months. This may not be the case given that the number of validators in the entry queue has been declining. The following chart depicts the total number of Ethereum validators in the entry queue since the Merge upgrade last year:

Though it is difficult to predict how quickly the Ethereum validator set will grow, it is likely to grow by some measure over the next several months because of the proliferation of liquid staking solutions. Liquid staking solutions lower the barrier to entry for many users to stake their ETH by allowing ETH holders to stake under the 32 ETH threshold and do so without giving up the full liquidity of their asset. Therefore, it’s likely that the problem of a growing validator set is an issue that will only continue to get worse over time if left unaddressed.

Despite the rather last-minute nature of the decision on September 14, developers have acted prudently by including EIP 7514 in Cancun/Deneb. Instead of gambling with the future of Ethereum, developers are correcting their lack of foresight by including a code change that will ensure a predictable maximum growth rate for the validator set of Ethereum while buying time to work on a more significant upgrade that will almost certainly be necessary. One week before the decision on EIP 7514 was made, protocol developers were not aligned on the severity of Ethereum’s validator set size issue, but the rapid turnaround time for consensus on this decision highlights how developers have agreed that this change is the safest to protect a network worth billions of dollars.

And the conversation about Ethereum’s validator set size growth does not end with EIP 7514. As discussed, EIP 7514 simply buys Ethereum developers more time to design long-term solutions, but not that much time. If appetite for staking on Ethereum does not meaningfully abate over the next several months, the size of Ethereum’s validator set will become problematic with or without EIP 7514. Whether developers should consider a more aggressive cap on validator churn, devote more time to researching ways to increase the effective validator balance, or consider different long-term solutions, are all topics of conversations that protocol developers will have in the months ahead.

It is of utmost importance that the broader Ethereum community participates in these discussions, and this time, the broader Ethereum community should not be caught off guard. Awareness about EIP 7514 may be the starting point for many in the Ethereum community about the issue of validator set size growth but it certainly should not be the last time the community speaks up about this issue. There are more radical changes to validator economics and network monetary policy that protocol developers are exploring to address validator growth in the medium to long run.

The Ethereum community has a responsibility to hold developers accountable in their decision-making process about the development of the Ethereum protocol. Instead of slowing the decision-making process, members of the Ethereum community should be driving this process by making their voices heard about the most pressing issues on Ethereum. Rather than oppose this upgrade due to its urgency, the community should be pushing for its inclusion, because the issue at stake is real, serious, and urgent.

To learn more about the issue of validator set size growth on Ethereum and long-term solutions already being considered by developers to address this issue, read the full Galaxy Research report here. Legal Disclosure: This document, and the information contained herein, has been provided to you by Galaxy Digital Holdings LP and its affiliates (“Galaxy Digital”) solely for informational purposes.