Practical endgame on issuance policy

it does not fundamentally matter who runs the validator

Well then imo this might be where a model can be harmful rather than useful. It matters, at least to me, who runs the validator. If you just assume the staking providers raise their prices, you end up like this situation, with only the centralised entities remaining to offer services.

If you have not studied the topic before or something still is unclear, […] Or review the answer in the FAQ dealing with the topic.

In this FAQ, it doesn’t make any reference to ‘home stakers’ (for the purpose of discussion, assume one or a group of people putting up < 32 eth for a validator, topped up with delegated stake, not a future orbit thing, or a 32 eth DV cluster of their own capital. Think rocketpool minipool squad). Where do they fit in with respect to your view of Ethereum’s goal below: (which i find far, far, too low of a goal for that matter)

Ethereum wants to retain solo stakers, at least when measured as a proportion of all stakers.

The full cost of operating stake is best approximated as the reservation yield associated with the stake, that is to say the lowest yield at which that ETH would be supplied as stake.

Idk, I think the best way to approximate the cost of operating stake is primary research coupled with a model informed on this and other data (see later in post). The lowest yield at which Eth would be supplied as stake is a hypothetical/counterfactual we can’t answer as far as I know.

The native token of Ethereum […] is a central part of the architecture and we must always ensure that users have access to a sound trustless asset: ETH.

Sure its absolutely important to Ethereum, but the users of ethereum and the holders of ether are not a 100% identical set, and if Ethereum the network is to succeed, more and more users need to gain value from the network, not through simply holding the asset. The people taking action on Ethereum and its L2s are the primary users to serve, the asset holders and machine operators are secondary/tertiary, (we might not agree in which order).

The supply curve thus implies the marginal cost of staking, and the aggregate cost of staking becomes the integral of the supply curve.

You are arguing that the supply curve should dictate the cost of staking, I’m saying that would likely be bad for the quality of security of the network. I also don’t even trust that it would be the ‘real’ cost of supplying validators, because different operators have different exogneous ways to profit from validation (private orderflow, privately sequenced l2s, etc).

You must thus study the FAQ for an accounting of the effect on the composition of the staking set

I have, and one quote from it I will pick is:

The concern is therefore only valid with a yield that goes close to 0 or negative at a low quantity of stake. No SSP can reasonably outcompete all others at an equilibrium staking yield of, e.g., 2% at 30M ETH staked.

I don’t understand

  1. why you don’t think yields can go ‘close to 0’ in your proposals (at least thats what i infer from the framing of the concern only ‘being valid’ in this case. and
  2. “No SSP can reasonably outcompete all others at an equilibrium staking yield of, e.g., 2% at 30M ETH staked” why do you say this? And why does this impossibility of out-competition not hold at 34m and 2.5% like the current day?

And directly preceding that you say:

and perfect competition is not a reasonable assumption. If the cost of operating a node is not prohibitively high relative to the income that the SSP can make from running it, then variety in preferences and circumstances between delegators will take a central role in shaping the composition of the staking set.

And to me this sentence reads like we should be on the same page, that perfect competition is not a reasonable assumption, so we shouldn’t adopt a curve that tends towards maximal marginal competition and thus imperfect markets like oligopolies and monopolies. Lets allow for ‘welfare loss’ where the cost of operating a node is not so prohibitively high relative to the income the SSP can make, that it allows for a variety of preferences and circumstances to survive and hopefully thrive.

This feels like an unfair accusation since I am actively working on making it possible to stake with less than 32 ETH: the vision of Orbit SSF is to allow for 1-ETH validators.

That is fair and I didn’t realise you were an author on the (V)Orbit work, I apologise.

I understand your comment relates to your business interests.

Sure but as linked in my post, my ideological interests have existed on this matter long before my ‘business interests’.

