Jérôme de Tychey - Introduction to Issuance Curve Topics

Transcript

I'm impressed you're you're actually uploading. So, if you're looking for a rack of tomatoes, just look at the seat underneath in front of you. Um uh help yourself. I'll be standing right here because I've been kind of losing my voice. So, it's al also going to help help for your aim. If you want to throw something, I'll be sitting right there. So, I'm really honored to be here. Thank you for seeker for having me. It's a it's a pleasure for to be there. Uh a couple of disclaimers. The many of the examples that you're going to see in this presentation are from the incredible works of Ansgar, Casper, uh, Paxi, uh, Justin and so on and so on.

Many many incredible uh, talented researchers that are constantly pushing this topic and not getting any good response from the community. So yeah, let's get into it. So a year ago, I saw this talk from Ensgar and Casper if is money. It was framing the staking yield as the poison fruit. Uh the presentation was a wakeup call for me and I was hoping that it will be a wakeup call for the rest of the community as well. Did it? Well, not really. We were still in a in the same situation that we were a year ago. So, let me take you for a ride. Let's buckle up. Uh we're going to see the situation we are in in at the moment. Talk about the dynamic um how can become and hopefully convince you that uh a change is urgent and necessary as a sweetener for this uh controversial

topic. Um and also to fill the vibe uh fit the vibe of the of this beautiful venue. I will spoil you with a couple of painting of one of the artists I really like George uh which funnily enough did a kind of a follow-up to the uh painting they used in their original uh presentation. Uh this one the the tempest here uh it can be seen as the aftermath after uh you know they eaten the forbidden fruit and God k them out of Eden. Uh you have uh Adam the E holder here who now needs to work extra hard to provide for his family needs. Uh you have Eve the core devs and researchers that are painfully delivering EIPs and laboring the new curves research papers. Uh and of course like back in the in the back

the the paradise where new limited didn't create any uh ex negative externalities and so on. Um really super fast let's chat about the monetary policy. You are all very sophisticated ET stakers. So you know about that the change of E supply is the related reward minus the burn fees. Two critical components. The number of E that we mint per year is roughly equal to 166 time the square root of the number of E at stake. Uh that's specification uh assuming that most of the network participate nothing goes wrong and so on. This is the reward curve. And of course there are burn fees. Uh 1559 uh B fees. Uh the more block space is demanded, the more EF we

burn. And of course uh the more blob space 4844 is demanded, the more EF we burn. And to set the tone, three fundamental theorist about monetary policy. Uh information is a coming good is an economic good. More information, better decisions. Regulatory agencies not saying that uh the EF or the CDs are regulatory agencies, but they tend to be captured by industry, the industry they regulate. Inflation is always a monetary phenomenon. We should pay attention and how much we mint for this uh for this case. Rule-based monetary policy uh rulebased monetary growth is great for anticipation. This is how uh most the modern model are built for build and hayek uh money prices are essential informations. Uh this is how people make their decision and forecast their

decision of investment and so on and so forth. So consider yourself warned. What's the issue with issuance in practice? Um so right now we have 35.5 million E at stake. Uh last time I checked so roughly 30%. The APR um it's moving uh sometimes a little bit more tips sometimes a little bit more ABV and so on but that's the rough number. So premer pre-burn that means that we have a an issuance of 0.82 and post 0.8. Um as more Eve come at stake due to the curve that we are using right now. As more Eve come at stake uh we are issuing more. The consequence of the supply is the blue curve you see on this famously

known website. I guess you all have been to ultrasound money. Raise your hand if you have not. Yeah, everybody knows about this website. We can clearly see three uh different phases for uh the E supply. Uh we were in a extreme growth until uh we reached September 2022 when we did the merge. So it was a time where we had proof of work plus proof of stake at the same time. And then we had the pre-blog era where uh IUM was milking fees out of L2s uh burning them out both the L2s and the fees uh and the post uh 4844 where we got got out of the ultrasound era and uh started to uh uh get more adoption, get more scaling and so on.

So what's wrong with this? the amount of if at stake is trending upward. So you guys at ET stakers have done a great job. Yep [laughter] congrats. Um but it's an existential problem for Ethereum. Uh this has been well documented by research for over the past three years and now is the time to act on it. And if you ever pass by Vienna, you can watch and see this uh beautiful painting called the three philosophers. uh do see it in person. It's really mesmerizing. It's a great renaissance picture with a fun interpretations. Uh the the the writings of Plateau and all the Greek philosophers were uh getting known more and more. So you have a three

intellectuals here that have recently learned about Plateau's cavern uh and the importance how it's crucial to not mistake the shadows and the reality of the objects [sighs] and also how crucial it is to get out of the cave of course. And what they are doing is staring at the darkness of the cave. Staking protects Ethereum. Too much stings geopodize Ethereum. So why is taking too much staking so bad? Two things. Two things that uh we should care the utmost care in this community. Um security and marketability or moneyiness of Epher. First let's talk about security. Um staking is a centrial

