The Debate Over ETH's Monetary Policy | DH + RSA

The Ethereum community is currently in debate, are we going to change the monetary policy of ETH? Why should we? Who gets to decide? What should it be? Today's episode of Bankless Takes is a masterclass on monetary policy for Ethereum and beyond. ------ ➡️ Apply to the Cartesi Grants Program here: https://bankless.cc/Cartesi ------ 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku ------ TIMESTAMPS 00:00:00 Intro 00:03:23 Defining Monetary Policy 00:07:35 Total Monetary Base 00:12:46 M1 Chart https://fred.stlouisfed.org/series/M1NS 00:15:54 M2 Chart https://fred.stlouisfed.org/series/M2NS 00:20:05 Inflation + Purchasing Power https://fred.stlouisfed.org/series/CPIAUCNS 00:22:50 Bitcoin Issuance Policy https://river.com/learn/who-creates-new-bitcoin/ 00:30:22 Ethereum's Monetary Policy https://studio.glassnode.com/metrics?a=ETH&c=native&m=supply. Current&resolution=24h https://studio.glassnode.com/metrics?a=ETH&c=native&m=supply. Current&resolution=24h https://notes.ethereum.org/@mikeneuder/iiii https://ultrasound.money/ 00:35:27 ETH Social Contract 00:37:23 Bitcoin Monetary Policy 00:43:09 History Of ETH Issuance https://github.com/ethereum/consensus-specs/pull/971 00:50:58 Proposal Breakdown https://ethresear.ch/t/endgame-staking-economics-a-case-for-targeting/18751 01:01:57 ETH Supply Curve https://imgur.com/pVrZ9Ii 01:13:37 David's Opinion on Moving Forward 01:19:08 Ryan's Opinion 01:25:06 Policy Option 2 ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ryan Sean Adams?

  Hey guys, we have a Bankless Takes episode for you today on the docket. Is Ethereum changing its monetary policy again? Dun dun dun. Question for you, David. So there's this debate in the Ethereum community right now, and I've been paying attention to it, but a bit on the margins. I think you've been more directly paying attention to it. But it's a debate about changing the monetary policy of Ethereum, this holy ground we're treading in. Should we do it? Who gets to decide? What should the eventual monetary policy be? What's the context for this conversation?

• 0:31David Hoffman?

  Yeah, so two Ethereum Foundation researchers introduced a blog post, like a research blog post, proposing the idea of changing the monetary policy of ETH, changing the ETH issuance curve from what it is today to something else. Along with this research post came a proposal, in alignment with the research post, to include a change to ETH monetary policy for the next upcoming hard fork in Electra, which could be a hard fork as soon as the end of this year. And this expediency, this speed, created a ton of controversy and debate about the politics and optics of EF researchers rushing in a monetary policy change into the next hard fork.

• 1:13David Hoffman?

  And this is something that some members of the Ethereum community had this like immediate negative reaction to. So really, in this debate that we're experiencing, that we're seeing in the Ethereum community, there's really like two pillars here. There is, should we change the ETH monetary policy? And then there's also like the much more controversial thing, which is like, what is the appropriate process for changing the ETH monetary policy? How fast should this be? How rushed should this be? I think in this episode today, Ryan, I actually kind of want to just focus on the monetary policy of ETH. There's the politics around the governance of Ethereum that I think the community and EF researchers and core devs will all kind of figure out. That's not really our realm.

• 1:54David Hoffman?

  What I'm primarily interested in is, are we at the end game of ETH's monetary policy? And if not, what should we do about it? And that's the subject of today's episode.

• 2:04Ryan Sean Adams?

  Before we get into this episode, a quick shout out to our friends and sponsors over at Cartezzi. What is Cartezzi?

• 2:10David Hoffman?

  Cartesi is the first modular execution layer with a Linux runtime and real world computing environment for Web3 devs. If that was kind of a mouthful to you, imagine running Doom as a layer two on Ethereum. So on-chain state with an on-chain gaming engine, or anything else that like Linux can run. So you can boot up a Linux environment and leverage all of the like Linux developer ecosystem, code libraries, open source tooling, etc. that has been building around the Linux ecosystem. So you can do just a lot. You can do a lot with that, perhaps like literally infinity kinds of things with a Linux runtime on your chain. Cartesi is giving away $1 million in grants for their ecosystem, and this is now live. This is the call to action.

• 2:55David Hoffman?

  So if you would like to apply to get some of that grant money, you can get up to $50,000 from Cartesi. There, the link in the show notes to get your grant applied.

• 3:03Ryan Sean Adams?

  They're given away, but you also, you gotta earn it. You gotta go build something. That's the old fashioned way, David. All right, should we get into the topic today?

• 3:11David Hoffman?

  Yeah, let's do it. But maybe we should, let's go like all the way back. Let's just like start at the very fundamental foundation of just like monetary policy. Ryan, what's monetary policy?

• 3:22Ryan Sean Adams?

  Monetary policy is how a entity kind of controls their money, right? And I would say that any, any money that has supply that is somehow impacted or arranged by human beings has a monetary policy associated with it.

• 3:43David Hoffman?

  So not gold? Gold, does gold have a monetary policy?

• 3:45Ryan Sean Adams?

  I would say it does. It's just like actually completely immutable from a nature perspective, right? Unless, unless we can find some way to do alchemy, which has, you know, alluded us through, through all of human civilization, but just gold is birthed in the aftermath of a supernova explosion, right? It's a, on the periodic table of elements, there's only a certain amount of gold in the universe. And so it's sort of derived its scarcity due to that. Everything else besides natural elements, even Bitcoin, even Ethereum, we'll get into it, and especially fiat currencies, they all have a monetary policy, which is just

• 4:28Ryan Sean Adams?

  their issuance. How much of the supply are they issuing both now, in the past, and into the future? What would you add to that?

• 4:38David Hoffman?

  Yeah, I would say monetary policy like on the human tech tree of like advances in technology emerges sometime after both government and army. And so like armies, they protect a fiat currency, right? They enforce its value. Governments like produce the actual monetary policy and then armies give these governments power. And so like, you know, it's a human controlled phenomenon. Policy implies some sort of like opinion about what money should be. And so I call like, I call it like relatively like a new phenomenon in the world. And then monetary policy really came into like, it's, you know, it's like climax

• 5:19David Hoffman?

  post the the gold, leaving the gold standard, right? So like, we had monetary policy while we were on the gold standard as the dollar. But it was really amount of like, how much fractional reserve are we okay with? And then when, once we went off the gold standard, we can like, all right, well, we now have complete and total control over the monetary policy of the US dollar. And so it's been this emerging thing alongside the role of like fiat currencies.

• 5:45Ryan Sean Adams?

  Yeah, maybe, maybe we should talk about that in the context of the different types of money that exist in a modern fiat based economy. So a modern nation state economy. And all of these are kind of like subject to manipulation, because you just talked about that, you know, the birth of government, the birth of sort of, you know, paper money, getting off of, you know, the gold standard, which had sort of an immutable monetary policy inherent in it. And there are like three, there's more than these, but the three areas of money that we could focus on are M zero, M one, and M two. So money zero, money one, and money two. Money zero, maybe we should start there and do some quick definitions.

• 6:29Ryan Sean Adams?

  So M zero is base money. What exactly is that?

• 6:34David Hoffman?

  I call base money almost like bearer asset money. It's not a precise definition, but it's like kind of close. It's literally just like the raw, underlying money of the whole economy, like literally printed dollars. And then dollars also held like digitally at the Federal Reserve. So this is like strictly currency in circulation plus commercial bank reserve balances inside of the Federal Reserve. It's like the, you can't, there's no deeper level other than M zero. It's at like the basement level of currency.

• 7:05Ryan Sean Adams?

  And you said the Federal Reserve. So this is kind of, we're doing this mostly in US terms, of course. It's a, we're talking about the dollar as the unit of account here. And the dollar being sort of the, the reserve currency for the world right now. It makes sense to talk about the, the Federal Reserve and the dollar specifically. So that's all of the physical cash that you see in the economy shrinking, I would say. There's not, there's not as much physical cash in our daily usage. And it's also the banknotes that are held at the Fed, the commercial banknotes held at the Fed. And if we look at what that number is right now, this is monetary base, total monetary base since 1959. And you can kind of see this over time.

• 7:47Ryan Sean Adams?

  So David, we are at about 5.8 trillion dollars in M zero as of today. And you can see this chart is like pretty, pretty steady up curve through the, you know, seventies, eighties, nineties, 2000s, and then whoa, what's this? 2008, what happened here? And we shoot back up and like the last, you know, 14 years or so have been the spike upwards in, in terms of M zero liquidity as, as more cash is injected into the, the M zero economy.

• 8:19David Hoffman?

  Yeah, there's worth, there's like two eras in this curve that really like stand out to me. There's the first era up to 2008 where like the slope is like pretty like linear, consistent, like regulated, dependable. And then 2008 happens and then the curve is, at first it jumps up. As in like we, me added a lot of money supply into the world. But then it like kind of gets erratic and unpredictable and you can kind of. Trying to see opinions showing up in M zero. You can see this is the Federal Reserve started to be like, oh, you know what we can do? We can like leverage these levers. We can spin these dials a lot more than we have. And this call kind of came into vogue in 2008.

• 9:00Ryan Sean Adams?

  You said opinions, but in what I had to go into more detail in those opinions. They seem like very short term opinions. It seems like somebody is drunk on the levers and just like leaning into them, like jerking them one direction or other. It's much more jerky. Opinions were expressed before this, but like they were very gradual, you know? And here's these incredible jerky ups and downs as far as M zero, but always up. I'll note that it's almost always the long term trajectory is up. So that is M zero. What's the next M that we should consider?

• 9:28David Hoffman?

  We're going to talk about M one and M two, but I just also kind of want to put an edge between M zero and M one. That doesn't exist between M one and M two. M one is derivative money and M two is also derivative money. So like we're now, once you go beyond zero, you're into the world of derivative money. And really like M one, M two, M three, technically it keeps on going. It's like M N like infinite number. But really, once you start to get beyond M three, it starts to get kind of foggy. M one derivative money, first order derivative money is money like with a trusted intermediary. It generally includes the most liquid forms of money, things that are essentially money without actually being money.

