From ethresearch By Anders Elowsson
Thanks to Vitalik Buterin, Caspar Schwarz-Schilling and Ansgar Dietrich for feedback.
This post presents a practical endgame on issuance policy that can stop the growth in stake while guaranteeing proper consensus incentives and providing positive regular rewards to diligent small solo stakers. Two possible ranges for an endgame reward curve are outlined in Figure 1. A hard endgame (red) with a reward curve that caps the quantity of stake by bringing the yield down to negative infinity comes at the cost of analytical, implementational, and political complexity (a hard cap can be hard to implement). Even setting the issuance yield to zero introduces additional complexities that would be advantageous to avoid if possible—particularly if there is no MEV burn mechanism in place, such that the 0% issuance yield merely halts regular rewards, while irregular rewards continue. Certainty can be the enemy of viability, because bringing down the staking yield to a low yet positive level will, in all likelihood, suffice. This post emphasizes viability: a practical endgame (green) with probabilistic guarantees on the quantity of stake that could be implemented at present.
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Figure 1. Issuance ranges for two endgames: a practical endgame in green which can be viable for the near term and easier to come to an agreement on, and a hard endgame in red with higher analytical and political complexity that may push solo stakers into receiving a negative regular yield. Both endgames overlap at low stake deposit sizes (D) and are therefore likely to lead to a similar equilibrium outcome, given reasonable assumptions about the willingness to supply stake at different staking yields.
The great news is that we can offer more stringent guarantees on the maximum proportion of the circulating supply issued each year, regardless of which exact endgame policy that is pursued. To Ethereum’s users, a stringent cap on issuance of native ETH tokens is desirable, because it caps the inflation rate. Since revenue of the protocol can be burned, as partially done today, the ETH inflation rate can be sustainably negative (deflation). Ethereum can have trustless sound money with preserved economic security—something that is very valuable for a decentralized economy. A social cap can be set at an issuance rate of i=0.5%, illustrated by a grey line in Figure 1. This is an easy-to-understand concept to commit to (memetic qualities), sufficiently high to ensure a viable staking set with ample room for consensus and consolidation incentives, and permits flexibility to temper the quantity of stake as the community sees fit.