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the stage is
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yours thank you and welcome to this
presentation of a practical endgame on
Ison policy which is also the title of
my recent East research
post and we begin in a hypothetical
future scenario a decade from now where
the cost of staking has come down and
staking frictions have been
overcome now people still have different
perspectives of the cost of staking and
Stak under varing conditions so there's
really no agreement on the exact yield
that is sufficient for
staking people have different
reservation yields that is the lowest
yield they find acceptable for staking
they are at this point indifferent to
staking or holding the token
let's plot the hypothe hypothetical
distribution of reservation yields we
see here we have Stak in yield on the
x-axis and we have amount of stake on
the y-
axis a few might be willing to stake at
the negative yield perhaps to attack or
defend etherum many more are willing to
stake as the yield becomes positive and
at 1% staking yield perhaps a lot of
token holders rushing in this
hypothetical scenario at two 2.5% half
the E is St and as the yield reaches
beond 4 5 or
6% not much more steak comes in because
almost all e is already
staked and we can explore this further
by Computing the cumulative steak here
in blue as it raes to
one the cumulative stake can be referred
to as the deposit Dru that is the
proportion of all steak that is
deposited for
steaking and we can also call it the
deposit size then we are referring to
the quantity of steak the total reaching
120 million if all eat the
steak now let's remove the negative part
of the yield and flip AIS and we have
now created from a distribution of
reservation un what we generally refer
to as the stake supply
curve so if you remember at the 2.5%
yeld half the it gets
St we add also the demand curve specific
by the
protocol and let's add
also 300K of Mev each year we then reach
at the intersection of demand and Supply
what we refer to as the stake in
equilibrium at the black
square but currently we are here and
this blacker isn't exactly known to us
so that's the situation we have right
now we are now ready to discuss the
motivation for a reduction ini ISS
if you note that over half circulating
Supply could be sted in a a plausible
scenario but it's this General agreement
amongst researches that 30 million e is
perfectly sufficient for retaining
security and here we would be at more
than twice of that so in on this range
here what's the cost why don't we want
to pay more for security than what is
strictly needed well for one we can
approach cost rather generally speaking
of you know the hardware that you need
to pay uh the taxes you need to pay for
you know you you have a liquidity you
need to finance the upkeep of of your
software Etc and it's then natural to
approach the cost as the reservation
yield if you remember that's the lowest
yield at which you are willing to
stti and then since the supply curve
captures the marginal reservation yields
as shown previously you can compute the
total cost for staking in aggate for the
protocol as the integral of the supply
curve and so in this scenario oh there a
picture can I remove this yeah and so in
this
scenario the the total cost of taking
becomes $ 820,000
e for this specific supply curve that's
$2.6
billion there's also a
surplus uh above the supply Cod so so
the marginal Staker with a low
reservation Shield will have a high
Surplus and uh the marginal Stak will
have with with a high reservation yield
will have no no Surplus at
all let's now reduce isance with the red
reward curve this then pushes down the
staking equilibrium down to the red
circle
here this gives us a cost reduction
benefiting all token holders uh so we're
removing essentially hard cost you know
taxes we're removing liquidity for users
and the risk premium and benefiting all
token holders in the form of a lower
amount of newly mined
eat and that's around $1.4 billion at
the current token price we would save in
this hypothetical scenario there's also
serface shift from stakers to allil
Holders but this just shifts value run
from one set of juices to another the
cost reduction that's the welfare gain
for and there a wonderful opportunity we
have here to reduce the cost of our uses
you know uh a simple way to frame it
would be don't buy things you don't need
you know this is not a sustainable
model and we of course need to focus on
facilitating sustainable economic
activity then some people say well the
yield makes ethereum attractive you know
it's fun to
stake but we have to remember that all
eat that is issu we also dute the token
holders so there's nothing gained you
know in aggregate we shouldn't try to
trick our users into believing so we
need to focus on facilitating
sustainable economic
activity or some people say well we need
inflation otherwise people just hoard
the
tokens well that's not true first of all
consider the fact that if you issue a
high amount of token then you compel
users to lock up the token staking
instead of having them available had you
know for paying your
transactions furthermore consider the
fact that of course if you if
you if you focus on what we're trying to
do you know the the the need to transact
is universal it's not really
affected and if we ensure that ethereum
facilitates sustainable economic
activity and that e remain sound then
the best option ofil producers is to be
on ethereum transacting using
e and so that's what we have to strive
for and then some people say well apps
rely on the Yi you know framing the
yield as somehow productive it's not and
it's not our role unfortunately to