• 10:12David Hoffman?

  It can quickly and easily be used for transactions. This is money held in commercial banks, savings held by banks and financial institutions. It's basically base money with a single order of intermediary between you, the user of M one and base money. So like, I would simply very call it like M one is like first order derivative money. Very liquid, but just not as perfectly liquid as M zero.

• 10:39Ryan Sean Adams?

  So the way this manifests to you is so M zero, of course, is like a $20 bill in your wallet. Okay. M one is the money in your savings account, your checking account in Wells Fargo. Right. That's, that's

• 10:51David Hoffman?

  Very, very accessible, but technically still subject to run on the banks.

• 10:56Ryan Sean Adams?

  Yeah, exactly. It's there, you know, PayPal, it's, you know, all of the digital money that you see in kind of like your own consumer personal savings account. That's sort of M one is kind of the stuff that we like basically use today.

• 11:08David Hoffman?

  The point is, is that there's risk at M1 and there's zero risk at M0. Like with any sort of centralized trusted intermediary, there's insolvency risk, credit risk, theft risk. There's some sort of trust happening at the M1 layer, which is the meaningful differentiation between M0 and any other M, which is like there's an intermediary between you and anything above M0.

• 11:32Ryan Sean Adams?

  Right. I don't feel like we feel that trust anymore. Like it doesn't feel risky anymore because you know, there used to be runs on the banks and things like this where your M1 is at risk and you better switch your bank. Now we have FDIC insurance up to 250K and it seems like the Fed system will bail out any bank that like leads to insolvency. But I guess there is some risk here. One important point to note is this is a lot bigger in terms of like M1 is a like, it's much larger. It's kind of like another circle, outer layer, I would say. If just M0 is kind of the nucleus, M1 sort of surrounds it.

• 12:12Ryan Sean Adams?

  We're looking at about 17, 18 trillion dollars of M1 right now.

• 12:18David Hoffman?

  Versus the 5.9 trillion of M0. And part of this comes from the fractional reserve layer of the commercial banks.

• 12:26Ryan Sean Adams?

  Exactly.

• 12:27David Hoffman?

  So like $1 in turns into like $10 out at the commercial banking layer. And so this is where we see like expansion of the monetary supply. Whereas the monetary base is at one number. The M1 number will always be some sort of multiplier on that because we have, we live inside of a fractional reserve system.

• 12:46Ryan Sean Adams?

  So David, if you thought the M0 chart was ridiculous with all of these ups and downs, look at the M1 chart here. And not much actually occurred in like M1 supply in 2008, but something happened around 2020. And we see this absolutely like massive mountain cliff edge spiking upwards. What is that? What happened here?

• 13:10David Hoffman?

  Yeah, well, starting actually back at 2008, it's notable that M1 did not go down during 2008, even when like according to central bankers, we were on the brink, right? We were on the brink of a financial depression. But like we learned from the financial depression that we need to quickly inject stimulus into the economy. And so we did that. And without being an expert in like the history of the Federal Reserve, like kind of staved away like a meaningful amount of depression out of the post 2008 economy. What happened after 2008 is like you see the steady slope upwards of M1 actually accelerate from pre 2008 to post 2008. Then we hit COVID.

• 13:53Ryan Sean Adams?

  COVID stimulus, wow.

• 13:55David Hoffman?

  COVID stimulus was like a different beast in which like everyone's memory goes back to 2008. And we were like, you know what worked in 2008? Stimulus. We're going into COVID, we're going into a pandemic, you know what we should do? Stimulus. Turns out like the COVID crisis and the 2008 crisis were like meaningfully different types of financial crisis. And we only really know this in hindsight, but like the COVID crisis didn't necessarily justify the amount of stimulus that we got, but nonetheless, we made that happen. And so like, it's hard to express how vertical the COVID M1 growth line is. But it goes from $4 trillion up to like, what is that, 12, 16 trillion dollars?

• 14:38David Hoffman?

  Inside of one year, like inside of maybe a quarter or two. And so we just quadrupled the M1 supply of money inside of the economy in 2020 because of COVID. And then like what happens? We experienced inflation for the first time in like 30 years, like go figure. And then it also continues to rise up until the point where you actually see it come down a little bit. When we all remember the Federal Reserve hiking interest rates for the fastest time since like 40 years or something.

• 15:06Ryan Sean Adams?

  Tightening, right? Basically, so we were doing the opposite of tightening. We're doing massive expansion very quickly in M1 and now we move back to tightening. So we've got our M0, we've got our M1. Just wrap a bow on this. How about M2? What does that include?

• 15:21David Hoffman?

  Yeah, that's just even more derivatives on money that's even less liquid than M1. This is commercial bank and credit loans. So this is money in money markets. This is money available to banks and financial institutions for lending. So it's money that's been put into a bank, turned into M1, and then it's lent out again to money market funds or other creditors or lenders, creating M2. Still very liquid, but you have a couple orders of derivation, which separates it from M0.

• 15:54Ryan Sean Adams?

  Okay, and so the total amount in M2 is 20 trillion. So larger than M1, certainly significantly larger than M0. So this is how the money that we experience in the typical fiat system. This is essentially how supply issuance monetary policy is managed. So what's the problem with this, David? Or what can be the problem with this? What is the criticism of central banking policy from, let's say, Austrians and those who think that all of this expansion could lead to some disastrous effects?

• 16:29David Hoffman?

  So there's a number of different ways to approach this conversation. First, I would say just like the central bank influences control over a mass number of people's lives through the levers and diaries that they have control over at the Federal Reserve. We have all been told that a 2% inflation rate is good and that we should accept that and that the dilution of our money by 2% every single year is good for society. It's something that we are just told. There's also, since the central bank also influences its control over the commercial banking layer, which is the layer that the average Joe has a relationship with. And so it's really just a huge intermediary

• 17:12David Hoffman?

  between you, the individual, the market participant, and the money that you use. And so when you use the dollar, which is a liability from the Federal Reserve, the Federal Reserve is your counterparty. It is your counterparty on the other side of the transaction of you choosing to store your savings. Inside of a currency that is managed by the Federal Reserve. So like you as an individual, as a market participant are giving up some of your sovereignty. Some of your power and influence goes into the manager of your fiat currency. And as we kind of saw with the M1 or the M0, the very erratic nature post 2008. Like, these are people controlling the lives of like the entire globe.

• 17:55David Hoffman?

  Because every, every transaction, one half of every transaction is fiat currency. And so one half of every transaction has this like one central intermediary, which is the Federal Reserve. And also commercial banks. And so, and when we talk about like living a bankless life or living a, being a self sovereign individual. Having a central bank is a obstacle to that because their choices impact us. And they are humans and they are folly and they make choices that impact the entire globe.

• 18:26Ryan Sean Adams?

  So this gives a tremendous amount of power to sort of the, the central bankers around the world to effectively make decisions. And like, this is kind of like an issuance tax. Now, we're only looking at one side of the, the equation. So this is not showing us the demand side for these dollars, right? This is just the underlying issuance. And since you mentioned it, you, you mentioned 2% inflation. I think it's important to draw the distinction, distinction between what we've been talking about, which is issuance and inflation. So inflation in itself is just the purchasing power that your unit of currency has, your unit of money has for some basket of goods. Let's say it's like food, you know, shelter, like energy costs, that, that, that is a basket of goods that is sort of defined.

• 19:12Ryan Sean Adams?

  And inflation is different than issuance. Okay? So like issuance can spike up, but you might not necessarily feel that in terms of inflation, at least not right away, not immediately. Because your purchasing power may not change, right? And so the, the Fed mandate, it's important to know when the central bankers around the world are kind of like managing the dials and the knobs for this. They don't, their mandate, they don't really care about issuance. They're not managing to an issuance curve. They're managing to things like unemployment rate in the economy, healthy GDP. They're trying to, at least they say, they're trying to get inflation to a 2% annual range per year. They're not managing to issuance styles.

• 19:53Ryan Sean Adams?

  Like, at some level, they don't really care about issuance unless it starts to impact the things that they're really managing, which is like inflation, the overall GDP of the economy, and only then do they actually care. The problem with this, though, David, is that the issuance expansion of supply does tend to manifest in inflation over time. So this is a chart of actual inflation from the early 1900s, so 1913 over time. So you could see, you're starting on this chart with about $10. And if you scroll all the way forward to February 2024, it takes, it requires $310 to have the exact same purchasing power of $10 you had a year ago.

• 20:36Ryan Sean Adams?

  Another, another way to show this chart is sort of like, what's the purchasing power of a consumer dollar from the early 1900s to, you know, the 2020s where we are? The dollar's lost over 97% of its value since, you know, 1913. So if you're holding wealth, at least over the long term in a dollar, it's basically a shitcoin. Like, you're not actually able to hold your wealth over any period of time.

• 21:01David Hoffman?

  Yeah, and this is something that, like, of course, early Bitcoiners instantiated inside of their culture, which is like, we don't stand for this. In fact, the purchasing power of money ought to go up over time, not down over time. The loss of the value of the dollar came to the benefit of a select few individuals. There's this concept called the Cantillon effect, where the people who are most proximate to the issuance of money benefit the most because they are nearest to the money printer. And so they get to purchase goods before inflation sets in. Actually, they are the cause of inflation because they have this privilege of buying goods before inflation defines other people's value of their money.

• 21:43David Hoffman?

  Their savings. And so Bitcoin has always been this reaction to this phenomenon like, what if we actually had a supply schedule of our money that was not responding to human incentives or human desires of a select few people? And instead, what if we use this money that stayed stable in supply and in theory would actually grow in value as a function of its demand inside of the economy? And so this is the Bitcoin theory, the Bitcoin idea is like you take this little decaying dollar graph and invert it. Whereas whereas the dollar loses money over time Bitcoins is would in theory grow in value over time as a function of the growth of the GDP around Bitcoin.

• 22:25Ryan Sean Adams?

