Practical endgame on issuance policy

[aelowsson]

I begin by mentioning that a background to this proposal can be found in the following four answers of the FAQ:

• Why should Ethereum reduce its issuance?
• Can stakers profit from a reduced issuance and what is the relevance and impact of the real/proportional yield?
• What about economic security? More stake makes Ethereum more secure right?
• How will a reduction in issuance affect the composition of the staking set?

@keyneom

I don’t believe deflation is sustainable, I also don’t think it is even desirable if it were. Over indexing on the store-of-value property of money leads to weakness in its use as a unit-of-account and medium-of-exchange. Ironically, something that is only a store of value can end up losing its value and then even lose that property as well (this is especially threatening to virtual assets that don’t have other fundamental uses outside of their own systems).

We ensure that ETH gets used as money in the world through the scaling roadmap as well as all the other improvements currently underway. The suggestion that ETH needs to make its users poorer for it to be used as money is a false premise. Ethereum will get used as money by being useful as money, not through a Keynesian fallacy (which Keynes himself wouldn’t even find applicable in this context).

@keyneom

Overall, I believe Eth is overly deflationary as it stands and needs higher issuance, especially as there are likely to be even more deflationary pressures coming as price discovery on blobs begins and increased L1 activity is likely in any kind of bull-run/growth stage for the network. I believe we are working to decrease the burn (L2s do this to some extent by increasing available tx space on ethereum)–I don’t know if it will be enough

You think transaction demand is becoming too high (too high burn) and therefore wish to further increase issuance, to encourage… more transactions and use as money? It does not make sense to me. We are not working on decreasing the burn. We are working on scaling Ethereum. The burn might just as well increase from it eventually, which would be welcome.

@keyneom

I don’t believe targeting a certain issuance really impacts whether effectively all ETH ends up locked in a LST or not. ~99% ETH could still end up being “staked” through Lido even with a 25% target for staking. Lido absorbs 100% of ETH and only issues 20% to validators for actual staking. Whatever little yield is generated is split across all LST holders. So, the real question here is what makes Lido the most money or gives them the most control. Most likely they want as much ETH as possible issued since they get to keep 15% or w/e % of it. Yield really doesn’t matter to them. They only care about the cumulative ETH issued because they keep 15% of it no matter what. Yields could be 0.01% for holders but it would still be the best option for getting some form of yield and not losing as much relative ETH to stakers by holding actual plain ETH.

Why would users send all ETH to Lido when they are provided with no yield on it? In the outlined scenario, staking through some other LST will give 400% higher yield since Lido apparently only stakes 20% of their ETH. Why not stake with that other LST then instead? There needs to be a logic to the arguments here.

“Most likely they want as much ETH as possible issued since they get to keep 15% or w/e % of it. Yield really doesn’t matter to them.”

Just to be clear, yield is generated through issuance. The equation is y=I/D.

“Yields could be 0.01% for holders but it would still be the best option for getting some form of yield and not losing as much relative ETH to stakers by holding actual plain ETH.”

Users will not risk their ETH through staking with a third party for 0.01% yield.

@keyneom

I could see an LST pushing negative yields to eliminate staking competition but guaranteeing their LST holders positive rates for a time where they pay LST holders out of their own reserves/earnings. Solostakers that face these types of attacks and leave are not likely to come back in my opinion.

The Practical endgame does not allow an LST to push us into negative yield territory (which would be unlikely anyway). So this does not apply.

@keyneom

Targeting ironically gives adversarial groups a target to hit in order to carry out successful attacks. Keeping things dynamic actually makes for a less guaranteed form of attack imo.

There is no “targeting” proposed in the post you are commenting on, in the sense that there is no negative yield.

@keyneom

Even targeting a certain percentage of ETH being staked does not give you a very stable amount of economic security because issuance and the burn are always running. If there are 100MM eth and 50% is staked that’s very different than only 50MM eth and 50% staked. What are the predicted market caps for these scenarios?

This is literally described in the post:

@aelowsson

The circulating supply will drift to balance supply, demand, and protocol income. Therefore, the pledge would ultimately be enforced by swapping out D for d in the equation for the reward curve and normalizing by including the circulating supply at the time of the swap, once the circulating supply begins to be tracked at the consensus layer.

We are going to change the equation for the reward curve to relate to deposit ratio instead of deposit size. This has been the plan ever since I made this post several years ago.

@keyneom

@aelowsson

3.1 The role of the reward curve

I don’t consider the reward curve to be purely a function of security. It is an incentivization mechanism to encourage Ethereum and Eth adoption.

The reward curve ensures sufficient staking to keep Ethereum secure. “To encourage Ethereum and Eth adoption” is very vague. If you think we should issue yield to lure people to the Ethereum ecosystem, read this answer from the FAQ.

@keyneom

From a tech standpoint I’d prefer a system like bitcoin that no matter how unprofitably they are participating allows them to do so regardless. The beauty of bitcoin is that it can always take on more miners it could be 10 billion separate participants in building the next block and nothing prevents you from joining in. They can always participate if they choose to. It’s a property that I’d like to shoot for.

I don’t understand your point. The Practical endgame literally does not cap the quantity of stake. Everyone will be allowed to stake, and even those staking with very small amounts will get a regular positive reward. This seems like exactly what you are looking for.

@keyneom

I think you intentionally ignore the incentive people have to spend immediately if they otherwise get diluted.

This has already been answered but I really think you should reconsider. Why do you feel the need to degrade the user experience and make our users lose money by diluting them? You have not provided a clear answer to this other than stating that you want them to transact. You do not think we can build a network where people transact because they want something, rather than being coerced into it?

@keyneom

People that stake right now get a real yield and are more likely to sell that if it is inflationary for real goods (even just to pay off the cost of running the validator) than if it is deflationary (in which case it just encourages more holding and more staking since I get even more of it and it is going to be worth even more – i.e. I think you’ve argued there’s no incentive to use/burn the token if it is inflationary since you just want to stake it but I don’t think you’ve laid out clearly why anyone would be incentivized to use/burn the token when it is delfationary).

We are not here to micromanage our users’ spending habits. It’s our job to scale Ethereum and make it as cheap and secure as possible to transact. Why do you feel the need to try to coerce users to transact when they do not want to? People will not lose the need to transact just because ETH is deflationary. If they need something, they will buy it. If they wish to send money to a friend, they will send it. If they have found a promising investment that they think will outperform all other opportunities available to them, they will invest. The winning strategy is to facilitate real economic activity. We should let users go about their business as they see fit, without diluting them, rather than trying to artificially coerce users into transacting (which by the way would not work anyway; but I am just responding to the argument).