support applications that do not
facilitate sustainable economic
activity that's not our job and if we do
so you know a high isance would always
over time turn into perverse subsidies
there's also a macro perspective to
consider High s participation puts
pressure on the consensus layer here we
have the current scenario around 35
million e St but imagine a scenario
where almost all e is sted and then
something breaks say there's a
discouragement attack the censorship or
there's U some client BG anything else
in this scenario ethereum relies on the
social layer as a final recourse but
what happens if the social layer
is sort of wrapped up everyone has stake
in a game well in this case the social
layer sort of becomes
overloaded and we have come to a point
you know where we can lead to very
aggregated failure modes we would then
very much prefer the bottom scenario
where we have a neutral social layer
available highest St position also can
lead to of course higher attestation
load and further more it you know if uh
it put pressure on the app layer when
one or or few lsds comes to dominate
this
money ethereum then is deprived of uh a
trustless sound assets which is one of
the most important crucial features of
the Central blockchain and and you can
imagine if if you have control of the
money you sort of can control uses and
apps in in various ways that we wouldn't
really like furthermore consider the
fact that if apps build on top of the
LSD and then apps build on top of the
apps building on top of the LSD and
you're creating this sort of mono and
then something breaks then you are sort
of threatening you know the whole the
whole system here which is something we
really would like to
avoid so in conclusion even though
nominally the protocol might seem
maximally secure if everyone is taking
it turns out that it's actually a bit
insecure both at the consensus layer and
at the up layer and we would prefer the
bottom scenario
here however there was a potential
downside for adduction initials for
example sud stakers do not have the
economic of scales of large staking
service provider so it's perfectly
possible that a relatively fewer solar
stakers might be willing to stake in the
scenario where the is where the yield
Falls very low there are arguments in
the other directions as well but still
let's explore this a little bit
so we go back to the first plot of
reservation
yields and let's split up these
reservation yields into two classes we
have delegate Stiers and we have solar
sters so loosely defined here now there
are more delegated Stiers than solar
Stiers so I'm just normalizing these two
plots as well so one scenario is that if
we lean on economical scale is that the
resolation yield among delegated St
might have a peak in distribution a bit
lower say at 1% whereas the peak equal
solar stakers is at 2% well in this case
we would indeed see that the proportion
of solar stakers at the lower isi will
be slightly
lower the argument in the other
direction is that at a very high stake
partici position and LSD comes to
dominated money so there's you know no
loss in liquidity if you own the
LSD big seconding surface providers also
get better economic of scale and you
know it may be perceived as that the
risk of staking with them Falls because
they become you know too big to fail
there's no social layer there anymore so
that's a counterargument and that could
happen at any year depending on the
exact shape and slope of the supply
curve M also becomes a much bigger
concern for us as lower
ISS it increases solar Stak is relative
yield
viability H you know because they cannot
effortly pull the rewards furthermore it
degrades the incentive to attest
properly since me will be the only thing
that
counts so there's a lack of incentives
to attest and we can then consider
various way how to resolve this you know
we can try to increase the attestation
penalties all right so now we increase
the attestation penalties but then if
you are staking service provider and you
drop attestation of your competitors
then then you can you can sort of force
them out so then we have to have
proposed penalties as well all right now
we added proposed penalties but then if
you're a soul ster and you make one bad
proposal you can get punish very hard
because we have low additions as well
you know and you might be in the red for
several
years all right and so then there are
ways to try to soften this but there's a
lot of things going on at the same time
here that we're working on and it also
further complicates the design of orbit
as a you know the sing slot finality
design because then there's also a way
for stakers to avoid void having to
attest as much as possible taking as low
risk as
possible and so the lack of incentive to
attest can then lead the S to
deconsolidate and then we need to raise
the consolidation incentives and this
can of course further raise fairness
concerns and what we would like to ship
is murn because this reduces all these
Tre
issues so that's something that that is
really important for etherum but we
don't have it and we have to deal with
the S we have we're now ready to discuss
a practical endgame on isan's
policy so here we have the current
reward curve with isan Rising all the
way up to 8 1.8 million e uh with the
current reward
curve here we have the redward curve
shown earlier it forms by taking the
equation for the current word curve and
adding the cube deposit size to the
denominator and I refer to this as a
practical end game it's practical
because it's something we can strive
toward watch without murn it's practical
because we should be able to guarantee
Sol stakers to not have to pay for
staking and it's practical because it
