Issuance: The Cost of Inaction

Transcript

Have to stay here. Okay, perfect. All right. I hope you're not bored about the issuance topics. Not yet. Okay, everybody agreed that we should reduce issuance. I I agree as well. Um I've been I've been kind of I can say it like a broken record for the past 6 months, but I'm I'm very happy to do so. Play you the same song every time. And uh this time it's a remix. It's a remix with a couple of numbers, couple of back of the napkin numbers about a the cost of inaction.

So, well, first off, uh hats off. Thank you to uh the E staker community for having me again uh presenting uh potential bad news for your yield, but a potential very good news for the principal, your ETH. Um 6 months ago I was invited in Buenos Aires to give this presentation. Um you can see it here. Introduction to issuance uh curve topics that you can find on uh YouTube. And I'm also thanking the E staker community for having this event here. Uh this has been in our strategy at ECC to bring uh outside event as inside event. And I hope you have a um wonderful time in the offset in the attendance and so on uh by hosting it

here. So, if you're watching this stream and uh you are thinking about uh organizing an side event at ECC, do know that we can help you organize it inside. So, we have synergies between um the main event and the side events. All right. So, here's the conclusion. We can bring ETH to $1 million plus. Come on. Come on. Or or we can take the the dark path and have all of those problems. Ah. Damn it. We shouldn't do that. So, for each of those um uh sources of cost, I've asked the multiple well-known AI agent to give me their best guess about how much those costs are hindering the price. What is the

valuation impact of not doing this, not doing that, and just having this laying around? Here we go. So, first, of course, issuance in practice. You all know about it. You've seen the slides last time, so I'm not going to talk too much about it, but that's for the audience watching and not having watched the previous talk. Um yeah. Currently, today we have an issuance of a 0.8% post-burn. That's roughly the current issuance of Bitcoin. In 2 years, it will be half that because of the halving, and we will be way above this at this stage if we don't change anything.

But, do know that we could have the same security property by only issuing 0.5. So, that's 0.3 less issuance that we could do. And what is 0.3 issuance per year? 0.3 dilution per year that we would save. In terms of raw dollars, it's $720 million that we wouldn't be minting in excess. Hey, we want to save $720 million. I want to. I definitely want to. Um so, that's that's a lot of supply that we mint in excess for excessive security that we don't need, and eventually also excessive security that hinder our own security.

So, not all of that is sell pressure, of course. Not all of that. But, it's fair to say that it's something between 0 and 100. And considering that some ETF are launching those past days, they're saying just oh, the yield will be converted in USD and distribute that to our owners. That's probably more close to 80 to 90% of those excess yield that goes into the market. So, let's at least save 0.3% of the supply from the sell pressure on ETH. And also improve our security, of course.

So, the message that I wanted to give you last time, and I it was quite well received. I thank you for having an open mind, is that staking protects Ethereum. That's for sure. But, too much staking doesn't protect Ethereum. It's actually jeopardize Ethereum. And it's a problem that we have been having for the past 3 years that we tried to discuss, try to come up, try to try to have a discussion about it and have to have an action about it. And we failed to do so for 3 years. And now it's the time to act on it because our setup, our organization of staking, our ecosystem of staking is changing a lot.

We have this small window of opportunity of doing this change now or be unhappy with it forever. How do you really get here? So, currently the staking ratio is 31% ish. It's climbing really fast because we have large DAT in large ETF, large institutions that are bringing in more ETH at stake because they are in competition with each others, and they have to reward their purchaser, their holders. Here's a very interesting list of events that drove us where we are now.

It's an upcoming article from Pintel that may be in this room. Are you in here Pintel? No, not yet. Anyway, it will publish this article soon and I hope you will have a lot of fun reading it. So, there's two thing, two side of this coin. There's security aspect of Ethereum that's hindered by too much staking, too much issuance. And there is also the marketability and money-ness. I thought the the hardest part was the security aspect of things. But, when you discuss with the core devs, they all agree that okay, it's very important. We need to fix that. It's a very big security problem.