  I think the way that's best expressed, though, is like that. That's sort of a theory. The the practice of that, though, is there's an algorithmic issuance policy. So they look at sort of the Fed M1 and M2 and these spikes and, you know, 12 guys in a room sort of controlling how much money is printed at any specific time. They say, let's get rid of all of that. Let's have a simple algorithmically defined issuance policy. And this is the Bitcoin issuance schedule. Maybe you could kind of define this. So this is a chart that looks much less sporadic, much more calculated, much more planned. It starts at zero, of course, and it ends at 21 million circa,

• 23:08Ryan Sean Adams?

  you know, 2041 or so. This is the Bitcoin issuance schedule. This is the Bitcoin monetary policy. This is essentially Bitcoin M zero. What is the M zero calculation, David?

• 23:20David Hoffman?

  Yeah. So there's a when you look at this graph, you get a very clear idea. I was like, oh, there's an algorithm happening here. Bitcoin, before I define that algorithm, which is very simple to define, one of the benefits of Bitcoin, like I'll just first date that Bitcoin established the first non sovereign monetary policy ever.

• 23:36David Hoffman?

  And so back when we were kind of defining monetary policy, like on the human tech tree, you needed both like a government and an army to create and then protect and manage a fiat currency. And this is really the novel institution that Bitcoin created. It has its army. It's called proof of work miners. It has its currency. It's called the BTC token, the BTC asset. It has its monetary policy, which is this algorithm, which from 2009 to 2012, the first like two and a half years of Bitcoin, miners received 50 Bitcoins for every single block that was mined, largely when Bitcoin was like completely valueless. Like it started to have a value 2011, but people were receiving 50 Bitcoins and they were mining on their CPUs. It was very easy to mine. It was actually a very loose monetary policy at the very, very beginning.

• 24:21David Hoffman?

  And then the supply schedule Bitcoin is that every four years, the issuance of Bitcoin on a per block basis gets cut in half. This is why we call this the halving. So November 2012 was the first halving, reducing the supply of issuance on a Bitcoin basis per block to 25. July 2016, the second halving, 12 and a half Bitcoin per block. May 2020, the third halving, 6.25 Bitcoin per block. And then my next week, actually, 2024, the next halving will reduce Bitcoin reward per block to 3.125. And then eventually at 2140, we will approach 21 million Bitcoins. And once we hit that 21 million Bitcoins per block, we're done.

• 25:04David Hoffman?

  There will be zero more issuance on a per block basis for Bitcoin. And this is something that you can review and audit the code on in the side of the Bitcoin system. And it has been executing according to that code since the inception of the Bitcoin machine, the Bitcoin system, unlike the Federal Reserve, which changes, which is why we have FOMC Day. Like FOMC Day is the feds deciding to alerting us to a change that they're going to change the issuance. And that's why everyone pays attention to FOMC.

• 25:33Ryan Sean Adams?

  Yeah. And this is defining code. I like that point you made earlier, which is like, so when you look at sort of monies in the past, we had nature, of course, which really doesn't have, is nature defined monetary policy, if you can even call it that. And we had nation states, which is Government and army, it's like violence. And now we have algorithmic monetary policy.

• 25:51David Hoffman?

  Satoshi, a human, did create monetary policy in Bitcoin. He just threw away the keys.

• 25:56Ryan Sean Adams?

  Yeah, basically. And it's the crypto economic incentives that actually make this thing go. And another important, important point to note, of course, there, on this chart, we're seeing Bitcoin issuance schedule. This is M0, okay? So there's no notion of M1, M2. The M1 in the Bitcoin economy would essentially be Bitcoin in an exchange, let's say. And so, most of the time-

• 26:19David Hoffman?

  WBTC on Ethereum.

• 26:20Ryan Sean Adams?

  Or wrapped Bitcoin on Ethereum. Most of the time, that is not fractional reserve, so it's a one-to-one. So, except in cases like FTX, where the Bitcoin wasn't actually there. So like, if you put your Bitcoin in Coinbase, that becomes M1, but it's not a fractional reserve system. It's like one Bitcoin in Coinbase for one actual Bitcoin issuance. Doesn't really affect the total amount of Bitcoin in circulation. All right.

• 26:43David Hoffman?

  The only reason why it doesn't affect that is because there's kind of this like social contract to, hey, don't, don't fractionally reserve Bitcoin. Because no one wants your fractional reserve Bitcoin. We actually kind of consider that a scam-

• 26:54Ryan Sean Adams?

  We've tried that a couple of times, right? Like, and so what happens is things like BlockFi and like, like Grayscale and, you know, FTX. And this is why there's this notion of not your keys, not, not your crypto, is because sometimes banks can go fractional, fractionally reserve things behind the scenes. You don't even know. They don't tell you because their ledger is a little bit different. So we did all of that to set up the conversation we're about to have, which is Ethereum's current monetary policy and the changes that are maybe being proposed. Are they being proposed? I'm not sure. So we'll talk about that in a minute. But before we do, we want to thank the sponsors that made this episode possible.

• 27:28David Hoffman?

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  The Cello Layer 2 will bring huge advantages like a decentralized sequencer, off-chain data availability secured by Ethereum validators, and one-block finality. What does that all mean for you? With Cello Layer 2, gas fees will stay low and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using social connect. But Cello is a community-governed protocol. This means that Cello needs you to weigh in and make your voice heard. Join the conversation in the Cello forums. Follow Cello on Twitter and visit cello.org to shape the future of Ethereum. Mantle, formerly known as BitDow, is the first DAO-led Web3 ecosystem, all built on top of Mantle's first core product, the Mantle Network. A brand-new, high-performance Ethereum Layer 2 built using the OP stack,

• 29:37David Hoffman?

  but uses Eigenlayer's data availability solution instead of the expensive Ethereum Layer 1. Not only does this reduce Mantle Network's gas fees by 80%, but it also reduces gas fee volatility, providing a more stable foundation for Mantle's applications. The Mantle Treasury is one of the biggest DAO-owned treasuries, which is seeding an ecosystem of projects from all around the Web3 space for Mantle. Mantle already has sub-communities from around Web3 onboarded, like Game7 for Web3 gaming and Bybit for TBL and liquidity and on-ramps. So if you want to build on the Mantle Network, Mantle is offering a grants program that provides milestone-based funding to promising projects that help expand, secure, and decentralize Mantle. If you want to get started working with the first DAO-led Layer 2 ecosystem, check out Mantle at mantel.xyz and follow them on Twitter at @zeroxmantle.

• 30:22Ryan Sean Adams?

  Ethereum's monetary policy. All right, this is a different curve, looks a little bit different than Bitcoin, although like not

• 30:29David Hoffman?

  Smooth.

• 30:29Ryan Sean Adams?

  Too much.

• 30:29David Hoffman?

  Smoothish.

• 30:30Ryan Sean Adams?

  Like if you look at sort of the line over the last, you know, Ethereum's almost 10 years old, so it's nine years or so. So what is Ethereum's monetary policy? What has it been? What like changes, what events have occurred? Give it, give us the timeline here in the rundown.

• 30:45David Hoffman?

  I would actually say Ethereum kind of lacked a monetary policy and perhaps even like continues to lack a monetary policy to this day, which is one of the biggest wedges, I would say, defined the difference between the Bitcoin and the Ethereum community. Ethereum started its monetary policy when the blockchain started, which was initial block rewards will be five Ether per block with no future prescriptive nature about any changes in the future or like any sort of model or anything. It's just like, hey, we're going to build this Ethereum thing and we're going to issue five Ether block during its proof of work phase. And that was as much like kind of thought that went into the whole system. And so Ethereum genesis

• 31:24David Hoffman?

  block, July 30th, 2015, five Ether per block, October 16th in 2017. So a little over two years later, it was decided that Ether, Ethereum was sufficiently secure and that we should reduce the issuance of Ether. So we went from five Eth to three Eth without really knowing what security is or any sort of like end game target. We just said, hey, like Ethereum, ETH price went up a lot. We are now issuing a lot of Ether in dollar terms. I think we can afford to like reduce the supply of Ether into the market. So we did in 2017. February 28th was the next one, 2019, the block reward went from a three to two. So continuing a

• 32:06David Hoffman?

  reduction of the issuance of Ether, again, without any sort of like rigorous nature. And then in December 1st, 2020, we created the beacon chain. So the beacon chain was a separate blockchain running in parallel to Ethereum, which would eventually become merged with Ethereum. And this was when this weird phenomenon happened in which we had both the two Ether per proof of work block on the proof of work side of things being issued, and then also a marginal increase of Ether being issued because we were also securing the beacon chain and proof of stake. I think, so I think it was something like a three to 6% increase in total ETH issuance because we had these two chains running in parallel. August 5, 2021, we introduced EIP 1559 and we started the burn,

• 32:51David Hoffman?

  which is one of the first like opinionated directional prescriptive natures about like, what should the ETH monetary policy be? We decided that excess fees ought to be burnt. So excess demand of the Ethereum economy, we burn those things. And that started this whole meme around ultrasound money. In 2015, September 15, 2022, we merged. So we deleted the two Ether per block reward on the proof of work chain. And we only had the beacon chain issuance, which was much smaller. And so this created fulfilled this like idea of ultrasound money. And it was a very constrained issuance algorithm with the burn.

• 33:35David Hoffman?

  And this is actually the moment where ETH went deflationary. So at the moment of the merge, there was more Ether in circulation than there is today. The supply of Ether, it goes up and down because we do issue Ether on the consensus layer, but we burn Ether on the execution layer. This is like, of course, transaction fees. On net, since the merge, the supply of Ether has gone down. I think we have burnt something like two, two or three million Ether. And that is where things are today. We activated withdrawals, but that actually didn't change the issuance curve of Ether. We activated withdrawals in April of 2023. And that is as things stand. This is the changes that went into effect.

• 34:19Ryan Sean Adams?

  One ad I'd make there, David, and maybe it's a quibble, sort of a semantics thing. You said that Ethereum has not had a monetary policy from the very beginning. And I would sort of agree with that, but also disagree. So, so like, when you say hasn't had a monetary policy, it's always had a monetary policy, but the monetary policy has been soft, let's say. It's been squishy. It hasn't been well defined. It's not been like the Bitcoin monetary policy, which is what's our, we're going to have the supply every four years and we're going to end up at 21 million. With Ethereum. It was basically like, we don't know where this thing is going to end. And it was like that in 2015.

