The EIP That Destroys DeFi | Stani Kulechov & Mike Silagadze

Ethereum’s latest staking proposal is sparking backlash across DeFi. Aave founder Stani Kulechov and EtherFi CEO Mike Silagadze join David to break down why stake tapering could push ETH yield toward zero, weaken solo staking, drive capital out of DeFi, and make ETH less attractive to institutions. They debate Ethereum’s monetary policy, whether the network is overpaying for security, and why trying to make ETH more like Bitcoin could undermine what makes Ethereum valuable in the first place. Subscribe for more conversations from the frontier of crypto. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔓NEAR | TRADE CONFIDENTIALLY, GET 20% BACK https://bankless.cc/near-pod 🔑BITKEY | GET 10% OFF USE CODE: BANKLESS | #bitkeypartner https://bankless.cc/bitkey ✈️COINBASE ONE CARD | EARN 5% BACK IN BITCOIN https://bankless.cc/coinbase-one-card 📊BITGET | TOKENIZED STOCKS 2.0 https://bankless.cc/bitget-stocks 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless --- TIMESTAMPS Intro 0:00 0:09 Ethereum’s Staking Debate 2:41 Stani’s First Reaction 7:48 Mike’s Centralization Concerns 14:37 DeFi Under Pressure 17:15 Stani on Yield and Cash Flow 24:54 The Case for Vanilla Ether 27:20 Mike Pushes Back 34:27 Issuance and Monetary Policy 35:16 Minimum Viable Issuance 40:47 Institutions Need Predictability 46:10 Conservative Yield, Not Zero 47:46 Legitimacy and Process 52:54 Final Verdict on the EIP --- RESOURCES Stani Kulechov https://x.com/StaniKulechov Mike Silagadze https://x.com/MikeSilagadze --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

• 0:04Speaker 00

  Bankless Nation, there is a new EIP in Ethereum land that has caused much dashing of teeth. To help me go through some of the news and get some of the reactions, I've got Stani from AVE and Mike from EtherFi. Stani, Mike, welcome back to Bankless. See you both.

• 0:18Speaker 01

  Thanks for having me.

• 0:19Speaker 02

  Great to be here.

• 0:20Speaker 00

  So stake targeting is the EIP, stake tapering. This is around ETH issuance. So it's an ETH monetary policy debate. There is a proposal out there from six Ethereum researchers and developers over in EF land, the EF, the ivory tower of the EF. And the concern in this EIP, the problem that this EIP is trying to address is that there is no constraint on the amount of Ether that will be staked to Ethereum. So the idea is that there's no cap on the incentive to stake more ETH. Right now, there is about 34% of all ETH is staked. And the worry that this EIP has is that that will slowly march

• 1:05Speaker 00

  increasingly close to 100% because there's no reason for it not to. There is more Ether issued in some, in total, the more ETH is staked to Ethereum. And the concern here is that with that vanilla Ether in the Ethereum financial ecosystem, the DeFi ecosystem slowly gets replaced by staked ETH derivatives, things like staked ETH from Lido, re ETH from Rocketpool, or with Mike, we have EtherFi's staked ETH derivative as well. So there's no Ether, vanilla Ether, as we know, it disappears and turns into the derivatives. And the researchers are concerned about that being the dominant equilibrium inside of

• 1:47Speaker 00

  the Ethereum ecosystem. Another concern that this EIP has is that Ethereum is overpaying for security. We simply don't need 100% of ETH staked, or even more than 50%. Something around 30% to 40% of ETH staked to Ethereum provides ample security, according to the opinions of these researchers. This proposal was introduced last week. Everyone hates it. I would say everyone outside of the EF does not like this EIP.

• 2:14Speaker 01

  Even people inside of EF.

• 2:16Speaker 00

  I don't think that's accurate.

• 2:17Speaker 01

  There are people.