force. Uh it tends to create uh inevitably create problematic market shares among the large stakers. The credibility of a slashing events gets eroded uh and eventually disappears. There goes Ethereum neutrality. Uh there goes also the perceived quality of the block space and the blob space that we are producing. There goes basically everything we are staking for, everything that we care about. If you think this is farfetched, take in consideration that large institutional actors have custodian constraints. Uh that means that they are going to use probably the same providers or started to custody themselves or as their risk, meaning that they are just going to grow the shares of certain actors. If you think statef around the around the corner, well, think again. I let

talk about that on his talk. Um so much so much so uh consider this as well. The number of if at stake is snowballing. Take Alice. She has two or three E. She's not staking because she doesn't care. She doesn't know about it and she has never heard about Eve staker. She's getting diluted 0.8% per year. Um, too bad for her for her. But flash forward to a few months, uh, few months later and now we have half the supply of E at stake. That means that Alice is getting diluted by more than 1%. Maybe now she start to realize that it's a pretty bad situation and she should stake as well.

she should uh log in on Kraken or whichever centralized exchange she has been using and start to stake there or use an LSD. After all uh 85% of the holders have got their if at a centralized exchange and they have access to simple solution to stake. Um there you go the phenomenon accelerates until most of the holders are actually stakers. Um and if has about 70 to 80% sticking ratio uh this is one of the worst case scenario and not a completely impossible scenario. Quite the contrary this is the worst case scenario because to defend proof of stake to defend Ethereum we need to have a career and social layer and also reserve of Eve that are not at stake that can come at

stake to defend the decentralization of the network against all kinds of attack. We are currently accepting a calibration of the rewards that well undermine the security to say the least. But if you're saying well security is a spectrum uh we need experts um it will fall into less debates scenarios and projection edge cases counter arguments like uh yeah I I understand the security aspect of it but hey we have more important fishes to fry or as my business partner says securityurities security doesn't sell what about marketability uh how easy it is to buy and sell the asset how it how easy it is to pitch the asset as an investment or

something you should or the moneyiness, how close the asset is to money in its functioning. If as an asset is uh much prettier in his in the eyes of its beholders uh of its bag holders of its potential investors when it's ultrasound at least when it's perceived uh that the the growth of the supply is contained the growth of the supply is predictable and so on. Sure, ultra soundness will eventually return as adoption grows, as uh it brings more fees. But go ask any people with crypto retail experience how hard it is to acquire new customer when their ass is in the red. The least we could do, the very least we could do is to take all the necessary action and decision to improve the adoption

condition of Ethereum. Changing the reward curves is one of them. Um it's apparently an easy one to implement too. Uh Nimbus and Sigma Prime can uh vouch for this. The reward curve in the code base is usually a few lines of code. So once we agree on the curve, it will shouldn't be so hard to implement. But what's hard is to collectively agree on something and collectively agree that it's necessary. Um I was describing how if at stake can slow and the consequences on security but what are the consequence for Ethereum and its economy. Um what is the consequence for DeFi? Well less if for DeFi of course and inevit inevitably as well if will start to be replaced by liquid staking tokens as the de facto

pristine collateral on DeFi and the native currency eventually. We are lucky to have uh to have Lido. Uh thank you Lido for sponsoring this event and hearing me out here. Uh we're lucky to have Lido that's currently in the lead and uh not an extremely predatory actor. Less LST dominance will shift our money model uh from trustless to governance-based with the LSTS DAO and so on. Furthermore, destroying the marketability, the money of EF and so on. We are we have collectively everything to lose here. And one thing I've been hearing when discussing uh issuance around town is that yeah, but more if at stake is good because less if will be available on centralized

exchange or on the market. This is good for the price, less if ready to be sold and so on. Well, no, that's not how it works. In the end, you will get uh ups and downs, greater sparks. This is called extreme volatility and this is not good for adoption. This is just a generalization of slippage and it's really not good for uh bag holders at all. Um, another bonus, not a painting this time, but a a more focal point on what's going on and where we're going. Uh, there there is a vicious cycle cycle between uh security and moneyiness. As the price of ease goes down, the cost of an attack goes down as well. Um right now uh the economic cost of an attack is what we use to say Ethereum is the best

and also why probably some other chains like Bitcoin have switched their narrative towards energy just to differentiate themselves with the leader that says well uh Ethereum is the most secure chain. So driving price erosion uh is really bad for us and we should make sure that this doesn't ever happen and every downward price pressure should be avoided at all costs. So at this stage um I'm kind of uh amazed that you are still standing and not throwing anything. Uh as a fellow solo staker I hear you well.