• 35:00Ryan Sean Adams?

  We're going to add a more precise, calculated, algorithmic monetary policy later. But we don't know how much we should actually be paying for issuance, right? So that is a cost in the network. And of course, in these crypto economic systems, these layer one blockchains that we're building, what does the issuance pays for? Pays for the army, pays for the economic defense of the entire system. I will say though, since the early days, and this sort of came to be verbalized in the Ethereum community, kind of like the social layer of things that we often on Bankless call kind of like the layer zero, that's beneath all of the chains.

• 35:41Ryan Sean Adams?

  At the layer zero, around, I would say, 2017, 2018, the community started talking about the social contract of the Ethereum monetary policy, which is, as defined, minimum necessary issuance or minimum viable issuance, which basically means we're only going to issue blocks to pay for economic security. So it can't be stifled away for any other use case because that is the most credibly neutral way to sort of spend our block issuance money. And how much are we going to spend? The minimum necessary to what? Secure the network and keep it decentralized, right? And so if you go back to Satoshi's original 21 million, I'm not sure a lot of thought was given to that number. It's like, like, what do you think?

• 36:26Ryan Sean Adams?

  I mean, he's probably just like, let's just do this every four years. You know, the Olympics happens every four years, whatever. Every four years, we'll just cut in half, wind up at 21 million, boom, put it in place and it hasn't been touched since. That's the difference. Ethereum's has been changed, right? But I'm, I'm not sure it went through, like, any, like, I'm not sure that Bitcoin's issuance curve had any greater foresight into, let's let me calculate how much economic security Bitcoin needs and the fullness of time. And I come up with this, you know, like 21 million number. That is the answer to all of the problems. You know, Ethereum's just been a bit more gradual. It's been looser and has begun the hardening process, I would say.

• 37:11Ryan Sean Adams?

  So the changes more recently have become less drastic, more algorithmic, but it certainly wasn't, it was loose on day one, is now less so, but it's not completely hardened either.

• 37:24David Hoffman?

  So the Bitcoin monetary policy, I agreed, just didn't really have much thought put into it, kind of by design, like it was said, hey, a hard cap, 21 million, whatever, 100 million, whatever. So long as we approach a hard cap, then that's kind of the Bitcoin's monetary policy. And it was like, simple by design, like a hard cap is just a pretty simple thing. The only thing left, once you've decided that a hard cap is good, the only thing left to decide is how quickly or slowly that you get there, and what kind of curve it takes to get there. What Bitcoin received as a result of that is predictability. This is the thing that Bitcoiners love about the Bitcoin monetary algorithm, is that like, you can just model it out independently, and say like, oh, at this particular date,

• 38:07David Hoffman?

  on this year, Bitcoin supply will be exactly this, and you will be like, within like, 98% of a correct answer. The only reason why there's a difference is because the hash rate on Bitcoin changes. With Ethereum, you've never had any sort of predictability. And so you don't really know what the supply of ETH will be at a given moment in future. And so this is kind of the problem with ETH's minimum viable issuance policy. I don't call it like, a systemic problem, but like, it's a vibe, not an algorithm. And actually, no one really knows what minimum viable is, because you don't know what minimum, if you are approached a minimum, until after your blockchain, like, gets economically attacked, which is not desirable. So you actually want to have a buffer above a minimum viable to stay away from it, because you don't know where it is. And this is one of the

• 38:52David Hoffman?

  big concerns about the Ethereum system, is like, we have a direction, we have a vibe, but we are still left to be opinionated as to where that vibe is, or how close to that vibe we want to go, or the choices we want to make to get there.

• 39:05Ryan Sean Adams?

  Well, there's two criticisms that come, I think, from the Bitcoin community, when you contrast that with Ethereum monetary policy. One is, you know, predictability, like you say, you can't sort of calculate into the future. I think that's actually less of the concern for many strong, fundamental Bitcoiners. I think that is part of the concern. I think the major concern is, you can't touch the dials, because that's a, there's a slippery slope there. Once you start to change things at all, right? So then you introduce some humans that are able to change things. And that destroys the entire, I guess, illusion that, like...

• 39:42Ryan Sean Adams?

  Of scarcity of your money, essentially. And I think among very strong Bitcoiners, they would say 21 million is Bitcoin. It can never be changed. If it is ever changed, of course, this is code. So you can hard fork Bitcoin. You could change it to 25 million instead of 21 million. You could you implement a 5% issuance. But the true deciders of what Bitcoin is, is actually the layer zero. It's actually the social community. Who's actually running the Bitcoin software? Right? Like between the miners and those that can verify and validate the transactions that the miners put out. Who who does the community actually? What does the community actually say is the true code for Bitcoin?

• 40:24Ryan Sean Adams?

  And I think for Bitcoiners, some of them don't even acknowledge that the social layer exists. I've had many arguments with them in the in the past. It's hey, like, it's all, you know, social layer. It's all layer zero at the end stage. There's an Ethereum layer zero with minimum viable issuance. And there's a Bitcoin 21 million, but you're still dependent on those nodes to kind of run the software. But they

• 40:44David Hoffman?

  The joke that I like to make about this is that the Bitcoin social contract is that there is no social contract.

• 40:48Ryan Sean Adams?

  Yeah, exactly. Right? We don't talk about it.

• 40:50David Hoffman?

  Which is still a social contract.

• 40:52Ryan Sean Adams?

  We just don't talk about it. Right? But they're very uncomfortable, let's say, with the tweaks that human beings like core developers are able to make. And like, the decision that the community has to make is what do we do in the future with respect to issuance? You have any thoughts on that?

• 41:09David Hoffman?

  Yeah, no, I think that that kind of defines the differences between Ethereum and Bitcoin. I think Ethereum Ethereum vibe about the monetary policy is like Bitcoin directionalism without being Bitcoin precision. And so like, we appreciate the idea of like, hey, don't touch the controls. Don't be don't be erratic, be constrained. But we also, as the Ethereum culture say, like, but we need to be pragmatic and we need to make sure that when we like tie our hands to the mast, that we know that we've developed a system that is anti fragile and resilient. And that's actually kind of getting to some of the proposals from this ETH monetary update is we are we are considering the fact.

• 41:52David Hoffman?

  That we are not ready as an ETH monetary policy system to tie our hands to the mass and let this system go.

• 41:59Ryan Sean Adams?

  Don't ossify it too soon has been part of the social contract. But let me just say some things that would be clearly outside of the social contract, right, of Ethereum. It's like, good luck getting this through, right? Is, let's say you increase issuance by like 1% and you delegate that to your core devs, for instance. That would be a change that would not go through because that is not encompassing with the minimum necessary issuance. And what would be the check on power to that is the community would rebel, people would not accept that hard fork, it would like not go through it, the same way that that the 21 million mandate is upheld with Bitcoin. So there are some things that are very clearly outside of minimum viable, minimum necessary issuance, like that, for example.

• 42:43Ryan Sean Adams?

  And there are some things that are-

• 42:45David Hoffman?

  If you wanted to get that change in, you would first have to change the social contract of Ethereum, which is a very hard thing to do.

• 42:51Ryan Sean Adams?

  I think so, or else what do you end up with, right? This is hard fork governance, choice to lose. You'd have Ethereum with like ETH grants and then actual Ethereum, right? It's like it'd be Ethereum classic versus Ethereum original all over again. So you get kind of a hard fork. So where does that bring? Just refresh us now. So you went through this timeline of Ethereum monetary policy and issuance. So where are we now? Like, there are some people, I think, that thought we were at the end of this, right? We did, we did the burn, we did the merge. Okay, we do have some sort of issuance like chart that like shows what issuance will be in the future. There's some sort of algorithm involved here. Where are we now? Aren't we done? Why aren't we done?

• 43:36David Hoffman?

  I actually kind of want to go back to this one part of the changing evolution of ETH monetary policy to a part that I'm wondering if listeners caught this as we kind of just, I kind of just glossed over it, which is when we created the proof of stake beacon chain. And then all of a sudden I said like, hey, proof of work rewards are happening. That's two ether per block on the proof of work chain. And then also proof of stake rewards. But like, what's the supply schedule of the proof of stake chain? Because that's actually now the supply schedule of what we now call Ethereum. And so a lot of people kind of gloss over how this current curve of ETH monetary policy was selected.

• 44:13Ryan Sean Adams?

  That's where the new issuance is happening, you're saying?

• 44:15David Hoffman?

  Yes, that's where the new issuance is happening, yes. And so there is this post inside of an ETH research forum called "The Beacon Chain Consensus Spec", and it was about, the post is "Signal: Nonfinal Status of Base Reward and Desired Issuance Goal", and so this is the Ethereum researchers coming to some sort of equation about the proof of stake chain, which is the current Ethereum chain, and what the issuance should be.

• 44:42Ryan Sean Adams?

  This is back in 2019 is the original date of this post, by the way.

• 44:46David Hoffman?

  Yeah, so there's this equation that is the current monetary issuance schedule of Ethereum, which is the yield equals 2.6 times 64 over the square root of staked ETH. And that's the curve. That is the equation. And this produces a logarithmic curve, so it starts very high on the y-axis at the very beginning, and then it tapers off very quickly, and then it slowly approaches zero at the end. And the comments on this ETH research post, this forum on GitHub, is pretty interesting. Justin Drake says, "Below is my rationalization as to why these numbers are reasonable", and then he's targeting 2 to the 25 ETH at stake, blah, blah, blah, blah.

• 45:31David Hoffman?

  And then, "Assuming each shard consumes an average of 1,000 ETH in gas per year, blah, blah, blah, with half the gas per year, blah, blah, blah, and inflation would be about half a percent, and the validator return would be 5%." Feels healthy! Which is like, the level of rigor that went into this thing. It's like, Justin did some napkin math, and I've seen Justin do napkin math before. He's generally directionally correct.

• 45:51Ryan Sean Adams?

  It's probably the same napkin math, though, that Satoshi did. It was like,

• 45:56David Hoffman?

  Probably, yeah.

• 45:57Ryan Sean Adams?