• 2:17Speaker 00

  Yeah, even some people inside of the EF. Yeah. Yeah. And so that's why I have Stani from AVE and Mike from EtherFi here on the show to get some of their reactions and to elevate their voices about the problems that this EIP creates for them and for the broader DeFi and builder ecosystem. Maybe, Stani, I'll just go with you, since AVE came before EtherFi. Stani, what was your reaction upon seeing this proposal out of the EF?

• 2:47Speaker 01

  Look, I think it's a, you know, it is an interesting topic to evaluate. And you know, if you ask the question of whether we're basically paying, are we paying sufficiently overpaying for security? And I think that's a really legitimate question to ask. That is for sure. I think that Ethereum has been built on security and also on the idea that you have a resilient network, an ecosystem, and anyone who is a builder, for example, like me and Mike, are choosing Ethereum because of that security and what it provides

• 3:30Speaker 01

  essentially. And that is the sort of like a core value proposition. So paying for security is a big part of that. I think the real sort of like objective of this proposal is basically somehow to affect the ETH price and get it up. So I know we're in a, what have like bearish markets and been for a while. So in this kind of a situation, we see various proposals and ideas floating around about, you know, how do we get the ETH price up?

• 4:10Speaker 01

  And this is, this proposal, while it's sort of things like, while it's, the mechanisms are around that ETH staking and whether it should be capped, and the issuance, particularly on the staking and reducing the yields that stakers are getting, and that way influence that there is less issuance and better pricing, better appealing, better appeal for Ethereum as an asset. And I think that's what are the actual consequences of the proposal

• 4:50Speaker 01

  aren't actually achieving that. First of all, it really destroys the concept of solo staking because it reduces the cash flows for solo stakers, creates also very unpredictable tax consequences. So, you know, the question is then, if someone gets a $500 bill for staking, they can even go into negative as well. So it really reduces the opportunity to come as a solo staker. And then the second biggest issue there is the institutional side. So obviously, institutions want predictability. They want a cash flow component, especially when they're building financial products and distribution. And this is one of the key

• 5:34Speaker 01

  areas why a lot of institutions come in, because they have this component there. And third, really important is DeFi. So Ethereum is built on DeFi rails. Whether EF wants to acknowledge that now or never, that is the real fact. Everything that is on Ethereum that is successful is about DeFi. And that is totally fine, because, you know, what Ethereum can really do is replace the financial system in overall and build on resilience, resilient rails that Ether provides the security. And there's a lot of argumentation that if

• 6:14Speaker 01

  we produce the yield on ETH staking, you can go to places like AVE and DeFi and, you know, get yield there. But a lot of this yield is actually being based on Ethereum staking. And if there is no yield on ETH, on DeFi, what it means is that ETH as an asset becomes a funding leg. So what is a funding leg actually means is, is basically when you do a carry trade, you want to borrow a cheap asset. Once you borrow that, you sell the asset to actually, to an asset that can be productive, and then you can, you can basically earn on that asset. And a really big example is the biggest carry trade in

• 6:54Speaker 01

  the world, which is the Japanese yen carry trade. So Japanese economy hasn't been doing well for the last decades. Yen has a very low or zero interest rate. So what typically is done in this carry trade is basically yen is borrowed just to replace with another leg that actually creates cash flow. So this is the sort of element that comes when you reduce the productivity of ETH as an asset and also by reducing the yield. And those are sort of my, there's a bunch of things about the process and whatnot. So like, I

• 7:33Speaker 01

  think the question of this whole topic is important, but I think the consequences are extremely negative for solo stakers, institutions, and DeFi that actually build the Ethereum house.

• 7:48Speaker 00

  Mike, from the EtherFi sector of Ethereum, what were the biggest flags that were raised in your eyes when you saw this proposal?

• 7:57Speaker 02

  Man, honestly, like, every aspect of it, I felt was, was kind of frustrating.

