Anders Elowsson pfp
Anders Elowsson
@anderselowsson
This EIP research post provides the rationale for adjusting Ethereum’s issuance policy to use a reward curve with tempered issuance. It covers relevant trade-offs, reviews security considerations, and discusses the endgame. https://ethresear.ch/t/reward-curve-with-tempered-issuance-eip-research-post/19171
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
I designed this reward curve to moderate quantity staked while still maintaining reliable consensus incentives, economic security, resistance to discouragement attacks and cartelization attacks, a favorable composition of the staking set, and viable conditions for solo staking.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
It simply divides the current reward curve by 1+D/k where D is deposit size, and k automagically comes to define the quantity staked at the peak issuance point (plus sign), which also becomes the point where issuance is halved relative to the current reward curve.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
A graduated approach is preferable, because it provides time for stakers to adapt before a full reduction takes place, smooths out disequilibria, and allows for an intermediate evaluation of effects on the composition of the staking set as well as the equilibrium quantity staked.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
Staking yield under the current level of MEV is here shown. The blue lines are just future hypothetical supply curves, that may shift downwards, increasing the quantity staked and decreasing the yield. The dashed curve represents a graduated approach intended for the next fork.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
The analysis begins by reviewing the effect that issuance policy has on user utility. It is important to understand that a high issuance level compels users to incur higher costs than necessary. The area below the supply curve is the implied aggregate cost to stakers and the area above represents their surplus.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
Relevant costs include hardware and other resources, upkeep, the acquisition of technical knowledge, illiquidity, trust in third parties and other factors increasing the risk premium, various opportunity costs, taxes, etc. The proposal reduces costs corresponding to the darker blue region, and welfare improves.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
Too often, all staking yield is considered as a surplus, with the implication that issuance policy is a zero-sum game. But due to implied costs, corresponding to issuance that does not generate any surplus to stakers, issuance policy is *not* zero sum.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
To illustrate this, the attainable change to someone’s proportion of all ETH can be calculated as y_p = (1+y)/(1+s)-1. It can be interpreted as the Fisher equation adapted to Ethereum. This “proportional yield” can be computed for both stakers and non-stakers, in the latter case with y=0.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
The figure compares y_p at two equilibria, through the associated changes to y and s. When changing from the current reward curve to the proposed reward curve, stakers are left virtually unaffected, whereas both non-stakers and de-stakers benefit (treating de-stakers' reservation yield as an indifference point).
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
The post then discusses the macro perspective, following my previous analysis. The macro perspective is very important and a broad topic but has already been given much attention lately, I will just share how I tried to sell it to Justin last summer. https://x.com/weboftrees/status/1710710993989316652?s=20
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
Section 4.2 reviews how the staking yield may affect the proportion of solo stakers under equilibrium. The biggest risk to solo-staking viability is economies of scale. But if an issuance policy leads to more staking, dominant SSPs can offer lower fees, better LST money, and lower risk due to emerging moral hazard.
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Anders Elowsson pfp
Anders Elowsson
@anderselowsson
We must also remember that self-custody is an important paradigm for many users and that LSTs come with risks; this will affect the supply side of the analysis. A problem of a high issuance level is that it forces a principal—agent problem on more unsophisticated users that do not wish to see their savings eroded.
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