Ethereum protocol R&D. Admirer of emergent order.

wrote down some thoughts with @ansgar.eth, exploring the status quo of staking economics, its drawbacks as we see them, and what the endgame of staking economics could look like + what we should do in the short term until endgame.

staking economics endgame: https://ethresear.ch/t/endgame-staking-economics-a-case-for-targeting/18751

near term issuance update:

Today, 30M ETH or 1/4 of all ETH, is staked. We argue why under the current issuance policy, in the long run most ETH will plausibly be staked via LSTs.

(thanks for the dashbord @hildobby)

we think high staking ratios have negative externalities:
* LSTs are a winner-takes-most market due to network effects of money. This LST could replace ETH as the de facto money of Ethereum. But for true economic scalability, the money of Ethereum should be maximally trustless: raw ETH.
* ...

* Economies of scale and network effects induce more demand for LSTs as the staking ratio increases, making solo stakers relatively less competitive.
* ETH holders are diluted beyond what is necessary for security.

today issuance yield doesnt ensure a limit to the amount that can be staked profitably. LSTs have significantly changed the cost structure of staking, making it possible that most ETH will be staked eventually.

instead endgame staking economics should target a range of staking ratios, e.g. around 1/4 of all ETH.

this approach is future-proof as it ensures sustainability with respect to the changing supply of ETH.
easiest mechanism to achieve targeting is an issuance curve designed to go towards negative infinity beyond some staking level. this economically guarantees staking levels will not grow beyond some specified range.

open questions and technical dependencies prevent a targeting policy from being implemented in the near term.

but leaving the issuance curve unchanged in electra means additional >40M ETH could be staked (60% of all eth). if long term goal is some staking ratio range, say ~1/4, we shdnt exceed significantly in interim

surpassing target range before transition to targeting policy means stakers will be insufficiently compensated until excess stake can exit.

we therefore see a strong case for @anderselowsson's proposed issuance curve to be adopted in electra (hard fork ~1y away).

typo: additional >40M eth could be staked over next 2 years. This would more than double current validator set size, with then 60% of all eth staked

it has two main things going for it:
* trivial to implement: one line code change for CL devs
* significantly reduces incentive for new stake and helps to mitigate bunch of concerns mentioned

* @anderselowsson's curve visibly removes many dilution concerns
* fun fact: just because nominal yields are reduced, it doesnt mean that *real* yields  are lower in long run equilibrium, see plot for hypothetical but plausible scenario, comparing current and hopefully future curve :)

while this proposed issuance curve by @anderselowsson is very effective at mitigating lots of concerns already (and very elegant!), it fundamentally cannot economically guarantee an upper bound for staking participation, unlike targeting. which is why we should still move to a targeting policy in the long run :)

staking economics endgame: https://ethresear.ch/t/endgame-staking-economics-a-case-for-targeting/18751

near term issuance update: https://ethereum-magicians.org/t/electra-issuance-curve-adjustment-proposal/18825