It should be an objective for Ethereum to make it possible to run a 32-ETH validator at a profit.
It should not be an objective for Ethereum to ensure that someone staking 1 ETH can do so profitably

Why the delineation between 1 and 32 and not a different level? And do you think a current 32 ether validator can be profitable (at what profit margin?) in the current regime and in the category 2 one, without subsidising costs such as rent/internet/power. (e.g. in a commodity cloud machine)

(I agree that its not feasible to expect a profit at 1 eth btw, I think we just need to acknowledge and enable the good types of delegation on the margins to these operators, to improve the chain’s staking gini coefficient)

We can further delineate two different staking regimes among those staking with less than 32 ETH:

I’m not sure this is the best delineation, because you can for example run a distributed validator minipool, but it is certainly important and related to my last comment, that there is a big difference between what you might call extrinsic capital (e.g. rEth) and intrinsic capital (squad staking with your squad’s own eth). It is extremely difficult under today’s curve even, to make the intrinsic squad staking viable without a lot of sunk cost accounting. As a result, most squad staking favours these extrinsic capital sources, because they are needed to improve margins into viability for those with the least capital.

If a staker operates less than 32 ETH as part of a squad-staking setup, then there is a possibility that it may not be able to remain profitable. However, the costs you suggest would be covered by the staking yield even under the extremely low supply curve and full MEV burn.

Of course, supportive of mev-burn, and I don’t really expect solo squad staking to super-economical without at least leaning on the sunk costs of a house with power+internet, or even the assumption of a full solo validator that the distributed validator tags along with. The $500 off-hand figure assumes some of that. Here is an example I’ve prepared were you to rent from a provider, which is one of the most low-cost ways to run a node other than running it yourself, not pretty.

It is in my opinion unlikely that we reach an equilibrium yield below 1% under the practical endgame, even after implementing MEV burn. I would further find 0.5% extremely far-fetched. It is important to use realistic assumptions about the supply curve in the debate.

This is somewhere our priors probably differ, I don’t know why you think it wouldn’t go far lower. As we’ve said, there are SSPs here with a motive for earning comission, so they will supply capacity to stake if they can do so above their hyper-low marginal extra cost. Who changes from cbEth to plain eth on cb because they’d rather 0% over 0.5%?

Inflationary tokenomics does not inherently make Ethereum cheaper, other than by driving people away from the ecosystem, thus lowering transaction demand.

They do not make Ethereum cheaper, but inflationary, or ideally, dis-inflationary regimes would be better for the use of Ethereum than structural deflation.

Why do you presuppose that people would want to continue using Ethereum if we design issuance policy to make them poorer?

Your category 2 design also includes issuance ‘to make them poorer’, the debate we’re having is whether the risks outweigh the rewards of bounding it, no one is arguing to increase issuance beyond the current curve. (Which is far far lower than the issuance policy that came before it)

And to answer the question directly, people would continue to use Ethereum because Ethereum aims to be the most credibly netural, decentralised settlement layer, not the cheapest, nor the one with the most structurally advantageous tokenomics for holders seeking to maximise gains. To have a diverse, redundant, non hyper-optimised to giant economies of scale network, you need to allow for that in decisions around issuance bounding.

I find it disheartening seeing people argue for making regular users poorer for “the greater good”. In particular when it is the new financial institutions close to the source of new money in the economy doing it, essentially replaying a centuries-old playbook, but in crypto instead. It is in my opinion a bit immoral.

You may consider me immoral, but I am earnestly arguing what I see as for the best of Ethereum (doxxed and with all my biases). I foresaw the likely stake centralisation in 2018, I was wondering ‘Am I the baddy?’ in 2021 when I controlled ~10% of the network, and now in 2024 I think I’ve meaningfully changed the trajectory of Proof of Stake Ethereum by showing groups of SME and home stakers outperform 8/10 of the biggest staking entities so far. However there is a long way to go in my eyes, before the Ethereum operator set becomes sufficiently decentralised for what it needs to be to be black swan secure, and I think bounding issuance, and making it even harder for marginal stakers to stay afloat, making distributed validators particularly economically non-viable at retail scale, will push Ethereum down the road I outlined in “the staking problem”, which was more eloquently framed by Ameen, as USDC fork choice rule.