  Let's have it every four years, end up at 21. It feels healthy, feels like it could work.

• 46:02David Hoffman?

  Bitcoin gets that luxury because as long as they approach a hard cap, like, mission accomplished.

• 46:07Ryan Sean Adams?

  Right.

• 46:07David Hoffman?

  Like Ethereum doesn't have that same luxury because that's just not what our vibe is. It's just, the emphasis I want to place on this is like, Justin Drake did these like, three sentences of napkin math, and then says, "Feels healthy" at the very end. John Adler, if you scroll down, he quotes "Feels healthy" and goes, "That doesn't seem like a particularly rigorous metric. Neither does that this other blockchain has X issuance rate, and they haven't gone attacked yet, so X must be fine. Why not outsource the task to an independent panel of actual economists?" And so this is actually a question I have for you, Ryan. When we merged to proof of stake and enabled withdrawals, did you think that we were done with ETH's monetary policy? Like, what did you think about ETH's monetary policy at the time?

• 46:50David Hoffman?

  Were we like, hands off, we were ready to go, this is gonna be it? Or like, we're gonna have to change it? What did you think about like, the conclusion of ETH's monetary policy, once we went, um, proof of stake and merged?

• 47:00Ryan Sean Adams?

  I mean, I think it started off in like, you know, 2015, 2016. It was more like, it was just like a liquid. It was just kind of like, um, you know, water sloshing about or something like that. And then slowly, it's hardened over time. And so like, maybe, you know, 2018, it became like a Jell-O type form. But I didn't feel like it was fully like, concrete. There was still some, um, hardening left to do. And so I felt like maybe there could be like, one more, like, maybe two. But the changes would have to be, um, like, much more slight. Uh, you know, not really affecting very much. I mean, it could be other burn mechanisms, uh, that we introduced, for instance.

• 47:43Ryan Sean Adams?

  But it would have to be in the spirit of minimum necessary, minimum viable issuance, and like, wouldn't be a major change that would affect everything. So, just, uh, yeah, not fully ossified, but real close, getting real close.

• 47:58David Hoffman?

  Yeah, I remember thinking when even before we merged there that there was never any sort of conversation about the ETH issuance curve out in public. It never really reached. I never heard about it really. And so like when we did the whole merge thing, I was like, you know, where did, where did we decide, where was the conversation about monetary policy? Where did those numbers come from? And like, my intuition was because I didn't hear about it as like a more an external Ethereum community member, I kind of just assumed exactly what ultimately happened, which is just like, we licked our finger, stick it up in the air, felt the wind and be like, that's the vibe. Let's go that way.

• 48:36Ryan Sean Adams?

  It's just not that different than what Satoshi probably did. It's just because you don't see how the sausage is made with Satoshi and it's shrouded in this mystery of a pseudonymous founder who just like, kind of like set the ship in the direction and just kind of like left, then like, that feels like it has much more narrative, I guess legitimacy in terms of setting the policy than looking like you can actually see it in this link in GitHub and you kind of like see how it came to be. You see the inside baseball. You see how the sausage is made.

• 49:08David Hoffman?

  Yeah. And so like always in the back of my head, I've always been like, there's, there's going to be one more because we did a bunch of unrigorous policy changes, directional, you know, self-correcting policy changes. But like, in order to actually like tie our hands to the mass on one of Ethereum's most important pillars, which is its monetary policy, its security, like we need rigor and debate. And because we kind of just like glossed over that conversation when we picked that curve in proof of stake, I always in my mind was like, there's going to be one more. Like, we're not done yet.

• 49:41Ryan Sean Adams?

  Yeah, it felt like the network's not done yet, right? Like, not all of the economic agents have entered. Like, in particular, like layer twos, we, we were, we're just on the cusp of these massive chains starting to consume Ethereum block space or just staking is new and liquid staking is new. And now I get layer has entered the picture.

• 49:58David Hoffman?

  So much data left to connect.

• 49:59Ryan Sean Adams?

  We don't even have an Ethereum ETF in the US, right? So the institutions haven't even entered. So how's, how are these economic players going to add? One other thing I'll just just mention is a massive disadvantage in having a hard cap and saying like 21 million is you actually we we pointed this out in the kind of like the earlier days of bankless is you actually don't know if that economic security is going to be enough to provide the level of like settlement that your layer one actually needs, right? So Bitcoin, you know, block rewards drop down to zero and will transaction fees be enough to pay for a decentralized global settlement layer? Like uncertain, but it feels like, wow, that's that's a pretty big risk.

• 50:42David Hoffman?

  They've already tied their hands to the mast, though, so they're gonna find out.

• 50:45Ryan Sean Adams?

  Right, they're gonna find out, whereas Ethereum can be a bit more, they can sort of wait the decisions over time and let all of the economic agents kind of enter before they fully ossify. So that brings us to the conversation that we are having right now.

• 50:59David Hoffman?

  We're finally here, 50 minutes into this episode, we are finally arriving at modern times.

• 51:03Ryan Sean Adams?

  So what is this? What is the debate? What is the actual proposal? Why do we even need, why is anyone even proposing that we need to change issuance in any way?

• 51:12David Hoffman?

  So Ansgar and Casper from the Ethereum Foundation, these are researchers from the Ethereum Foundation, released this ETH research blog post called "Endgame Staking Economics: A Case for Targeting." And so importantly, endgame, rather than like, Ethereum culture has, I don't know if you noticed this, but like, started to replace those word ossification with endgame. And so like, we're actually kind of removing ossification from our vernacular and kind of replacing it with endgame more and more and more. And so like, this is the attempt to discover the endgame issuance curve for Ether, Ether's monetary policy. And importantly, this thing is, they're calling for a case for targeting.

• 51:55David Hoffman?

  And so what's targeting? Targeting is basically trying to find a particular percent of Ether supply that is staked to Ethereum and targeting that number by putting bounds on the left and the right side of that target.

• 52:12Ryan Sean Adams?

  Okay, can I just understand that? So like, that is, what they're trying to target is percent of ETH staked? They are not trying to target issuance. They're not trying to, there's just over 120 million Ether in circulation and that number can go up, it can go down based on like rewards versus burn.

• 52:34Ryan Sean Adams?

  They don't really care about that number. That's not the metric that they are targeting. What they care about is percent of ETH staked. And right now, it's around like, what? Between 25 and 30%, something like that?

• 52:47David Hoffman?

  Yeah, it's like just over 25%, but it has been increasing up only ever since inception.

• 52:53Ryan Sean Adams?

  Okay. And so, Onskar and Casper, if I understand the contrast of this proposal, they think it's a bad thing for Ethereum to go too high in terms of percent of ETH staked. So, a bad scenario would be like 90, 95% ETH staked. Like, anything that is directionally close to that is bad. And around, you know, like 25 to 30%, 35, 40, like, that feels like a safer zone. And so, that's what they're, that's the, when you say targeting, that's the thing that they're targeting, yes?

• 53:24David Hoffman?

  Yes, that's correct, yeah. And they also make an argument that like, if we get a higher than 50% ETH staked, I'm not sure, I don't think this is in the blog post, so I might be putting words in their mouth, but the vibe is that like, once you approach some like, uh, uh, pass some equilibrium, like, once you pass 50% of ETH staked, the difference between 50% and 100% of ETH staked is not the equivalent of between 0 and 50%. Like, once you hit 50%, like, there's kind of a magnet at the 100% end, and you very quickly approach 100%, and it's very hard to reverse that, uh, for all the incentives of ETH stake.

• 54:01Ryan Sean Adams?

  So, that's the reason that they're bringing this up before we cross these thresholds, where it becomes harder and harder to kind of go back. Can we just, like, why? Why does it matter what percent of ETH staked? Like, why is 90% a bad thing according to Casper and Onskar? What reasons do they give?

• 54:17David Hoffman?

  There's a number of different reasons. Um, maybe I'll kind of start by, uh, defining the differences between solo staking and, uh, staking service providers, what we would call LSTs. LSTs, like Lido, Rocketpool, you know, Stakewise, and now even LRTs, Liquid Rescating Tokens, do a very similar thing, if not more. They reduce the cost to stake. Um, do you hold any, like, our ETH or, like, stake ETH, Ryan?

• 54:42Ryan Sean Adams?

  Yes.

• 54:43David Hoffman?

  How costly, in terms of your time, energy, and capital, was it to trade your Ether for that stake ETH?

• 54:50Ryan Sean Adams?

  Incredibly simple, easier than technically running a solo staker, of course. There's just some associated risk. But there's also, for me, it's like, there's risk in running a solo staker as well. But very, very easy from a, like, just click a button.

• 55:05David Hoffman?

  And also, if you were to solo stake your Ether, you would not get staked ETH or our ETH in return.

• 55:10Ryan Sean Adams?

  It's not liquid, do you mean?

• 55:12David Hoffman?

  It's not liquid, exactly. And so, the incentive to use a liquid staked token is high because you get liquidity on your staked ETH. The cost of staking with a liquid stake token is very low. It's like 10% of your yield for Lido. But then, you also don't have to run your own node. These professional operators are doing it for you. And so, you actually unburden yourself and you just pay 10% in the fee to the Lido system. And so, the costs of solo staking are high because you can't re-stake and you have to run your own node. You get some fees back, but really, this is all a compression of fees anyways. Like, all these liquid staking providers are all competing on fees. And so, by making it so incredibly easy to stake with a service provider,

• 55:58David Hoffman?

  we are basically assuming that the supply of staked ETH is going to approach 100%. Because the curve of ETH, the ETH monetary policy, is logarithmic. It approaches, it marginally decreases in yields for the higher percent of ETH stake. But there's no real mechanism to prevent it from going to 100. And this was, this is true for all of the LSTs. Now we have LRTs doing token incentives. Like, three-fourths, I think, of all newly-deposited Ether into the beacon chain is going into Eigenlayer. And so, this is an external force on yield on Ether that's coming from outside of the protocol.

• 56:41David Hoffman?

  So even that is pushing Ether into being liquid staked Ether, into being liquid re-staked Ether.

• 56:46Ryan Sean Adams?

  Okay.

• 56:47David Hoffman?

