The economic incentives of staking in Serenity


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. :slight_smile: 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.

  1. Sliding scale for issuance based on total stake

  2. Set hard % and all stakers split. Total ETH created reduces each year

  3. 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? :thinking: 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. :+1:


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?