But, most of people are more like, "Yeah, but you know, maybe we should wait. Maybe there's no problem to wait. Maybe we should have more research. Maybe we should not not act too much on it. Maybe we should just act once because we have one chance to change the the the monetary policy and that's it. And that's absolutely not the case. You don't have one chance one one chance to change the monetary policy. You can change it a lot. You can abide to a rule and adapt to the rule as well. So, there are problems regarding the security of ETH associated with staking. Um the credibility of large slashing event is of course impacted when you have too much at stake. When you have large actor that are at stake, there is a problem regarding the snowballing effect. Um if you are not staking and

everybody is staking, well, you're getting diluted. Yeah. And you're getting diluted by 0.8%. So, if you are not putting your ETH on Aave to get 1.4 and not putting your ETH at stake, you're just losing 0.8. So, at some point the average Joe will say like, "Hey, I have better be at stake." If what you're going to pick for staking, you're going to probably pick an LST or a custodian to do it for you. And of course, um there's a big problem regarding our security and how it was envisioned in the first place. If you look back in time where we picked this curve 6 years ago, we weren't discussing LST at all. We were saying like, "Yeah, it's a possibility, but nobody would ever get into LST. Why why would it?"

Um or we would say we were saying like, "Look, 20 25 maybe 30 max is more than enough to secure the network." The big problem we have when we have too much at stake is that there is too few that are not at stake to come and stake and defend the network. So, I would argue with you if you if you like. I will stay in this room and I have the conversation that there is a diminishing return in addition to the security level of ETH when you add more ETH at stake. Yeah, after 20 25 30% 50% okay. But, there's also a negative return if we have 70% of the ETH at stake. So, the next ETH at stake is not going to improve the security at all. It will also lower the number of ETH that income is taken to defend the network.

So, the governance capture both from potential institution that are going to be very big. We have Coinbase custody that is uh doing the staking for most of the larger emitters around the world around the US, sorry. Plus LSD governance that is a new part of the thing. Um well, you ask AI agent that tell you like, "Oh, it's likely a 10 to 15% um valuation discount because of the capture in term of governance. When you ask about the diminishing security that's it's going on like it's not only ETH that is not available to come at stake and already at stake and at a large actor, it's also ETH that is cannot cannot be in the economy of

Ethereum in the meanwhile. That's more likely a 80% discount of the value of ETH. And by the way, there is a pretty good thing that we want to do with Ethereum which is single slot finality. If you are going to argue with me and say like, "Yeah, but um changing the issuance curve changing the reward curve is going to have we're going to have less diverse validator set and so on. Well, at the same time if we push everybody at stake, we end up with a pretty big network and it's going to be pretty hard to do proper single slot finality. And it seems like the AI models value single slot finality a lot.

So, consider a 9% discount in value by letting too many ETH go at stake. Now, what I think would be already the final nail in the coffin like there's a big security problem, we should take care of it. Yet, many people are still like, "Yeah, maybe we should wait a little bit more. Let's print this excess 700 million. Like nobody would care. We just socialize the loss." Well, at the same time we are removing ETH from the economy where it should be. And doing so, we are more or less making making ETH a less pristine collateral.

And that's super important in term of valuation. So, consider that a 15% discount in the value of ETH. Uh what matters a lot to me is that having too many ETH at stake is removing ETH from our current product market fit, which is DeFi. Um and in any economy of the world, when you have a saving account, your private bank giving saving account and rewarding the uh the the savings by, let's say, 3% and at the same time, you have the deposits being rewarded at the central bank by 6%.

The central bank look at this and be like, "Hey, how how come I'm giving six to the bank that is depositing their funds and they are only giving back three? Oh, there's a problem. I need to lower my rate, the the main rate, the principal rate, the director rate of the central bank." We are kind of in this situation right now because you get 3% on staking and you get 1.4, 1.5 ish when you're on Aave. There's there's a clear mismatch here and we have engineered this mismatch and we are continuing to push people to go and stake with this mismatch.