  So, the argument is that solo staking is fundamentally losing to staking service providers, simply because of the dynamics of the supply curve.

• 56:55Ryan Sean Adams?

  Okay, and why is that bad? Was it bad to? So, basically, one of the arguments here is this would result, like, if we don't change something, we'll have fewer solo stakers and that is a bad thing for the network. Is this the argument and why?

• 57:10David Hoffman?

  Not just fewer solo stakers, that's that's one thing, and I think that's important. But also, let's go back to what we were talking about with the Federal Reserve. We actually have a removal of M zero money from the Ethereum ecosystem. And we almost in a 100% LST staked world, we actually only have M1 money. And this is actually starting to get into one of the my motivations for this episode. Because I actually think Bankless has a position here. M1 money is intermediated money.

• 57:40Ryan Sean Adams?

  Right.

• 57:40David Hoffman?

  It is.

• 57:41Ryan Sean Adams?

  Banked.

• 57:41David Hoffman?

  Banked money. It's banked money.

• 57:43Ryan Sean Adams?

  Right.

• 57:43David Hoffman?

  And so Lido.

• 57:44Ryan Sean Adams?

  Or it's more banked on the spectrum.

• 57:46David Hoffman?

  It's more banked.

• 57:46Ryan Sean Adams?

  Yes.

• 57:47David Hoffman?

  It's more banked. Even even Rocketpool, which is like non custodial and permissionless. It's still intermediated by smart contracts, which have smart contract risk. And so we this current Ether monetary schedule, this curve, actually does not protect vanilla Ether. So it's actually one thing to talk about the protection of solo stakers, which I think is totally noble. And we should definitely consider that. I also think even more, much more critically, this is a conversation protecting raw vanilla Ether. And the M zero of Ethereum.

• 58:19Ryan Sean Adams?

  Base money, basically.

• 58:20David Hoffman?

  Base money of Ethereum. And so the idea of constraining the supply of ETH staked is in protection of base money. It's in it's a boon to the value of raw Ether at the cost of staked Ether in terms of value.

• 58:38Ryan Sean Adams?

  So let me see if I can kind of connect those dots of why it's bad to have like all of the Ether inside of M1 rather than M0. So we're basically saying if you move from Ether to like Lido staked ETH, you're moving from M0 to M1 without realizing it. The same way if you put cash in an ATM, inside an ATM, and it goes in a bank account. Well, you've just converted your M0 into into M1. You have sort of a set of bankers that you're kind of dealing with. Now, there are levels of like what we mean by bankers, right? With Rocketpool, it's much, much more decentralized. You're trusting some smart contracts, that sort of thing.

• 59:12David Hoffman?

  There's actually no banker in the Rocketpool system. There's just smart contracts.

• 59:15Ryan Sean Adams?

  Right. With with Lido.

• 59:16David Hoffman?

  Smart contracts are the bank, which we are generally cool with.

• 59:18Ryan Sean Adams?

  With Lido, you have some smart contract risk and then a permission set of validators should be made. That'll decentralize over time. And then also you have kind of like a Lido governance token, which is again, that's another layer of something, some sort of intermediary. It could be light intermediary, maybe it's acceptable, but it's not as pristine as M0. And then if you go to the extreme case where you have an exchange doing this and staking like a Kraken or Coinbase or something, well, that is purely, you know, CETH on Coinbase, for example, that is purely banker intermediated Ether. And imagine if that was 90% of all Ether supply was staked inside of CETH. Well, if like an exchange founder goes wrong, you get

• 1:00:03Ryan Sean Adams?

  another Sam Bankman-Fried on the scene, they decide to fractionalize that Ether reserve, then they can kind of do that. And there can be all sorts of shenanigans. And we're left with the same system that we left, where you have banker intermediated money. I guess it's sort of a tail wag the dog type of scenario as well, where just like the protocol loses power to the banker cabal.

• 1:00:29David Hoffman?

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• 1:01:11David Hoffman?

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• 1:01:52David Hoffman?

  Token launches don't have to be complicated. Talk to Toku today to get a free initial token valuation. Right. Let's open up the image here where we have the three different options for the ETH supply curve because I think we can do a little bit better to explain what targeting is. I'll do my best to explain this for the podcast listeners. So we're looking at three different graphs, three different supply curves of Ether, the asset we have. On the left, we have the current supply curve, which is, like I said, it's the yield to staking Ether is very high if there is not very much Ether being staked. And then as more Ether is staked, that yield comes down pretty rapidly at the beginning and then it kind of just marginally

• 1:02:34David Hoffman?

  gets closer to zero. But there's also a meaningful buffer between zero and the actual yield. So like you kind of always will receive, even when there's 100% ETH staked, I think at 100% ETH staked, all ETH staked gets about like 2.2% yield. And so that's the current supply of things. And so that's one of the main reasons why there's this magnet in the current state of the Ethereum monetary policy. Why there's this magnet approaching 100% ETH staked? Because even at 100% ETH staked, everyone gets 2% who's staking their ETH. Now, the thing is, is that, like I said, above 50%, really the incentive to stake your Ether doesn't come from the fact

• 1:03:15David Hoffman?

  that Ethereum needs more security. It's actually motivated by removing yourself from dilution, like avoiding dilution, which isn't a good reason to actually have 100% ETH staked. And so like minimum viable issuance, it's somewhat similar to like minimum viable security. Like, we actually don't want Ethereum to overpay for security. We don't want Ethereum to be over secure. It should be at a Goldilocks zone. It's kind of like one of the social contracts of Ethereum is like, find the Goldilocks. And so this, by having like 2% for all stakers, even at 100% stake rate, really penalizes raw ETH and basically invalidates its ability to exist. So that's the current state of things. And that's the left side curve. We have two

• 1:04:00David Hoffman?

  options that is proposed in Ongar's and Casper's research post, which is option one, which is the

• 1:04:07David Hoffman?

  Less, the less, the smaller of the two changes.

• 1:04:12Ryan Sean Adams?

  Less aggressive.

• 1:04:13David Hoffman?

  Which is less aggressive, thank you. Which is, take the exact same supply curve that we have and just lower the issuance. And so, don't change the curve, just lower the total amount of ETH being issued. And so, at 100% ETH staked, actually, there's zero issuance. And so, you actually severely disincentivize the power of that magnet to approach 100%. And so, this assumes that there will be some sort of equilibrium discovered before we ever get to 100%. Where just like the total issuance of Ethereum approaches zero as we approach 100% stake.

• 1:04:48Ryan Sean Adams?

  To kind of slow things down. You put the brakes on somewhere between the process, like between the 25% of ETH staked and like the 90% like red zone. You're just kind of slowing that incentive down.

• 1:05:00David Hoffman?

  That's exactly right. Like, don't change the actual curve, just reduce the total supply of ETH being issued to also reduce the incentive to create M1 money at the cost of M0 money.

• 1:05:10Ryan Sean Adams?

  Okay.

• 1:05:11David Hoffman?

  And then, there's the more aggressive response, which is, actually, let's add a new mechanism. Let's change the shape of the curve to make this curve become extremely aggressively avoiding 100%. And so, this is like, so instead of like having a smooth log curve that's kind of basically just like, you know, shaped like a rounded L, it is an S curve. And so, you have a very steep drop off at the very beginning, as we do now. That mechanism stays the same. It highly incentivizes ETH to become staked at the very beginning of the curve, where there's not much ETH stake. So, it very strongly incentivizes higher than zero ETH staked. And so, there's a very high yield to go from like 0 to like 10 million ETH staked, which is exactly what it is today. And then, there's a target.

• 1:05:56David Hoffman?

  I call it like 25 million or 25% of all ETH staked, where that is the flattest part of the curve. But then, when we start to get 30, 45%, 50%.

• 1:06:07Ryan Sean Adams?

  You're making these numbers up. That's not necessarily, but whatever the target is, insert your percentage target.

• 1:06:12David Hoffman?

  I'm trying to like illustrate the shape of the curve.

• 1:06:14Ryan Sean Adams?

  Okay.

• 1:06:14David Hoffman?

  Yeah. Once you get a higher than the target, then the issuance of yield drastically decreases and actually goes negative.

• 1:06:23Ryan Sean Adams?

  Negative yield?

• 1:06:25David Hoffman?

  And so negative yield. And so think of trying to, for the podcast listeners, a very vertical line that drops, that approaches zero, very, very quickly at the very beginning, starts to become more horizontal and reaches its maximum level of horizontals at the target. And then as it gets further away from the target, target being like a 25%, as it gets further away from the target, it starts to go back vertical, continuing downwards. So it's like a sideways S that starts high and ends very low and actually drops off at the bottom because it goes negative. And so what this is doing is this is adding an opinion, adding a mechanism beyond the target that reduces ETH issuance and even allows it to

• 1:07:08David Hoffman?

  go negative. And so what this would look like is that if you are staking your Ether, when there is negative issuance, you're staking your Ether and you're actually having Ether taken, taken away from you. If you are staking.

• 1:07:20Ryan Sean Adams?

  You have like 32 ETH in your validator and you're expecting to receive some profit. But if it switches into negative issuance mode, then you, you're actually, you're actually every like block taken away from you basically. And that's like it's burnt, I would assume it just goes somewhere.

• 1:07:34David Hoffman?

  Yeah, it would probably, it would just get deleted. And like that, it may be that intuitively, like as a gut reaction and people are like, well, that's crazy. Why, why would you do that? Well, like, think about the incoming yields from Eigenlayer. What if the negative interest rates of Ethereum is like negative 2%, so you are losing 2% every single year inside of the protocol?

• 1:07:53Ryan Sean Adams?

  But you're making.

• 1:07:53David Hoffman?

  But you're actually receiving 8% inside of Eigenlayer. And so you are net positive due to the external forces around Ethereum that's extra to the protocol. But the protocol constrains and protects itself by penalizing people inside of the beacon chain who are staking beyond a particular target.

• 1:08:11Ryan Sean Adams?

  It's interesting how you frame this. You say you're inserting an opinion by adding kind of this target and the negative rate. And I'll say, yes, you're inserting an opinion, but we already have an opinion here, right? Which is the current shape of the curve, which kind of diminishes over time, is actually an expressed opinion already. And we could keep that opinion relatively the same, except just like modify it slightly or like.