• 8:05Speaker 02

  You know, first of all, it was proposed with, you know, a matter of days leading up to the meeting where these proposals were discussed for inclusion in the next hard fork. And so I, you know, I'm sure there's all kinds of arguments about why, you know, why it came in so late, but it just, it certainly didn't create a good impression that this thing was, it created the impression that this thing was trying to get sort of squeezed in without, without much debate, which, you know, in fact, had the opposite effect as a result. So that was frustrating. A lot of people were frustrated by that. The other part of it was, and Stani, you alluded to this, is that it was, in a bizarre way,

• 8:50Speaker 02

  proposed as a way to benefit solo stakers when, very straightforwardly, this hurts solo stakers. Solo stakers are individual node operators on Ethereum who are running their own little node, you know, at home. They have the highest cost basis because there's no economies of scale. They have their own machine, they have their own internet connection, you know, a 2.5% yield, 2% yield is pretty much break even at this point in terms of the cost of operating a node. So if the issuance goes down, which of course it would with this proposal, all solo stakers go into a loss. And so to me, I mean, it just really represents magical thinking to believe that all of these thousands of people

• 9:33Speaker 02

  who are currently running nodes are just going to altruistically keep doing it, even when they're losing money on it. I mean, some people maybe will, but like, self-evidently, a large proportion of them will not. In fact, there was a survey fairly recently done by ETH Staker that showed that the sort of reserve price for most solo stakers is 2%. And they, they say, I mean, you take them at their word, or you can, you know, imagine that they're lying, I guess. But most solo stakers say that, you know, if it drops below 2%, they turn off their nodes. So at least let's look at the first order effects here and say, look, this is going to centralize the network. Because large entities like Coinbase, Binance, Sharplink, and, you know, Bitmine.

• 10:19Speaker 02

  They have no cost of capital, right? Users are depositing into their exchanges, into the, you know, the Dats. The ETH is just there. If the yield is 20 basis points, they'll still stake. So you're going to have basically an exodus from independent, smaller operators. LSTs will immediately concentrate into one giant LST, liquid staking tokens, because at 20 basis points, 50 basis points, you're only making one basis point of revenue. And so you need massive scale for it to make any sense, to pay developers and auditors and all that. So this is, it's hugely centralizing. And that seems self-evident. I think it's self-evident to, to a lot of people.

• 11:00Speaker 02

  So seeing the, the argument from the proposer being that this will help, you know, decentralization is just like, kind of, kind of bizarre. The, the other aspect of it is that liquid staking tokens provide more of a service than just, you know, intermediating staking. Liquid staking service provide user protections that would be inappropriate to provide at the network level, but it totally makes sense at the application level. Like if, if North Korea all of a sudden decides to, or executes an attack that steals like a, you know, a giant chunk of EtherFi's liquid stake teeth, we have the option to do a fork.

• 11:44Speaker 02

  And that would be frankly, totally reasonable, I think, for, for us to do the proper governance process and then rescue that. You, you would not do that, you know, at the network level. And other protections along those lines. So liquid staking tokens provide an application layer between raw, you know, ETH and users, you know, the, the people actually use. If you look at the TradFi markets, the market for derivatives is 10 times, more, more than 10 times the size of the market for spot. So whatever universe you live in, if Ethereum becomes the, you know, the platform for all of finance, all ETH is going to be in derivatives. Like that, that's just, that's just the reality of it.

• 12:26Speaker 02

  So this argument that we should reduce, you know, the ability of liquid staking tokens to, you know, to, to pull in ETH because it'll reduce, you know, the amount of ETH stuck in derivatives, I mean, it's just, it's a red herring because it's like, that's going to happen anyway, whether it's going to be AVE, you know, AETH or whatever else. Like all the, like when you pay money to, to, you know, you buy some groceries at a store, you're not generally giving them like a hard, you know, hard cash, right? You're giving them a credit from your bank, which is based on a fraction of reserve. But we, yeah, we can argue about all that, but the, the point is all transactions in the, the real economy happen using various financial derivatives. And, you know, if, if Ethereum becomes a real economic system, that's going to be

• 13:11Speaker 02

  the case here too. And again, last point, in a real economy, having a fixed money supply is really bad. There, there are no economists, no serious economists that would say, yeah, you should have a fixed money supply that never changes, right? Milton Friedman's perspective, to take one, one example, is that your money supply should just grow at a fixed amount of 3% per year. Like that's one, one argument, because otherwise you have deflation, which in some ways is actually worse than inflation. The money supply needs to grow as the economy grows. So this argument that we need to have zero issuance in some, at some point is a really bad argument. It's like a Bitcoin brain worm that actually makes, makes no sense in the, in the real world.