So there's both a security and a moneyness aspect of things because while we are driving the price down by emitting too much, while we are doing so, we are also injuring our security because our security is measured in economic value. As the price of ETH go down, the security of the network goes down as well. And it goes down for sure by having agency capture both from institutions and from more decentralized governance aspect of the LSTs. Um it would require proper full presentation about the principal agent problem regarding this specific topic.

Um but you can consider it's a 6% discount in value just by the fact that we have our a a um synergies between the two. So, why we should do it now? Again, we've been looking at this topic for 3 years. We've been using the same curve for 6 years. And the conditions have changed completely. The client teams have done wonderful job. The institutions have done wonderful job. The if staker have done wonderful job to make staking easier. Yet we are still rewarding the same curve. It's Yeah, the the the risk premium is going to continue going down. And at the same time the way we pay for this risk is going to stay the same. This is not normal and this is not aligned at all

with the history and the ethos of Ethereum. When we have an externality that we pay too much for, we make changes. That's what we do. So, let's fix that. Well, what about waiting? Well, the problem is not going to change uh on itself. Um a recent paper from some researchers and independent researchers of the EF have clearly pinpointed that there is a mismatch between what the market is actually rewarding in term of yield and what the staking is actually rewarding. We have a the this engineered artificial layer um preeminence of some staking aspect, notably the liquid staking aspect.

And this is absolutely not in Lido's and other liquid staking organization to self-limit themself. Um if one of those liquid staking provider decided to say, "Oh, well, we are too big. Let's let's limit ourself and just do 20%." Well, anyone will fork and create Lido number two, Lido number three. Like it's not in their best interest. It cannot come from those organization. We cannot wait for those organization to actually decide that it's not in the best interest of the network for my organization to be 20% of the ETH stake or to be 30% of the ETH stake or be to be 50% of the ETH stake. It has to come from the market to incentivize them not to stake too much because staking is something that's for

you know, like 20% of the network of 25% of the network, not 50% of the network, which is where we are going. And I generally hope that for the 10-year anniversary of ECC next year, we don't have 50% of the ETH at stake, because that's a snowballing effect that we wouldn't be able to stop. And it comes with an avalanche that's probably very red on the price. So, we have the elephant in the room like right after I did this presentation at ETH Staker last November. Um Hilton Bee from Dragonfly made a presentation about everything that's going to come at stake. And it's coming at stake, definitely. Like the entry queue is pretty long. And we have new ETH, new DAT that are popping up here and there.

Let's tell those guys to go fetch some yield on DeFi, fund our economy. Let's let's let the the ETH flow into the Ethereum economy rather than to the staking economy, because this is a diminishing return for our security and for our issuance as well. Look um so this is this is starting to be very demagogic. So, every time we change the the issuance in a more restrictive way, the market paid attention. Yeah. We make those changes in more scarcity, the market respond by yeah, more scarcity. That's interesting. I value the asset more.

The economic theory is pretty clear on the matter. In the long term, money is neutral. So, if you print less and everything stay the same, your price will go up and your market cap will stay the same because you just printed less. If you print more and you don't change anything, your market cap will stay the same and your price will go down. Nevertheless, there are good things about having a ticker that is going up in value. It attracts attention and it shows strength. So, it goes sometimes a long way along the way that having a better performing asset is also having a better performing network as a whole in terms of adoption.

So, there is also something regarding deciding not to act. We've known this thing for 3 years and we are not acting on it. What are we showing the world in terms of capacity to act? Like we are looking pretty bad. Like not doing anything. And this is why the model says like well, 5% discount. Like if you if you if you know there is a problem and you are not acting on a problem, that should be considered as weakness. That should be considered that you are not capable of tackling your problems. So, 5% discount. Let me give you a 5% discount on the value of ETH again.