• 1:08:33Ryan Sean Adams?

  I guess change, change the opinion at a more fundamental level and add like, kind of like negative issuance. But I guess, you know, the current approach that we have is already an opinion. It's important to note that. It's just an opinion that we've been used to, because we've had it in place for the last, like, three years. Okay, so this is what they're proposing. And the idea, I guess the-

• 1:08:53David Hoffman?

  Well, maybe, maybe just to really clarify what they're proposing.

• 1:08:56Ryan Sean Adams?

  Okay.

• 1:08:57David Hoffman?

  They, they have created a proposal to include option one, the less aggressive change into Electra, the next hard fork, which in the Ethereum context is like aggressive already. Like you guys are changing the supply curve, we're slapping this thing in. And this is why there's controversy is kind of the, the speed and the haste in which option one, the less aggressive curve, the one without the second new opinion is being added into-

• 1:09:22Ryan Sean Adams?

  Oh, that's why people are actually upset. They're like, okay, well, now you're trying to do this option one. We haven't had time to kind of like weigh in, give this some thought. And like, you're trying to like, put this in a hard fork. Now, when I, when I-

• 1:09:33David Hoffman?

  And to be clear, this is not consensus. So by default, this is not going into the hard fork. They are just proposing that it does go into-

• 1:09:40Ryan Sean Adams?

  This gets into another separate podcast I don't want to do right now, which is like, how does, how does a bill become a law? You know, how does, how does-

• 1:09:46David Hoffman?

  Ethereum rough consensus? I don't want to do that podcast.

• 1:09:48Ryan Sean Adams?

  Yeah. How does the EIP actually, it's a messy process. Let's just say that. And you can't just create a research post and like, propose it for next hard fork. And suddenly it's there. Like, this is the process of the community kind of vetting it. The, the other thing, I've heard Anshkar and Casper like, like actually talk about this. And I think they're, they're not like forcefully pushing this. They're very much wanting to have the discussion with the community. In order to provoke that discussion, this is what you have to do. You have to write a post like this.

• 1:10:17David Hoffman?

  You have to provoke it.

• 1:10:17Ryan Sean Adams?

  And you actually have to like poke a little bit. And you have to be like, this option one could be ready for the next Ethereum hard fork. What, what do you say? And so at some level, this is exactly the conversation that the Ethereum, Ethereum community kind of should be having, I guess. Okay. So-

• 1:10:33David Hoffman?

  One of the arguments that they make is that because we are in the current, the shape that we have, there's actually, there is no constraint on the total supply of ETH staked. And so, one of the reasons why they are being aggressive with it is that they, like I said, are provoking it. But as we approach, you know, 40% stake, 50% stake, 60% staked, it makes it harder to go back down to a lower number.

• 1:10:57Ryan Sean Adams?

  Because you have some incumbents, right?

• 1:10:59David Hoffman?

  Right. You have incumbents. Well, you're already there, right? There's literally Ether in the beacon chain. And so, getting it back out is like a whole other step. And so, one of the arguments is that actually, the quicker that we can do this, the less painful it is on net, because it's less self-correct.

• 1:11:13Ryan Sean Adams?

  Well, yeah. If you're, fewer incumbents, fewer existing projects have like, sort of based their entire ecosystem around the assumptions of the current curve, right? I was just even thinking, our conversation with Blast and Pac-Man, right? He built an entire Layer 2 based on ETH stake yield. What happens if that goes in the negative direction? There are a lot of downstream effects on the business model for that entire Layer 2, I would imagine, right? And so, like, this type of thing, the longer it exists, is going to be harder to change. And so, I guess with option 1 and option 2, the entire idea is to target a lower percent of ETH staked. And in doing so, the protocol has greater control than kind of like the

• 1:11:58Ryan Sean Adams?

  smart contracts and banking layer that's kind of built on top of it. And we have more base money, and that keeps Ethereum, the argument would go, that keeps Ethereum more, quote unquote, decentralized. But the contrast with that, right? It's because what I hear from, and I think Bankless is fully subscribed to this, we want Ether to be a monetary unit, we want it to be money. We've sort of like, been talking about that for a long time. I think most of the community now agrees with this, including Onskar and Casper. And their argument for a proposal like the options that they laid out is, if Ether is going to be a global permissionless money, then M0 has to be very strong, right? We can't have everything turn into M1.

• 1:12:43Ryan Sean Adams?

  Right? And then like, the other side of the debate is also people who believe and want Ether to be money, a monetary unit. They say, well, the more times you tweak the algorithm for this and the supply curve, we have to go back to like factory reset. We have to go back to day zero and we have to say, well, it's been how many days since the Ethereum algorithm was actually tweaked? And it opens up like a layer or a narrative hole for people to say, hey, you know, a few core devs can kind of change issuance at every time. See, you just did this in like the Electra Hard Fork in 2024. And what's to say you're not going to do it in like another year or two and you'll keep changing it over time?

• 1:13:27Ryan Sean Adams?

  So we're all ETH as money people, right? Like, is that the question of, you know, what side of the debate do you fall in? Is this worth weighing in on?

• 1:13:37David Hoffman?

  I think that particular argument is actually relatively weak. I think you and I, as children of 2016, 2017, Ethereum, this is when we learned about Ethereum. That particular context of Ethereum's era was marked by Bitcoiners like bullying us about that exact point. And they've also like never really been right about that.

• 1:13:56Ryan Sean Adams?

  What you mean changing, like anytime you change it is a bad for your money.

• 1:14:00David Hoffman?

  Ethereum is a shitcoin because it's just, it's no different from the Federal Reserve. Like literally Anthony Pompliano tweeted this out one time. It was like ETH is no different from the Federal Reserve. They change their monetary policy all the time. And like they were always, it was always just like not really representative truth. Like they didn't, they don't change the monetary policy all the time. It happened like five times, four times. And it most importantly, it was always to the reduction of ETH's supply. And, and I like, I'm very happy with the history of ETH monetary policy. I think we've made the right choices through and through and through. And so I'm less inclined on like, Breaking the Lindy of the current state of ETH monetary policy.

• 1:14:37Ryan Sean Adams?

  You don't think that there's a

• 1:14:39David Hoffman?

  I don't, I don't think it's that big of a deal.

• 1:14:40Ryan Sean Adams?

  You don't think that there's a sense of mysticism here? That's like, it's kind of the emperor, like with no clothes. Uh, there's something about money that is mystical. It's like high priests, like Satoshi has to devise this perfect algorithm and then like disappear. And who knows why it's 21 million, why it's not something else like? Do you think that the illusion of money starts to use its actual monetary process? Since all it is is a shared story. If you start to erode the actual story and people see that it's just a, like some people writing code that actually created the monetary policy?

• 1:15:16David Hoffman?

  I think the other side of the story is stronger. Notably, both options here decrease the total issuance of Ether. So both option one and option two, lower the issuance of Ether. Both of them increase the moneyness of Ether. And so everything's a trade off. We are changing the monetary policy one more time.

• 1:15:37Ryan Sean Adams?

  Potentially.

• 1:15:37David Hoffman?

  But, eh, potentially. But every single policy change ever made to Ethereum, to this day, historically, has always reduced the supply of Ether. Except for the one caveat, when we made the beacon chain and we actually added issuance because of the proof of stake chain and parallel. But people just accepted that because it fit the story of Ethereum and it made sense. And this, these two options both reduce the total issuance of Ether, increase the value of base money. And so I think those, that side of the story is much more powerful than just like the Ethereum. It's not just the core devs, like

• 1:16:13Ryan Sean Adams?

  Oh, so you do have an opinion on this? You, you like these options?

• 1:16:16David Hoffman?

  I have an opinion on it.

• 1:16:17Ryan Sean Adams?

  You like the direction of these options?

• 1:16:20David Hoffman?

  If, if one of these options increased the supply of Ether, increased the issuance, I would have much stronger reservations.

• 1:16:27Ryan Sean Adams?

  It's outside of the

• 1:16:28David Hoffman?

  The social contract of minimum. Both options are inside the, the social contract of minimum viability.

• 1:16:34Ryan Sean Adams?

  Do you think that these options strengthen the monetary properties of Ethereum? It's like, and

• 1:16:41David Hoffman?

  Massive.

• 1:16:41Ryan Sean Adams?

  You do, okay. But would you also concede that from a narrative perspective? They first weaken it in the short run because you're injecting yet another change that the core devs have proposed. So in the short run, it weakens it, but in the long term, you think it strengthens it?

• 1:16:59David Hoffman?

  I think it weakens it, sure, technically, marginally so, but I don't think it weakens it all that much. Like, I think the costs of changing the monetary policy of ETH are low.

• 1:17:10Ryan Sean Adams?

  And you

• 1:17:11David Hoffman?

  And the benefits that we get from this change are

• 1:17:12Ryan Sean Adams?

  And you also, do you also believe that there should actually be an end game? So like, here's another slippery slope argument, it's like, yeah, sure. It's always one more change, right? Like, there's always another end game beyond the end game. And so you've called this the end game, and then you're like, you'll come up with another term for a new end state, you know, and want to change this again two years. Like, are you on team that monetary policy actually should ossify at some point? And get, there should be an end game?

• 1:17:44David Hoffman?

  I think option two is the most credible path to an end game Ethereum Ether monetary policy economics. And this is, this is in the title of the blog post. It's titled "Endgame Staking Economics: A Case for Targeting." So like, notably, option one is not an end game to me. And option one, which is the keep the same supply curve, just lower the total issuance, is buys us time to get to option two, which is the endgame. The, to be my own devil's advocate, like, a failure scenario here is we choose option two. Say we choose 25% ETH targeting, and then we actually learn that we, that we approached minimum viable issuance and actually went too far, and we're actually less than viable issuance.

• 1:18:27David Hoffman?

  And we're like, oh shit, too far, we actually have to increase issuance because we went too far. That's like the bad case scenario. But I think we can, 25% is just a number I made up. We can research that number, maybe it's 33%, maybe it's 40%, I don't know. But I think that we have plenty of tolerance here to choose a number that's healthy and that it will be sufficiently secure. And that the option two is the most credible path to choosing a monetary policy that we will never ever have to touch again.

