Ethereum Pectra Upgrade: The Impact on Institutional Staking

Over the next few weeks, Ethereum is undergoing a major upgrade called ‘The Pectra Upgrade,’ which includes several important changes to both the execution (‘Prague’) and consensus (‘Electra’) layer. Staking on Ethereum will be significantly impacted by some of these changes. As such, this piece will focus on these changes, discussing everything an institution needs to know about the upgrade, from a staking perspective.

The specific Ethereum Improvement Proposals (EIPs), set to be included in Pectra, with relevance to staking are:

• EIP-7251: Increase the MAX_EFFECTIVE_BALANCE
  This EIP will enable existing and new validators to voluntarily increase their maximum effective balance from 32 to 2048 ETH enabling in-protocol autompounding.
• EIP-7002: Execution layer triggerable exits
  This EIP enables an execution layer transaction to withdraw stake directly, including a new feature allowing partial withdrawal of stake- of particular relevance given EIP-7251.
• EIP-6110: Supply validator deposits on chain
  This EIP changes the way ETH staking deposits are handled, and reduces the activation time for new staking transactions from over 8 hours, to less than 45 minutes.

The impact of these improvements is far reaching and more nuanced than the simplicity of the descriptions above. The improvements modify the way staking is operationally achieved, it adjusts the way rewards are calculated and alters the risk of slashing. The upgrade introduces new transaction types to facilitate the characterisation of new validator statuses, as well as new protocol mechanics to deal with the added complexity in tracking the flow of staked ETH and its status.

For the convenience of the reader, we split the information in this report into five sections:

1. Introduction: A holistic view of the planned upgrade alongside a brief explainer of the new staking functionalities available.
2. Explainer Section: A thorough description of the upcoming changes to staking flow, rewards generation and slashing rules.
3. Analysis: An in depth assessment of the impact of these changes to the reward/ risk tradeoff for stakers with a particular focus on large flow institutional stakers. 
4. Twinstake Opinion Piece: An overview of how Twinstake assesses the tradeoff between setting a higher max effective balance and remaining with the current status quo of 32 ETH.