Endgame Staking Economics: A Case for Targeting

[barnabe]

@casparschwa

[6] We analyze these yields in isolation, in particular we do not consider the tx fee burn mechanism (EIP 1559). The underlying analysis would remain unchanged nonetheless, as all yield curves would be shifted up- or downwards by some constant amount, independent of the staking level. We simply wish to reason about an ETH holder’s decision to stake or not to stake and for that only the difference in yields is relevant.

I believe this footnote addresses your question, indeed the burn may shift up the real yield, but that shift is constant across the whole real curves, so does not change the relative quantities and thus the arguments of the post.

[XofEE]

I’d like to share my perspective as an average Home staker to provide a more down-to-earth example :

If issuance approaches zero or goes negative, I’ll continue staking out of conviction and also because I don’t want to make the “effort” to withdraw my validator. Most home stakers, like me, want to avoid unnecessary entries or exits of their validators. This benefits the network.

However, if negative issuance persists, I’ll be forced to withdraw because it’s not sustainable for me in the long term (I will no longer have ETH at the end so it’s better to exit beforehand)…

This creates a re-entry barrier, necessitating the redeposit and setup of my validator again, an effort I won’t undertake if the low APR remains. I’m not a machine; I won’t cyclically enter and exit, as it demands effort and entails risks. I’ve sketched my stance on a graph to illustrate the gap between the my APR thresholds for exiting and re-entering. (The figures are quick approximations and vary among home stakers.)

This simple graph demonstrates that if the APR falls significantly low, I will not consider re-entering if it persists in that range, effectively establishing a ‘no-return buffer’.
It suggests that pushing issuance toward zero or negative risks driving away home stakers not out of conviction but due to re-entry barriers.

However, I believe there’s an equilibrium APR before reaching 100% stake. Solutions like MEV burn and reducing issuance seem simpler and quicker to achieve this equilibrium at a lower ETH staking ratio.
I don’t think it’s necessary to implement a complex targeting system, as I don’t believe (or hope) we’ll reach 100% of ETH staked. However, if implemented, I think it could cause side effects for home stakers.

[TimDaub]

First of all, great job. I read most of this proposal very carefully, and I agree with most of the points brought up in it. I also took to social media as to support the proposal and to address some of the popular criticisms:

• Some do simply not acknowledge the value of ETH as money: https://twitter.com/timdaub/status/1776243946282164648, or they question the seriousness of the proposal (https://twitter.com/timdaub/status/1776217596410343620), which I find incomprehensible.
• Some of the criticism seems to be without substance: https://twitter.com/timdaub/status/1776250136680698018 or it misses the key points of the proposal, namely that LSTs challenge ETH’s money-ness: https://twitter.com/timdaub/status/1776248440495718635
• There is a class of criticism that entirely misses the point as it assumes the SEC would monitor the internet to draw conclusions on whether ETH is a security based on what is written in this forum: https://twitter.com/JimmyRagosa/status/1774817554445299717 Even if this was the case, why would it matter when engineering the protocol and addressing its challenges outlined above? The SEC is not the primary customer we’re working towards to build the protocol.
• Everyone who holds ETH should be more aware of how incredibly valuable it is for an asset to have a monetary premium. Educate yourselves here, for example On Monetary Premia | AIER. Everyone who has to pull 17 magic tricks a quarter to preserve their wealth’s value over time is intuitively aware of how valuable it is to JUST hold a true store of value. That should be the vision for being an ETH holder. Not to imitate the existing financial system where I have to cast 23 different spells on my fiat money such that it doesn’t insta depreciate, but where I can buy ETH and know that the network’s productivity (that goes far beyond just staking) takes care of preserving the value.

Then, this aside, I picked two quotes from the article:

@casparschwa

At a hypothetical staking participation level of 90% with 2% yield, assuming a liquid staking share of 90% and an average SSP fee of 10%, 0.16% of Ethereum’s market cap, or ~200,000 ETH, or ~530 million USD at current prices, are paid in SSP fees every year – a de facto tax on all ETH holders.

To the authors, I would emphasize immensely this part of the proposal, which I think is counterintuitive for many ETH and LST holders. If I understood correctly, then the punch line here is, in reality, that with more staked ETH receiving yield, ETH inflates more in absolute terms, which means holding ETH becomes even less economical.
I think printing a curve showing the number of staked ETH vs. how high absolute inflation is could help to explain this or further understanding. E.g., I’d be interested in how much ETH is being printed when, e.g., 60M ETH is staked at 2% vs., e.g., 30M ETH at 3%.

@casparschwa

Holding raw ETH should be economically feasible, to ensure user friendliness and preventing dilution beyond ensuring sufficient security.

I actually think a part of the requirement here should also be that “holding raw ETH is simply like holding money,” as to say that it should be straightforward to hold money and not require me to do 17 tricks to hold the actual money and not a derivative that is actually inflated away by someone who more sophisticated than me.

This, in turn, also means that we should see staking rewards merely as the counter good for providing a service and paying expenses for that service. And in that line of arguing, I’d like to say: Motivationally, I’m pretty sure that most validators already hold ETH for its money-ness or as an investment. ETH has also been a great investment, especially in a fiat currency environment where all value globally is rapidly inflated. So, we can hardly argue that we should pay ETH validators for the risk of holding >= 32 ETH. So then we actually pay them for an active internet connection, a computer, the amount of time they spend on maintenance, and the risk of participating in validating. And what is that cost? I doubt that it is, in reality, so high that barely anyone does it economically. I personally know of people whose non-technical family members also got a computer to stake ETH because it was apparently such easy money! WTF

If you think about how you have to put your fiat money into an ETF that then spends it on 500 US-based companies and has this incredible black-box complexity, all just to preserve the fiat money’s value over time, then this is the inverse of what we should be aiming for, and sadly, this is the direction we’ve been going towards. So I support this proposal! Make holding ETH economical and preserve its property of being money.

[jsarcher]

For targeting staking ratios we should use a PID controller.

[gorondan]

GEB controller seems robust enough, is doing a great job in RAI and related forks. It intakes a target and sets the rates accordingly. Plus, it’s very well documented and in-prod tested, with community tweakings.

[Bhaney44]

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