• 1:18:59Ryan Sean Adams?

  Okay, so this is the first time I've, we've ever discussed this, by the way. So I'm just kind of like formulating, that's your opinion then?

• 1:19:06David Hoffman?

  I am telling my Ryan my opinion right now for the first time.

• 1:19:09Ryan Sean Adams?

  So, do you want to hear my opinion?

• 1:19:13David Hoffman?

  Sure.

• 1:19:14Ryan Sean Adams?

  I think option two is not off the table and could be a final like negative issuance resting rate.

• 1:19:23Ryan Sean Adams?

  I could be on board with something like option one that is much more moderate. But overall, I feel like it's too soon to do something as drastic as option two. Potentially, option one, maybe not this year, hard fork, but maybe the next. And the reason I say I feel like it's too soon is because the full range of economic agents that we'll see in the future have not yet entered Ethereum in force. Right? So we're just at the early outset of figuring out like what restaking is going to look like. And that could be a massive force, economic force inside of Ethereum's like monetary considerations.

• 1:20:07Ryan Sean Adams?

  We don't have an ether ETF. We have no idea how much ether the institutions are actually going to like slurp up and how, what it looks like when a black rock with X percent of ether starts to flex its muscle and say, we are now staking. Right? Like, what kind of ripple effects will that have on preserving this? So I guess what I'd say is, it's just, it's just soon. I'm glad we're having this conversation. I worry about making a drastic decision. Option one is not that drastic, so I could sort of see the case for it, but I'm not necessarily sure that option one is like enough of a change, that it's worth it to actually like

• 1:20:51Ryan Sean Adams?

  open the door and change monetary policy yet again. I'd rather like, you know, measure twice, cut once. It's kind of, it's kind of my gut take on this.

• 1:21:00David Hoffman?

  I think that, that you are being reactive, which is totally fine, legit. You're being reactive to what is going to be incoming data from future phenomenons. I think my position is that we actually have sufficient data. That we ought to do something now because we actually do have informed hypotheses about what's going to happen in the near term, which is like, well, what do you think? What do you think? We haven't, Agonlayer is not live yet. We haven't seen Neil from AVS, but I'm sorry. What do you think is going to happen? More ETH is going to be staked?

• 1:21:35Ryan Sean Adams?

  I see what you're saying. I see. So, so I think actually, and

• 1:21:38David Hoffman?

  We have the data.

• 1:21:39Ryan Sean Adams?

  I think that's kind of, I think that's a valid point, right? Which is basically what you're saying is we, we know what we want, which is we don't want 100% of Ether being staked inside M1 type vehicles, right? Or anything close to that. And we know we want to preserve an M0 base money on Ethereum, right? And in order to do that, we can't have like 60, 70, 80, 90% of ETH like staked. And so like, we know what the, the fact, the polls are, we have basically a target rate. And so we should go ahead and do that. I, I think there's, there's merit in that case. What I would say though, is the Ethereum community is actually not necessarily on board

• 1:22:24Ryan Sean Adams?

  with that yet. Like, I think we're still in the phase of the advocates for something like option two, or even option one, quite frankly, still have to make the case to everyone in the entire Ethereum ecosystem, that like, there should, we should actually strive to have a target rate for percent of Ether staked. And I've seen parts of that argument, but I haven't seen that argument like strongly put, let's say, and to be compelling enough to get the vast majority of Ethereum ecosystem participants on board. And you also have counter, like, Lido would not want that, right? Like, I think you've heard, Hsu's

• 1:23:04David Hoffman?

  No, Lido, Lido wants a 100% ETH stake. There have been tweets from Lido team advocating for it.

• 1:23:09Ryan Sean Adams?

  Sure. And this is, this is, but Hsu also has said, I mean, we had an entire podcast about this. He, he said, yeah, 100% ETH staked, like, you're going against gravity. And by the way, it's not a bad thing. It's not a bad thing. And so I feel like in order to do something like option one or option two, you have to have more debate, more consensus, more justification, more like, there should be X% of ETH staked, and it's obvious because of these reasons. Um, because otherwise it feels a little bit, um, God, I'm going to say it, feels a little bit Prague Powie.

• 1:23:47Ryan Sean Adams?

  For people who don't know, it's a deep cut reference.

• 1:23:49David Hoffman?

  There's a lot of listeners who don't know about Prague Pau and I don't want.

• 1:23:52Ryan Sean Adams?

  Just that the entire community is not bought into even the idea of a target ETH rate right now.

• 1:24:00David Hoffman?

  Right. So, okay, so Prague Pau progressive proof of work was this proposed change to the Ethereum hashing algorithm back in our proof of work days. And if I remember correctly, it was very, it was interested by the miners. Miners were interested in it because it would brick ASICs. And I think this is right, it would brick ASICs and it would, it would be a boon to individual GPU operators. Like back in my GPU mining days, that would have been a boon to me. And it would have been a penalty.

• 1:24:30Ryan Sean Adams?

  There'd be winners and losers and basically core devs would get to decide kind of who they are, basically, right? In the minor community, it never went through, but it was very controversial.

• 1:24:39David Hoffman?

  Actually, the reason, this is a side quest, you know what, you know what happened actually? Why it didn't go through? Because COVID fucked up the supply chains of the ASICs. And so the actual, the Prague Pau fears of ASICs incoming actually went away because COVID ended.

• 1:24:54Ryan Sean Adams?

  I was against it, by the way. I just thought it was stupid.

• 1:24:56David Hoffman?

  Most of the community was against it.

• 1:24:58Ryan Sean Adams?

  I thought it was stupid because we're doing staking anyway. Why are we messing with like mining?

• 1:25:02David Hoffman?

  That was awesome.

• 1:25:03Ryan Sean Adams?

  You know, it became a non-issue, obviously, because we transitioned to staking.

• 1:25:06David Hoffman?

  So as we go forward in this debate as to like what do about the supply of ETH staked? I want to call into attention, option two, the more aggressive one, which preserves vanilla raw ether inside of the Ethereum economy. And I kind of want to put this into contrast of like many of the startups, including the ones that you and I are invested in both as angels and through Bankless Ventures. And these are like organizations like Lido, any LRT project. Like, do you, do you have staked ETH inside of like DeFi?

• 1:25:40Ryan Sean Adams?

  Yeah.

• 1:25:40David Hoffman?

  I have, I have staked ETH.

• 1:25:41Ryan Sean Adams?

  Yeah, yeah. If you're a validator, you have like, a lot of people have vested interests in this is what you're saying.

• 1:25:46David Hoffman?

  Right.

• 1:25:46Ryan Sean Adams?

  In not changing this.

• 1:25:48David Hoffman?

  There's a lot of people with vested interests who want ether to go into their project before touching.

• 1:25:56David Hoffman?

  The end consumer. And if we can target, if we target like 25% of ETH staked, it is a boon to raw vanilla ETH. That is a boon to like the long tail of Ethereum, to the average Joe who doesn't have to think about or kick the tires of every single staking project, of which I think we also want many of them. And so like if there, say there's like negative ETH yields. So like the net effect of ETH yield is like 10% because of Eigenlayer AVSs, because of the LRT incentives, et cetera. And so as a result of that, there is negative 3% inflation inside of the Ethereum beacon chain.

• 1:26:40David Hoffman?

  And ETH stakers are just eating that negative inflation because they're getting yield from external forces, external startups, like the LRT startups, the Eigenlayer startups. Maybe you're just like Joe Schmo, average retail guy, who doesn't want to be beholden to any LRT or doesn't want to have their ETH in Eigenlayer just to stay, not just to remove themselves from dilution. And so raw ETH gets, it's deflationary because of MEV burn, because of EIP 1559.

• 1:27:11Ryan Sean Adams?

  We should just hold raw ETH.

• 1:27:12David Hoffman?

  It's also deflationary because all of the people yield maximizing are receiving negative inflation from the Ethereum protocol. And so maybe you just want to F off and not think about any VC-backed startup, any LRT, any like LST dominance is trying to eat into like 100% of market share. Maybe you just want to hold our ETH and you don't want to have to be intermediated by some startup. And so this, I think, is, it's, it's very bankless aligned, in my opinion, to have option two, because it preserves the M0 of Ethereum ETH. It, this intermediates the Ethereum economy significantly in the ETH context. And I think it's, it's just like beneficial to the margins, which is always what crypto and Ethereum has always been about.

• 1:27:57Ryan Sean Adams?

  Yeah, I mean, there's things, I'm not fully on board. I just, I don't know yet. I'm definitely open. I don't know about the option. There are certainly some things. That are like within ethos to sort of support, right? So you know, like widest set of participants is always going to be ETH holders. The ability to like have my private key in a self sovereign way. And for that to be a monetary unit that is useful is like incredibly important. That is the widest set of possible participants in this decentralized network. So strengthening that makes sense. And M zero being strong, strengthening Ethereum's like monetary capabilities, monetary effects makes sense. Solo stakers being like a valuable participant in this network.

• 1:28:40Ryan Sean Adams?

  That is like, that is essential to how this, how this operates as well. There's a lot to like, I think about these concepts. I just don't know if this specific implementation is going to deliver on all of these things or if it's practical. But I guess that is the debate that is going to.

• 1:28:56David Hoffman?

  Right, that is the debate. There's like the very concrete, here are the parameters debate. And then there's also the vibe debate. And the vibe debate is what we're seeing on screen here, like these three different options.

• 1:29:06Ryan Sean Adams?

  Interesting.

• 1:29:07David Hoffman?

  My vibe, my vibe is option two firmly.

• 1:29:09Ryan Sean Adams?

  Firmly? You ready to call that? You are, you are, yes, I guess I'll be breaks again. It's like, I like the concept. Let's have more discussion about it. Very good, though. I feel like I now I totally, I understand what's going on and the wider context. And Bankless listener, we hope you do as well. Should we end with a brist and disclaimers, David?

• 1:29:29David Hoffman?

  Let's do it.

• 1:29:29Ryan Sean Adams?

  All right, of course, David and I hold some ETH. So we have a vested interest in this network being successful. And you guys know crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.