My yield is fair. My yield is fair. Of course, uh stairs are the hero backing Ethereum. Uh no one is arguing against that. We bear operational risk, the custody, the smart contract, the slashing risk and so on. We pay liquidity risk. Uh staking e locks in the staking contract. Uh which means it's less liquid. Of course, you have LSTs. But if there is a an ICO you really want to participate, you cannot pull out easily. You bear operational risk also. It's a it's a lot of risk, right? Um and is this risk fairly priced? Uh the market weight all those risk normally in a normally working market and expect a yield to compensate them. The growth of EA at stake will stop eventually when we reach the

reservation yield the mar of the marginal staker like nobody wants to uh join uh staking because it's so low. And how low can we go? We can go to 160%. 160%. That's is that low enough? Ah [sighs] it seems pretty clear that we are far from this reservation yield right now. But furthermore, let's talk about those risk. Um, we need to acknowledge that we are not in 2020 anymore. We've been using the same curve for five years and the landscape has massively changed. We benefited from major improvements.

First, the Lindy effect. Uh, is anyone from balancer in this room? Yeah. So uh normally normally the probability of finding a new vulnerability in a smart contract decreased with the longevity um but still uh account security is better slashing protection is better. Uh we just had a few talks about searching protection and the new innovation in this field. Liquidity is better like a like you have LSTs and way to uh to mitigate your the situation regarding liquidity. I'm not even mentioning tricks to skip the execute. We have a client diversity. We have a detailed strategies that are available to more and more unsophisticated actors to prevent from uh uh the loss of value in E when they're at stake. But also we

have regulatory clarity, tax guidance, uh regulatory development, state TTF, institutional custody and etc etc. And more importantly, it's very unlikely that changing the the the reward curve will get us sued by the SEC. So the risk premium is likely going to be significantly reduced and continue to be significantly reduced. Yet we are using the same curve since 2020. So why now? Time is of the essence. Why now? Why do it now? It's even something that we can fit into Glamsterdam eventually anyone. Okay, maybe uh the risk the risk I mentioned with always only trend to be lower. Uh statef just around the corner.

So it's important to make those changes now before we have much more larger actor at the table and countless top researchers for for countless top researchers uh the situation that we are in right now is already very problematic. It's already worrisome. And also ask yourself the question like is it normal to get 3% if at stake and get 1.5% on a like what is is it double the the risk or like even if you stake 100% what will you get on on a here's a bonus uh the soldier also available in Vienna. Uh when you're in Vienna go see the joy. No interpretation is just to give you a will to fight for new issuance.

Some people may say, well, you know, changing the monetary policy, the market will hate this. The current curve is okay. Come on, we picked this curve five years ago. Yeah, but we have a history in Ethereum to uh not pay too much for security, not overpay for security, maximizing security and neutrality without overpaying for it. Look what we've done in the past. Those beautiful EIPs that change how the ERM policy worked. Um this is also a bonus but from from private collection uh Jovanni Borgini in his tutor an allegory for coming of age transition to adulthood the duality between youth versus prudence and wisdom. When we change the market the the monetary policy of Ethereum the

market listen the market pays attention uh often time uh large changes in fees or large changes in the monetary policy led to huge price action. I'm not trying to draw a perfect correlation here. Uh but we will see what 7918 which going to change the uh blob market price will do to the price. There are only two factors we should consider. Uh scarcer EF at least the perception of scarcity is good for the marketability of the asset. There are tons of benefits of having pricier EF. One of them is that the EF will have a more budget to continue uh doing research. But of course there are dramatic pitfalls in looking for higher prices for only the sake of it, the sake of it. Uh this is not what issuance

policy is about. Issuance policy is about the protocol cohesion uh the consistency and to be honest we just look bad if we are overpaying for our security. So you can run all the valuation model you want. They all boils down to two factors that are to take into consideration for Ethereum valuation. I mean the market cap. This is the fees that we generate and the adoption of the protocol. How much the output of the protocol are demanded are used and so on. Everything else is just long-term neutral including the monetary policy set paribus. If we don't do any adoption, if we don't burn more fees but just mint more, we're going to have the same market cap and just lower price of EH. Great. Not great actually. So if

you want the price to go up, just the price to go up. The recipe is pretty simple. Print less, burn more. Print less, burn more. Like yeah, print less, but more. I I will bring I will bring a t-shirt with that next time. So talking about the research on the matter, we are blessed and I I I choose my words carefully here. We are blessed with the world-class quality of researchers that are working at on the topic at the ERM foundation but also with the countless top ranked universities that produced a lot of analysis of this. You can have a look at everything that was produced on issuance.wtf.