If you do not support reducing issuance, you can state your arguments for it already today. There is no need for a delay of several years. There is also no need for the excessive issuance stipulated by the current reward curve; this is already clear today and to delay the reduction by 4-5 years will not serve Ethereum well.

I do not and I already did. My arguments were that Category 1 / Do nothing, is 1) good for upholding the social contract where there is credible argument for adjusting near only once more, and yes, 2) good to pay for a robust security budget, which I see as positive and framed it above as ‘growth’ as it grows the number of ethereum nodes and validators and operators and the on chain economy, but you I think consider it to be a regressive issuance tax that impoverishes people.

I support correlated attestation penalties, but this is a nuanced issue and there is this idea that they will somehow substantially alter conditions for solo staking—they won’t.

Yeah ack, not a magic wand, but would love to see urgency on this and mev-burn in fusaka maybe.

Remember, Ethereum activity exploded under proof of work when there was no staking at all. There was just a lot of uncommitted capital with app developers trying to attract it.

And if I’m not mistaken, a 4.4% annual issuance rate…

Considering you acknowledge that one of the problems here is the LSTs make the locked, unlocked. I do think issuance is stimulative.

(I’m not saying this is a good thing and a lever we should be pulling, but you are asking me how my view that issuance is stimulative unlike in sovereign markets adds up).

Inflating away our users’ savings with this goal in mind will only hurt them.

That is clearly not the goal here. The intention is to stick to a curve that was designed to be disinflationary or slightly deflationary with respect to fiat currency, by targetting a max issuance rate of ~1.1% (iirc), which should in theory be beneath government’s 2% fiat price inflation targets (though those are different types of inflation), and it also has the benefit of always offering a marginal price to stake right to the end of the curve.

Blockchain compromise is highly asymmetric and black swan driven. A non-trivial issuance for security is part of building the most trustless decentralised public blockchain.

and expect them to stick around if a competitor with a native token without an inflation tax shows up.

The current competitors and most new ones always bootstrap with inflation taxes, I don’t think thats a major risk. On the other hand, Ethereum cannot afford to be out-competed in its decentralisation and credible neutrality, while it does not have competition in the stability of its money supply

Concerning the statement: “Operators providing validation as a service do not suffer from inflation”, Ethereum does not exist to enrich staking service providers.

It does not exist to enrich them, but Ethereum does exist by who these entities are and how they are controlled. We should not end up with a mono-culture if we want Ethereum to be anti-fragile. (And keep in mind that by count, most of this group are people with < 32 eth running nodes)

It should not be the objective of Ethereum to promote separation of labor and capital. We thrive on home stakers staking their own ETH, but they can of course stake other people’s capital as well. The argument that decentralized stakers do not stake their own ETH seems very convoluted. It seems more like an attempt to promote your company, fitting also with your advocacy for an inflationary issuance policy.

I don’t suggest to set it as an objective, I do think you should model it while analysing how many small operators would become under-breakeven with a given change. Considering they “can of course stake other people’s capital as well”. This is what I mean by “decentralised stakers do not stake their own eth”, that the economics of running either a solo or a piece of a DV with your own capital, accounting for costs, leaves a fraction of return if any. Most of these cases are at least using minipools, (and now Lido CSM,) to get more ether validating on their machines than they own themselves. The market for “has 32 eth” and “wants to run their own node” is now exhausted, and we’re left with “has some/minimal eth” and “wants to run a node for reward”.

This is an inappropriate debate strategy and should be avoided.

Fair enough, its hard to always discern when you are outlining strategies and when you are advocating for them.

In conclusion

And my conclusion is, it is not theft nor reckless to pay for security, and we should do our best to focus on the quality over the quantity of security. Proof of stake is a highly asymmetric risk surface, and they way PoS chains break is rarely through the front door economic attack.

I am unconvinced that bounding issuance to d rather than D won’t cause ultra low cost validators driving the equilibrium APR to way lower than most seem to expect, resulting in a mono-culture of ~3/10 entities that can make profit at such low rates. This has been my fear for approximately 6 years now, and I don’t see why my concerns are unfounded nor unreasonable.

1 Like