Thanks for the answer. 
I guess this would definitely be a nice incentive to onboard early, while at the same time global inflation remains almost the same. 
This has nothing to do with economics, but I would also be extremely careful with slashing in the beginning (I spoke with a lot of people who are considering becoming validators and they’re all so scared of it ).
How long is the proposed staking period? That’s obviously and important consideration to many. Do you foresee secondary markets for people looking to buy-out early from their staking obligations?
A max withdrawal rate of 8 validator slots per cycle, with a minimum withdrawal waiting time of 24 hours. So in normal circumstances when few others are withdrawing, you can withdraw within a day. In the case of an attack or other situation where everyone tries to leave at the same time, the waiting time can go up to months, but that’s an exceptional case.
It would appear that with some recent changes to the base reward quotient and switching from cycles to epochs, the rewards have shifted down some. @vbuterin I noticed on github most of those changes were from you so figure you may be the best to comment on this.
I’m interested in how the base reward quotient is being determined since that number seems to directly impact the scale of rewards. Is it purely technically driven right now to fit other areas of the spec? I just want to make sure that we get the incentives right.
I’ve started a GitHub page for this topic. It can add to the discussion here or if people want to just contribute directly on the page that’d be great.
I am grateful that you have brought this important topic up @econoar!
Even though we are clearly dealing with an nascent and abnormal economy, I believe that staking incentives is partly in the realm of macro-economics. As such, I believe that people with academic research and actual experience in these matters should be brought in to comment (of course after being thoroughly educated in crypto-economics). Experience can even be in game-world economies.
This is a related discussion on the topic of ether supply rate / miner rewards in the current Ethereum mainnet, ahead of a decision made by the All Core Devs:
Possible outcomes from altering the ether supply growth rate
And to sum up my thinking:
Are we allocating enough thinking toward macro-econ basics as we balance staking incentives with security considerations?
Is the deflationary pressure of storage fees significant enough to incorporate into the inflation calculations? Unlike gas fees which are kept in the system and passed to the block creator, storage fees are burned forever.
I think that @MihailoBjelic makes a good point about targeting certain metrics.
To maintain such targets would require far more econometric measurement than is happening now in Ethereum. Additionally, an articulation of the desired outcomes would have to be made by key stakeholders. And, above all, there would have to be the will and capacity to periodically make changes in order to reach the desired outcomes.
That validators need to be incentivized is clear. But to decide on the rewards so far in advance seems unrealistic. How can we know now what competing investment options will be available when the time comes to potentially stake?
Perhaps it is better to focus on the design of “how to decide” on matters like this, and what considerations and stakeholder groups are important to the process.
This commonly-cited connection between reduced ether issuance and an improvement in the price of ether to fiat is unproven.
Ether is not exactly allegorical to corporate shares, which would increase in value in the eyes of investors should the firm perform buybacks. Ether is perhaps more similar to the currency of a small economy, featuring limited types of firms. Perhaps its value is more rooted in the growth of the underlying economy and in the subsequent demand for gas.
Rampant inflation may not be a factor in evaluating ethereum as a viable network. It may have actually been driving the miners to participate in ICOs and direct investment in projects. IMO we need to measure and prove what inflation is actually doing to the behavior of individuals and firms.
It’s not exactly a currency either. It’s a currency asset whereby staking it allows you to own a greater percentage of the total amount of the currency.
I agree though that the effects of inflation aren’t proven. It’s also less of an operating factor for currency that increases and decreases in value by 5% daily.
A few additional points based on @econoar 's opening questions :
If we want to compare ETH against asset classes outside of crypto, it’s not necessarily fair to use checking accounts or other nominally safe investments. We should treat it as the market would likely treat it: as a risky asset. This means using a large discount rate that prices in a risk of failure, similar to how people value cash flows in a start-up. We’re talking 30%+. We may have unshakeable convictions on the future of ETH, but it’s unrealistic to expect the market to see it the same way.
However, just because we want to use a realistic discount rate 30%+ doesn’t mean we also have to target inflation accordingly. We have to remember that we’re talking about ETH-on-ETH return, not Cash-on-ETH return. If transaction counts and total gas paid has an astronomical growth rate post-sharding, we may not need to pay stakers with much inflation.