There is endless research on the matter. Like only 60 talks on insurance.wtf and it stops at March 25 because after that the researchers were very busy trying to figure out new curves and so on. We are artificially creating a non-just dilution and stratification between the different ETH holders. Up to the point that at some limit, like let's say 50% of ETH at stake, you're getting too diluted and even your cousin that just discovered Ethereum is like, "I want to get into staking because crypto.com told me I should stake." Yeah, and then everybody stakes.

Here you go. 4% discount. We want another discount on ETH. I don't. It's an old conversation. We've been having this conversation for a long time. And the more we wait, the more we look like fools that cannot make a decision on an important matter. Eventually, after today, after the next week, after pretty soon I hope, we can get into the conclusion that we have a chance to change this thing and we should change it now. It's not a matter of changing the yield to reduce everybody's cake. It's a matter of winning the market because we care about it. For staker, making sure that we deliver deliver positive real yield for all. For holders, making them feel like they risk

cap inflation. Like they know that going to be deleted by max this amount. And for the network, we cannot overpay for security. This is not in our roots. This is not in our soul. We never done that. Why have we been doing that for 6 years? It doesn't doesn't make any sense. And of course, we can also figure out a way to continue to have our healthy round of solo stakers that have been here supporting for the whole time. So, uh there's a matter that for me it's very cuz we have generations and generations of so-called ETH killers that are framing themselves as we're better than an ETH. We do a better VM. We do a better consensus.

21 validators enough. I'm rejecting you from my validator list because I don't like your institution and so on and so forth. Those L1s are constantly being launched. There will be multiple generations. And what they all have in common is that they mint a lot when they create themselves. We are We have a chance to own the narrative of the dilution. We have the most secure network. We have the only network that also have figured out its economic budget. And we are also going to be the one that print the the least.

So, by not acting on this, we are also not owning the narrative defensively and offensively against the competition. Why are we doing so? At the same time, we are in a pivotal phase of Ethereum where we are continuously subsidizing the L2 with the blobs, pushing new features, pushing new things that we should add to the network so that we are quantum proof, we are future proof, and we are welcoming the institution that will build on us with new privacy features. And we are also welcoming the individuals that are looking for financial freedom Ethereum. This is costly for us. Can we afford to have an ETH that is not performing well?

Can we afford to have weak ETH? Absolutely not. What What's the matter about it? 10% discount. I think it's fair. Like I'm would say 20% discount on this. So, coming up, let's sum it up. 1.4% per year, $720 million of excessive mint of ETH. We can discount that. Yeah, let's remove this. That's 1.4% per year of less sell pressure. 15% on the valuation and money-ness, 12% on the governance, to 8% on the diminishing returns in term of security, 86% on agency capture, give or give or take, 4% on social injustice dilution, like why would I say why why am I not rewarded for holding ETH?

A 5% these signals, 10 in signals on the notification, 10% on missing out on the narrative of the dilution of the of the excessive dilution of other networks, and also constricting the road map in term of single slot finality. What? Okay. Today, the price of ETH is roughly 200 $2,100. Multiply this, we have discounted ETH by 50%. Great. So, we remove the 3%, we put the 1.5. How much does it take to re- We we kept the cost 22 years. Yeah, are you ready to just ditch 22 years of 3% and ETH going down just to get a little bit of more to scoop a little bit more, or do we want a strong ETH? Our principle is worth more than

that. This is the mis- stake. 22 years. 22 years. My kids will be 26, 27 and tell me like, "Why did you hold on to those diamonds? Like they are worth nothing now." Yeah, great. All right, that's the cost of inaction. We are all here because we care if if about Ethereum and because we love Ken. So, let's have discussion today. Let's have the discussion later on, and let's ship an EIP for Hegota so we can finally get this solved. Thank you.

Any more? Okay. Who's next? Justin. Justin Drake, please come on stage.