allows us to design consensus incentives
in an easy way and and it's also
practical and it's an end game because
it allows us to probabilistically stop
the grow in stake so that's why I favor
the red reward cover or something close
to it this shaded range is approximately
where I would like to be then gives us
room for a higher or a lower worker
depending on you know how the design
works out and feedback from the
community others might prefer
differentes for focusing on stopping the
grow in Stak or increasing the yield for
solar St and this can be
discussed but you know if we go too high
you can imagine if we say go to 110
million each state and provide anything
about the bare minimum to avoid Sol
sters pay you know then this would feel
like a misbalance of this different
Traders we're trying to to to balance
and then there might be a movement to
further redu ISS and we would like to
make a One Singular change to isan's
policy and that's why I find that this
will be slightly above where we want to
be and you note that none of the reward
cures nor the Shaded range goes above an
interest rate of
0.5% that's sufficient to ignore
security to to ensure security and it's
at the upand of any tradeoff I think
think we should ever consider so
regardless of the exact end game that we
choose we could safely commit to never
issuing more than
0.5% of the circul supply each year it
feels like a rather attractive
proposition you know tell your friends
shoose ethereum shoose e there will
never be more than 0.5% of the
circulating Supply issued each year and
a cap on ISS it's perfectly viable or
Insurance security whereas a cap on the
circulating Supply is not regardless of
you are in proof of stake or proof of
work and from my perspective we could
just ship you know 0.5% cap solidifying
it and then come back to addition a few
years but there seems to be from the
community ASP we want one single change
so that's not something I would push
for there are other ways to construct a
reward curve I'm showing here other
other Alternatives in in the it research
post like sigo shapes for example uh
with the equation prided there
let's now look at the impact of an
insurance reduction on
stakers we have here the staking yield
and we see that we
are uh showing it with Mev now we add
the supply curve and we are able to
reduce the equum from 60 million down to
around 40 million
state but of course we are here and so
given some reason we might end up in
this region
here we must also consider a very low
supply curve and what would happen in
this scenario and here we have that bad
situation for the M micro perp when all
almost all it is St and we could then
bring it down to around 65 million e
with the red reward C in this
scenario and of course shiping meone as
well we come down to almost 50 million e
State and it might seem like a bad
scenario but it turns out that it's
actually better for SE to be at the Red
Square there than at the black square
and that happens
because of this equation uh it's from my
post minimum viation that sort of
started this whole conversation and it
captures the attainable change in the
proportion of the circulating
Supply so it's sort of like a
proportional yield or it's been referred
to as the real yield or the change in
ownership we have the yield that you
attain on top of the fraction line and
we had the inflation rate at the bottom
of the the
uh fraction line that could be negative
you know if there's a if there's a high
burn rate but otherwise
positive and we can use this equation to
draw uh something I refer to as isopr
proportional lines and at these lines
across these lines the proportion of the
circulating Supply that you attain
remains constant so it doesn't matter if
you're at 1 1.5% yield 2.5% yield or
3.5% yield from the perspective of the
stakers once you account for delusion
effect if everyone almost Stakes you get
the same proportion of the circular the
supply let's draw more of these lines
it's like a topographical map you know
with counter lines indicating equal
elevation so at this map you want as a
St to be as a high elevation as possible
this equium at the red uh area is not so
good even though the yield is high
because you're at low
elevation any equium above the dashed
curve is at a better higher elevation so
the orange area here is better for you
as a ster even though the yield is
lower and here we have the supply curve
from previously and we see that if you
start here at the black
Square you have 110 million each Stak
than say a
1.8% Stak yield well it might feel good
as a Staker but you follow this is a
proportion line the way to the other
equum that's possible on the disip curve
and you see that you're equally well off
as a ster at a you know 0.25% is on SE
and 20 million State because you not
suffering from
delusion and the optimal situation here
is actually at this at this red square
here where you at the highest elevation
is possible on the
map but this is just Surplus shifting
around you know it's not the motivation
forance the the motivation is for inance
reduction the motivation is the cost
reduction but it's important to
understand this as well it's very
important to emphasize
this and just as a concluding remark a
checklist on the Practical and what
needs to be done there needs to be a
theoretical uh foundation and we have
shipped it there's a cost reduction and
there's the macro perspective we need to
have curve parameterizations and they're
available in the post and elsewhere
uh we need to design orbit ssf
consolidation incentives and I I posted
yesterday uh a post on that so I would
put it as yellow because it's a draft
post but it's sort of outlines
approximately where we would like to be