• 13:54Speaker 02

  So again, going back to what I said initially, like every aspect of this is sort of frustrating because none, none of it actually makes any sense. In some ways, I can sympathize with some of the problems that are, you know, the, the, you know, EF or I guess the, the researchers are trying to solve, but there's better ways to solve them. My perspective, and I've argued this in the past, is that we should just enshrine LSTs. And that, that kicks EtherFi's staking, Lito's staking out of the picture. Just have an enshrined LST that solves some of the issues that, you know, they have, you know, concerns about. And that's a better solution in my mind than, you know, fucking with the issuance curve in the way that's going to blow up DeFi and have all kinds of other externalities.

• 14:37Speaker 00

  To me, the biggest argument that I would like to dive into now is what you just said at the end, it was going to blow up DeFi. I'd like to understand if this proposal were to go through, what would happen in DeFi? What, what are the second, third, fourth order consequences of a potentially zero yield because like staking hits the target at 50% and so we're burning all of the yield because we have ample security? That's the effect that would go in if this EIP were to go through, but essentially yield approaches zero as stake teeth approaches 50%. Mike, what would happen in DeFi as a repercussion of this proposal?

• 15:17Speaker 02

  Yeah, I mean, the seven of the top 10 DeFi protocols would face a massive capital exodus. So that's, I mean, so I don't know if that blows, that to me is, seems like that's blowing up DeFi. So all the big DeFi protocols stop, you know, DeFi-ing. You know, it would be imperfect analogy, but imagine the US government said, okay, we're going to change the issuance curve on T-bills. If too many people, you know, are holding T-bills, we're going to, you know, suddenly start tapering the, the rate or making it impossible to, you know, to buy more T-bills. You know, like low, short-term bonds provide this sort of foundational yield layer.

• 16:02Speaker 02

  And there's, you know, 100 layers of derivatives that are, you know, then built on top of that. If you mess with that foundational yield layer, whatever you think about whether T-bills are paying too much or too little, or is taking you this too high or too low, if you're messing with this foundational yield layer on top of which a lot of other things are stacked, I mean, you're going to, you're going to really break the system. And so you really have to think hard about, yeah, how much of a problem is a, you know, one and a half percent, you know, inflation on ETH? And again, that's, we're ignoring the burn, right? Because with the IP1559, there is burns, it's actually going to be lower than 1.5%. But let's say burn goes to zero, 100% of ETH is staked. How much of a problem is 1.5% yield?

• 16:46Speaker 02

  I think the case is actually stronger that the yield should be higher than that it should be lower. As I, for, for the reason that I articulated, that you actually need the money supply to expand. And if it doesn't expand, it actually creates all kinds of other problems because you don't want to hold ETH as debt if it's deflationary, you know, it's actually makes it hard to use ETH as, as money in that case. I wouldn't argue for increasing the yield. I argue for not fucking with it. That's my, that's my position.

• 17:15Speaker 00

  Stani, Stani, what resonates with you there?

• 17:18Speaker 01

  Yeah, it's sort of, it's, I, I, I think for DeFi protocols, DeFi protocols are agnostic to different assets and, and obvious use cases. So assets will change, but it does point out what Mike basically said is that it really removes the productivity around ETH as an asset. So if you don't have the yield component, you won't have that yield component in DeFi unless you go high up on the risk curve. So this is the, basically the, the biggest argument that actually the authors of the proposals, the proposal are making is that, you know, let's just, let's just cut the, cut

