EthStaker

ETH's staking econ is under scrutiny. A post by @caspar highlights an issue: if left unchanged current incentives could lead to a majority of ETH being staked, posing risks to the network's decentralization. Lets break it down

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ETH's staking econ is under scrutiny. A post by @caspar highlights an issue: if left unchanged current incentives could lead to a majority of ETH being staked, posing risks to the network's decentralization. Lets break it down

🧵
0/9

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

/ethereum foundation | opinions are my own but more than likely they come from Vitalik's blog paragraph.xyz/@chaskin

1/ Currently, 26% of all ETH is staked. While staking is essential for network security, Caspar suggests the current incentive structure will drive this percentage to unsustainable levels with significant implications for Ethereum's core principles

3/ The LST market could be winner-take-all leading to:
- The LST could gain greater utility as money than ETH itself
- The dominant provider would have immense power over Ethereum governance and transaction inclusion
- Systemic risk to the LST poses a wider threat to the entire network

4/ The primary function of staking is to secure the network. It can be argued that we're already overpaying and diluting ETH too much, as we have $105BN in economic security. The question is whether we need 4x more staked ETH to secure the network. This post says no

5/ Caspar's proposed solution involves adjusting Ethereum's issuance curve to cap ETH dilution from staking at 0.4% (currently 1.5%). This would reduce validator yields across the curve

6/ However, Caspar thinks that under this adjusted model, the real yield for validators would actually be higher due to significantly reduced dilution, especially in a scenario with extremely high ETH staking percentages

7/ The simplified equation:
Lower yield + less ETH issued (25% staked) = greater real yield than higher yield + excessive ETH issued (>80% staked)

8/ The Electra upgrade provides the earliest window to integrate these changes (9-12 months). Inaction could lead to further centralization and unnecessary ETH dilution because the upgrade after Electra won't be until 18-24 months from now

9/ The likely end goal is to establish staking economics that target a balanced targeted percentage of staked ETH. Further research is needed to determine the ideal percentage and fine tune the mechanisms to achieve it

2/ A major concern is the potential dominance of LSTs. As staking participation increases, LSTs are likely to control a majority of staked ETH