This would make for a somewhat awkward toggling between blocks that get rewards and blocks that do not, as it went over the limit, and then gas fees brought it back under the limit.
However, you could slightly modify this proposal to reduce issuance linearly as it approaches the limit. In this way it essentially functions like an AMM that discovers the correct issuance for maintaining a fixed supply, while providing smooth issuance per block. It would also still have a hard cap that you could explain to people, it would just never be able to reach it.
(I’m not necessarily in favor of this proposal, but I think this would be a better version of it.)
Thanks, @DanielVF. Indeed, it would be a weird bounce up and down if we ever got there. I think in reality, we never get there; it’s just an easy meme. Ultrasound money predicts a supply of 125M in 200 years!
I think people often conflate the two topics; how you allocate/issue/burn something can be tangential to what you have available to allocate. Making the ETH supply a fixed amount allows for the separation of concerns in this regard.
It enables the debate about issuance to focus on the “how” rather than on “how much” and “how”.
So if we reach the cap and tx fees are not high enough, what would happen?
In this case staking stops being profitable and we lose on security.
This loss in security can lead to a loss of usage.
Which put tx fees even lower.
All that can result in a death spiral.
So a cap would be bad, not as a bad as Bitcoin cap (as costs of mining are way higher than costs of staking).
Bitcoin supply cap is the worse design flaw or Bitcoin. In Bitcoin history there were only brief moments where tx fees alone were enough to support mining. As Bitcoin block rewards decrease, security will decrease unless blocks happens to be congested. So Bitcoin will need to create artificial blockspace scarity to enforce its cap.
Ethereum doesn’t need to follow Bitcoin bad design and should look on what is best. Currently, it is not profit maximization (we could have smaller congested blocks to burn more ETH) but userbase development (low tx fees make people more likely to use Ethereum).
That’s the point, it should be fixed/solved before this point. A supply cap is a forcing function.
If you increase staking yields through higher issuance, you’re not creating new economic value, you’re expanding the supply and redistributing value from all ETH holders to validators.
Higher rewards funded by issuance are effectively paid for through dilution. Validators receive more ETH, but every existing holder owns a smaller share of the network. From the perspective of ETH holders as a whole, this is largely a transfer rather than a net gain.
The key question is not how to maximize validator yield, but how to maximize the value of ETH and the security of the network. A stronger asset can support robust security with no issuance. Simply printing more ETH to increase staking rewards will weakening the asset that ultimately underpins the security budget.
We can already see this dynamic playing out with ETH’s price and its impact on validators.
The challenge for stakers today isn’t that staking yields are too low in percentage terms. It’s that the underlying asset has underperformed. A validator earning ~2% on an appreciating asset is in a very different position from a validator earning the same yield on a depreciating asset. No rational person would lock up $48,000 to get a return of ~$90 per month.
Increasing issuance to boost rewards doesn’t solve that problem. It may increase the number of ETH earned, but it does so by expanding supply and diluting holders. If anything, that risks putting further pressure on the asset itself. That will in turn put downward pressure on price, further reducing the incentives for stakers to lock up capital.
The long-term solution is not to print more ETH for validators. It’s to strengthen the investment case for holding ETH.
Security ultimately rests on the value of the asset being staked, not just the nominal yield attached to it.
I think this proposal identifies a communication problem, but I’m not convinced it requires a monetary policy change to solve.
Today, ETH scarcity is typically communicated in terms of total supply, which obscures the mechanism that actually matters: net issuance.
The important property isn’t that there’s a fixed maximum supply. The important property is that issuance and burn are coupled to network activity, and that ETH can become net deflationary when demand for blockspace is high.
Instead of introducing a hard cap, we could communicate a protocol-level scarcity metric directly. For example:
Net ETH Supply Change = Issuance - Burn
This is arguably a more meaningful measure of scarcity than total supply because it reflects the actual economic behavior of the network.
Bitcoin communicates scarcity through a fixed quantity. Ethereum communicates scarcity through a dynamic equilibrium. These are different properties, but both can be measured and communicated clearly.
If the concern is that Ethereum’s monetary policy is difficult to explain, it may be simpler to improve how scarcity is represented than to modify the underlying issuance mechanism.
It’s been talked about for a good 5 years and there still isn’t a glib explanation that most people can wrap their heads around. The best I’ve seen is something like “ethereum has a theoretical max issuance of 1.51% per annum”.
Supposedly beginner friendly!
I think we need something really dumb that will likely never be reached.