Ethereum's Infinite Endgame: Balancing Issuance, Staking, and Decentralization

At Devcon SEA 2024, the Ethereum community came together, hosted by the Ethereum Magicians to discuss one of the most critical aspects of Ethereum's roadmap— the Infinite Endgame for Ethereum's economic model.The session brought together leading researchers and experts to discuss Ethereum's issuance, staking dynamics, and their impact on the network's security and decentralization.

If you're new to Ethereum's economic model, don't worry. We'll break this down in simple terms so you can understand the stakes (pun intended!) of this discussion and why it matters for Ethereum's future.

What is the Infinite Endgame?

The term "Infinite Endgame" refers to Ethereum's long-term economic sustainability. Ethereum's economic model revolves around Ether (ETH), which serves multiple roles:

1. A store of value
2. Fuel for network transactions (gas fees)
3. A staking asset that secures the network

The big question is: How much ETH should Ethereum issue to stakers as rewards while ensuring the network remains secure and decentralized? Too much issuance leads to inflation, while too little could weaken network security or centralize control in a few hands. The session tackled this balancing act.

Why Discuss Issuance and Staking?

Issuance refers to the new ETH that gets created to reward stakers who validate transactions and maintain network security. With Ethereum's Proof-of-Stake (PoS) mechanism, stakers lock up their ETH to help secure the network in return for rewards (yields). But as staking grows, so do concerns about how sustainable this model is.

The session's core debates focused on:

• Is Ethereum's current issuance model sustainable?
• Should the staking yield be adjusted to incentivize decentralization?
• How can we prevent centralization of staking, especially through Liquid Staking Tokens (LSTs) like Lido?

Key Panelists and Their Views

The session featured insights from prominent voices in the Ethereum community:

1. Ansgar: Researcher advocating for changes to the issuance model.
2. Sacha: Researcher at Lido with concerns about centralization.
3. Artem: Cyber Forum researcher focused on frameworks for decision-making.
4. Anders: Supporter of reducing issuance to improve Ethereum's security.
5. Tim: Questioning whether changes to issuance are necessary at all.

Let's look at their arguments and perspectives in detail.

The Debate in Simple Terms

Ansgar: Ethereum's Issuance Model is Unsustainable

(Timestamps: 01:11:29 - 01:12:30)

Ansgar kicked things off by pointing out flaws in the current issuance model:

• The yields given to stakers have anomalies: those who pay (users) are also the recipients (stakers), leading to strange economic effects.
• Ethereum faces two scenarios:
  1. A small percentage of ETH is staked, but yields remain high.
  2. A large percentage of ETH is staked, but yields drop to unsustainable levels.

Ansgar's concern is that the current model pushes towards the latter, which could harm the network. He proposed reducing yields to ensure the network remains economically efficient and secure.

Watch the discussion here: https://youtu.be/bOTdFBjo0OE?si=ysWxusmE8FB-HukU&t=4289

Sacha: Minimal Changes to Avoid Centralization

(Timestamps: 01:12:45 - 01:13:48)

Sacha, representing a more cautious stance, agreed with Ansgar's concerns but argued for minimal changes. Why? If staking rewards are cut too drastically, small, solo stakers might drop out, pushing more ETH into centralized staking providers like Lido or centralized exchanges.

Key concern: Centralization undermines Ethereum's goal of decentralization. Sacha believes 50% staked ETH is the upper limit we should aim for to maintain balance.

Watch the discussion here: https://youtu.be/bOTdFBjo0OE?si=7Mv5-3QN4_g5W4dB&t=4377

Artem: Frameworks for Decision-Making

(Timestamps: 01:15:10 - 01:16:50)

Artem focused on the bigger picture: What are we optimizing for?

Ethereum's priorities should follow a clear framework:

1. The Network (Ethereum itself) comes first.
2. The Asset (ETH) comes next.
3. Stakers (those securing the network) are vital but secondary.

Artem highlighted the need for real-world data to make informed decisions. He also warned against hasty changes, emphasizing that cutting issuance without proper research could lead to unintended consequences.

Watch the discussion here: https://youtu.be/bOTdFBjo0OE?si=0pOGUl95mt8c4tKD

Anders: Cutting Issuance Improves Security

(Timestamps: 01:18:00 - 01:19:06)

Anders made the case for reducing ETH issuance, arguing that doing so:

• Lowers costs for the network.
• Improves overall efficiency.

Importantly, Anders argued that reducing issuance wouldn't compromise ETH's scarcity because ETH's total supply is inherently limited.

He also pointed out a technical benefit: Lowering staking rewards could improve consensus and transaction speed by reducing the number of attestations required.

Watch the discussion here: https://youtu.be/bOTdFBjo0OE?si=pkqx-UGeaDTLJV5B&t=4678

Tim: Why Change the Issuance Curve at All?

(Timestamps: 01:19:10 - 01:20:00)

Tim raised an essential question: Should we even change the issuance curve? Ethereum's current assurances to stakers have built trust in the network. Changing those rules could damage confidence and destabilize Ethereum.

Tim's position was clear: The burden of proof lies on those pushing for change. Are the benefits of reducing issuance worth the risks?

Watch the discussion here:https://youtu.be/bOTdFBjo0OE?si=JCnDih17waobe17b&t=4750

Major Themes and Audience Questions

Several themes emerged during the session, alongside questions from the community:

1. The Precautionary Principle: Should Ethereum make changes now to avoid future problems, or wait until we have more data? Ansgar argued that waiting makes the problem harder to fix, while Sacha and Artem emphasized caution.

2. Centralization Risks: Cutting yields could drive stakers to centralized providers or alternative yield opportunities like restaking, leading to even worse outcomes for decentralization.

3. Segmentation: Some proposed splitting staking duties into categories (e.g., block production, attestations) with tailored incentives for solo stakers.

4. MEV Concerns: Lowering rewards might increase reliance on MEV (Maximal Extractable Value), a controversial source of income for validators that favors centralized parties.

5. Social Commitment: Anders suggested a community-led agreement to cap ETH issuance (e.g., 0.25% annually) as a middle ground to address concerns.

The Road Ahead: What Can Be Done?

The panelists and audience agreed on one fundamental point: Ethereum's decentralization must be protected. While the perfect solution remains elusive, several ideas were put forward:

• Anti-correlation penalties: Discourage centralized staking by penalizing validators who behave similarly.
• Yield Optimization: Keep yields attractive for solo stakers without encouraging excessive staking.
• Real-World Data: Study staking behaviors during different market conditions (e.g., bull vs. bear runs).
• Segmentation: Explore ways to incentivize different types of staking.

The debate highlighted a core truth: Ethereum's economic model isn't just about numbers. It's about balancing security, decentralization, and economic sustainability to ensure Ethereum thrives for generations.

Final Thoughts

The Infinite Endgame isn't about finding a one-size-fits-all solution—it's about iterative improvements driven by community consensus and data. Ethereum's strength lies in its ability to adapt while staying true to its core principles of decentralization and security.

Whether you're a solo staker, developer, or ETH enthusiast, these discussions matter because they shape the future of Ethereum. As Ansgar, Sacha, Artem, Anders, and Tim showed, there's no easy answer, but one thing is clear: Ethereum's community is deeply invested in getting it right.

The next few years will be pivotal. What do you think the endgame for Ethereum's issuance and staking should look like? Let the conversation continue!

For more context, watch the full discussion here and read the background materials here.