we also need to redesign eum's consensus
incentives a bit if we push is down
close to Zer and we have been working on
this a bit but as you noted the
discussion about this R senses but
there's a few things quirks to work out
so I put at the orange if we push met
Buton both of these becomes Greener
because you know then the issue isn't
that big
anymore I also working on a
probabilistic equ analysis that I will
post uh in the first quarter of next
year and that will uh I so I will put it
at Orange and that would be like a
foundation for my perspective of why we
can do it
uh from the perspective of you know
decentralization and we also need to
build community support and I'll put it
at Yellow by turning the other check
marks green we can also build community
support better you know and we build
community support of course by striving
for an ethereum that facilitates
sustainable economic activity that is
what we're working on in all these
different parts of the roadm that is how
we strengthen e and ethereum and that is
a suitable North Star in my opinion
thank you
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thank you so much endis now time for
questions first one what do you think
about reward corbs with Dynamic
parameters yes uh I I have written about
this actually there's a
fq and I talk about the issue if if the
question relates to the issue of trying
to know dynamically I adjust the work
the point is that it's not a way to to
address the issues that we have in the
long term in the long term it doesn't
matter you know we need to focus on the
one reward curve because that's how we
prioritize this these different aspects
you know so I think that there's there's
the idea of you know having some Dynamic
solution there's there's there's a
threat in it that you think that you're
solving something but you're not solving
it you're not solving it in the run run
the only reason why we would like to
have a dynamic curve is if we have if we
go back here oh I can yeah but if you
have an equilibrium where you have to
lower the isan yield so much in the
beginning then of course and I describe
it a bit in fq then of of course you
could consider a scenario where you have
like you tick down the reward curve
gradually over a year you know so that
you don't make people uh get to lose uh
the staking so quickly making like it
becomes like very bad B effects on
everyone if you just shook it because
otherwise the assumption is of course
that some are going to leave so the yeld
is going to go up again but but but if
you shook it down and then uh the year
becomes very low there's a risk that the
solar Stiers are going to live before
the year comes up
again next one how does the beam chain
proposed road map affects progress on
issuance policy well so my
interpretation of uh how how it affects
is that is it's essentially um something
that is sort of part of the idea is that
we we try to ship asan policy as one of
these gradual improvements it's not it's
not like part of the beam Fork it's
supposed to be done
earlier so I would say that it's sort of
part of the overall role map there
yeah thank
you what would what would you say is a
good governance process to agree on a
new issuance curve uh rough
consensus that was a quick
one
um why does me burn affect our needs for
consolidation incentives in orbit S ssf
no it's not M burn that effect it's m so
if you design orbit s like a Bas basic
idea of how you can design orbit ssf is
that you push out smaller stakers so
that they don't attest as
frequently while you at the same time
give them the same yield so that's it's
sort of fairness still but the situation
is such that if you push out them from
attesting you cannot at the same time
push them out from
proposing that's a a a lot of bigger
concern because if we still have me in
the situation then we cannot make it
fair if we push down the ISS and then
you still gain a lot of the value you
gain almost all the value from proposing
and attaining this me you know there's
no M burn in place then everyone would
like to be deconsolidated to remove risk
but they still get to propose as often
as today and so that's an
issue great thank you so much the next
we still got more time is there yield
where you might expect institution to
lose interest in staking or might find
alternatives to generate
yield long question does it compete with
some traditional Financial yield
threshold I mean the beauty of having a
reward curve is that if there's a loss
in interest in staking in general the
yield goes up you know that's the whole
principle so I mean it's hard for me to
cons the the option would be here maybe
implic implied is that that
everyone wants to stake but no
institution other than one or a few are
still willing to provide services and I
find it a bit perhaps tricky to
contemplate that this would be the case
but of course we we have to allow
various institutions to compete you know
we we cannot avoid that there's going to
be a comp competition it's we would like
of course for for there to not be but
it's not something we can avoid
should we go for the last one there's no
V but I think since it's already here
let's answer it there's already so much
Financial investment by influential VC
funded actors even at current levels do
you think it's possible to make a change
that drastically affects the bottom
line
yes okay do you can you a little bit
more about the yes uh why do you think
well I don't know I don't think that VC
funded actors is is like the biggest
issue for us it's I mean the biggest
issue of course is if solo stakers would
feel like it's it's a disappointment for
them so Visa funded actors is the least
of our concerns I would say in
this great our time is up now thank you
so much