Uh it's a good extract but here is a tlddr. Um there's an optimal if at stake range from 20 to 30%. We are getting past 30% right now. uh we are overpaying and diluting all the orders. So the holders should say like hey guys we should change this. It's uh it's painful to see this u continue. There is a clearly uh detrimental uh thing for Ethereum with the uncertainties with the delusion and uh yet indeed no alternative curves are perfect candidates notably when it come to the certain categories of the stickers that are impacted. So consensus on the curve will be very hard to reach.

Um, it's much easier to agree on an issuance rule like max x% per year. This is what we can commit to. Let's say we'd say max 1% per year, max 0.5% per year, and then maybe we'll change the curve the year after. Maybe we change the girl somewhere else. Just admit max 6% per year. Here's what success look like. We're not framing yield reduction. Uh, not saying like, hey, we're just going to do yield reduction. This is an improvement of Ethereum for everyone. Um the staking cap uh has outstanding benefits um notably ensuring that staking can deliver positive return for everyone. There is an inflation cap uh it keep as a pristine collateral. It keep LST for governance specific

liquidity stuff. Um and so it can keep the solo stakers valuable for long term. Here's another bonus. The judgment of Solomon. Uh you certainly know the story. Uh morning come. You have uh two mothers uh two babies. One passed away and the other is still living. Both mother claim the living baby it's theirs. Solomon says let's cut the living baby in half. What happens? Well, one of the mothers cries, the other mothers rejoice because justice was made. And Solomon grieves gives the custody of the the child alive to the crying mother. So no interpretation. Uh, should we cut the issuance by half?

Who's going to cry the most? [snorts] Um, yet the good news is we we we can be way less uh harsh and cruel than that. We can collectively agree on um on a much more powerful signal on this simple rule like max issue on X per year. >> [sighs] >> I've only been given uh 25 to 30 minutes. So I will absolutely not have time to discuss all the different curves that were proposed. So here are a few shapes uh that have been thoroughly discussed on research with all their pros and cons. Um yeah, this one is cool. Uh this is the famous uh issuance 2.5 uh issuance 0.25.

Uh oh, I'm missing some. Am I going too fast? Hey, I think some of them were scrapped in the thing. So, I have a personal preference for Frankenstein 0.5, but you can make your own mind. So, here's my message to you. The stakes are high. Ethereum right now is a is a critical adoption. We need to we need to realize that critical moment for Ethereum. It has a lot of potential for failure still. Uh we see copycats of Ethereum popping out uh every every morning.

large VC firms, large firms just funding something that's are basically made to compete against Ethereum. In the meantime, we have to relentlessly continue shipping the different features that are missing on Ethereum regarding interoperability, regarding privacy. We are scaling the L1. That's a big effort to do. Uh and we are catching up on different things also and continue to sponsor the L2 cost with our own fees just for the sake of adoption. So let's take a step back. Can we afford to have weak E in this phase? Absolutely not. And by not advocating for a change on this curve.

By not acting, we are just sunbagging Ethereum. This change will make us stronger. Uh it will be both defensive and offensive. We'll have better security, better marketability of EH, but also we'll be able to defend oursel because our monetary supply is sound because we don't emit more than 0.5% when the new protocol that's going to launch are going to have like 10% increase of the supply each year, 20% increase of each year and so on. So, we have a chance. Oh, here it is. Sorry, I get mis click up. Yeah, I like this one. Issuance 0.5 Frankenstein. Ask me about it later.

So this is a chance to signal and rally our preference. Uh you can easily express yourself uh on the social media only for research. Say like hey 0.5 sounds very marketable like it's like 50 cents you know or 1% I like 1%. Uh and alternatively eventually the situation will be so dire that uh it will passively bleed value eventually uh go into fighting over controversies and competing EIP. So this is what we want to avoid. We want to show that we are collectively agreeing that this is a problem and we need to act on it. Final bonus. Uh this one is inference. Uh another soldier leaving you with the interpretation. Young guy staring at you with a with a uh misuse look [laughter]

with a meonic fringium and too much staking zero paradise Ethereum. Thank you. If you want to chat about the topic, my DMs are open. I'm also hosting a a small uh discussion on Thursday morning uh with different stakeholders, different stakers. If you want to participate to this chat like reach out. I'll be happy to invite you as well in the morning. Proof of stake is turning five in a few weeks. Uh and what it wants for its birthday is a new reward curve. So, let's print less and burn more. Thank you. [applause] [applause] >> Well, thank you very much. I know the room is full of questions. Uh I've got a whole bunch myself, but unfortunately we

are out of time. We've used all 25 [laughter] minutes just to kind of get that conversation. Um but we are coming up to a break after the next two talks, but let's uh continue on on the agenda for it. And I I think issuance is probably one of the most challenging topics facing us right now. Uh and it's unfortunately one I don't think there is a consensus on with a clear path. And so I'm looking forward to that further discussion here. >> Thank you. >> [applause]