I agree with keeping the inflation and staker return simple before we get data on sharding. Target a simple and low percentage like 1% or 2% and let the market determine how much ETH-on-ETH return is justified by staking. Without data on the growth rate of transaction fees post-sharding, we’re essentially trying to make policy with one hand proverbially tied behind our backs. As a future staker, I know I’d want to see transaction growth rates before committing to stake long-term. Until that data is available, I’d stake or not stake according to how many people are currently staking.
Granted, point 3 is entirely based on ease of investment decision-making to stake. If there are technical reasons why the current reward schedule is the way it is, that obviously take priority.
I generally agree withe everything @jpitts wrote.
Few remarks:
I think this is pretty important to note and understand.
Of course, basic economic logic says that e.g. zero inflation can have only positive impact on the price (certainly not negative and probably not even neutral).
But, I would say that the Ethereum “KPIs” (state of the tech, app usage etc) and the overall state of the crypto ecosystem impact the price at least an order of magnitude more.
We need to decide on the specific inflation/rewards, sooner or later. I think it’s hardly possible to take into consideration all current alternative investment opportunities for validators/stakers, and it’s definitely impossible to account for the future opportunities, which implies that there is no scientific method to determine the optimal inflation. That said, I guess what remains is public discussion and gut feeling (public agreement to try with X% inflation and change it to Y% at a later point of time if needed). As I’ve said, it’s impossible to foresee future investment opportunities for stakers, so we might have to repeatedly adjust the inflation in future anyways, e.g. every few years (no. of validators can not be adjusted bellow a certain threshold if we want a secure system, so adjusting the inflation is the only variable to tune here).
Any thoughts on capping the total number of ether? Doesn’t solve the inflation issue, but does give people a sense of scarcity, like bitcoin. Just seems like it is part of the economic landscape. I know this has been a hot topic in the past, although I haven’t paid too much attention to it, so I’m not pushing it… feel free to dismiss this comment.
I wouldn’t think about this ATM.
Even Bitcoin’s 21M cap is absolutely unsustainable when coupled with PoW, i.e. no state-of-the-art crypto can exist/survive without inflation.
However, as tech matures and becomes more efficient, I think this will probably become a sensical discussion topic.
Full agree with this @MihailoBjelic. Focusing on a cap right now is the wrong thing. Perhaps some day when network fees are truly enough to compensate stakers, then it will be possible. However, it’s a completely unproven theory right now that relies on high price and high network usage. There’s no way Bitcoin would survive with a 21mn cap right now.
The other issue with deflation is it prevents people from wanting to spend it. Targeting “reasonable” issuance rates that guarantee safety is the better way to go IMO.
Is there a specific reason that the current “sliding scale” mechanism was selected? Sure, it may be the best option but I’m just curious. Taking previous notes from this thread and just thinking about it, there seems to be 3 possible (and likely more) options when it comes to staking incentive structures.
Sliding scale for issuance based on total stake
Set hard % and all stakers split. Total ETH created reduces each year
Set actual ETH issuance a year for split. Issuance % reduces each year
I believe @MihailoBjelic mentioned 2 at a point. It’s perhaps a simpler and easy to understand solution. The issue is, you really have to get that number right.
I’m curious as well as to why the sliding scale method has been adopted. It seems to me that getting the sliding scale for rewards correct would be harder than getting a flat number correct. You basically have to decide ahead of time what the right reward is at all parts of the continuum, not just decide one flat amount and let the market dictate the number of stakers. I don’t mean to say that it’s an incorrect approach, but I don’t see why setting a scale for rewards is any easier than finding the flat number for inflation.
Yes, I was talking about this option, but I don’t understand the “Total ETH created reduces each year” part? 
Total ETH created actually slightly increases each year, because we have the same inflation % but the base is slightly bigger each year?
I fully agree, would love to hear other people’s thoughts on this.
Er, yes I have them flipped. Fixed % means total ETH issued goes up every year, Fixed ETH means issuance % goes down each year.
Oh, ok, then we definitely understood each other well. 
What if someone sitting on a large amount of ETH (Joe, Vitalik, etc?) comes along and just stakes it all and immediately gets the majority of the interest. Do we care?