• 18:03Speaker 01

  the issuance. We cap it, no more issuance, yield goes down all the way to, to zero, basically. And then like, you know, the, the argument is that people will find the yield in, in, in DeFi. But that is actually not the same thing because what the authors of the, the proposal don't really realize, and, and many of them very, barely use DeFi and understand how DeFi works, but a lot of the yield actually comes from these liquid staking derivatives that basically just makes it more feasible to stake and come in and out. And then that creates the, the borrowing demand that you can go into lending protocols,

• 18:47Speaker 01

  supply and withdraw without sort of going to the queue process. So if you remove that component and you move the underlying yield, effectively what happens is that users have to go higher in the risk curve where, on, on basically ETH yields. I don't particularly know many yield sources at a scalable way where you can actually get a yield on ETH beyond the sort of like a, kind of like a risk-free or this low risk yield that is derived from native staking. So what actually happens then is that the users of DeFi and the holders of ETH are starting to actually look for other sources, sources of cash flow.

• 19:31Speaker 01

  And I think there, the biggest, the biggest winners are actually stable coins. And let me explain this in a more concrete example, how it works in, in TradFi. So whenever the interest rates are low, set by, you know, when we have a low interest rate environment, that stimulates the, the equities and the stock markets and commodities and so forth, and even the crypto markets. When the, and that, that, that's logical, that makes logical sense because you don't want to sit on zero yielding cash because your inflation is just basically eating your capital. So you're finding new opportunities. But it works the same way around.

• 20:14Speaker 01

  So if you don't get, you know, sufficient beta or cash flow and you have a yield component in cash, funds move towards cash, for example. This is sort of like how the money movements are in, in the, in the traditional finance. What will actually happen is that those holders of ETH that are comfortable with the beta of ETH and appreciate the cash flow, they might actually then switch their positions from ETH into stablecoin yields because they, there, there's a big difference there and, and doing that on-chain. So that is like a really big challenge there.

• 20:58Speaker 01

  And then obviously what happens to ETH when you remove this productive asset nature is that it becomes that sort of like a funding leg. And this is where I earlier mentioned about the, the sort of like the, the big Japanese yen carry trade. Why does it exist is because there's cheap yen available that you can borrow and then sell it for dollars and then basically take those dollars and, and earn at a software rate, for example, or, or higher. And I think the similar approach applies into.

• 21:34Speaker 01

  Into the same scenario where you have a zero yielding asset, you simply borrow it to just swap it into a more productive asset and then to do strategies and that creates sell pressure for ETH as an asset. And that is why sort of like it has an impact for that user base that is coming and want to hold it because, you know, they believe in the sort of like a monetary aspect and the value aspect of it. And that is why I'm bringing up like this point is because that is what the authors of the proposal are trying to achieve. They are trying to make a more sort of like a better ETH as a money sort of like or better like a value capture asset.

• 22:15Speaker 01

  But in fact, it really creates, you know, circumstances and consequences that go against that objective and goal. And I don't blame them because I don't think there has been many sort of like economical reviews that I've seen based on true economics that actually review this proposal or down argumentation is based on.

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• 25:26Speaker 00

  And like that, that's one of the spirits behind this proposal is that, you know, vanilla Ether, you shouldn't be compelled to have to put your Ether inside of Lido or Rocket Pool or EtherFi because those are all intermediaries in a sense. These are all, you know, third-party intermediaries. They're DeFi apps and so like they're better intermediaries than like a bank or brokerage, but they're an intermediary nonetheless. And what is Ethereum for other than reducing intermediaries? And so by with stake targeting, you don't have to stake your ETH, you get to hold vanilla ETH and you don't have to put your ETH in AVE in order to keep up with the rate of issuance and to get the yield.

• 26:11Speaker 00

  You can just hold vanilla ETH and be intermediary-free. It's very self-sovereign, it's very Bitcoin-like, it's very hard money, sound money. And, you know, AVE, Stani, to a little bit of your point, the Japanese yen carry trade is a, is, there's, there's a conflation on real yield and nominal yield. There's a lot, the ETH stake rate is a nominal yield because we are minting ETH as we are giving it to the ETH, to the ETH stakers. Real yield is not happening. Real yield is the transaction fees that are paid to stakers and then maybe you also want to count burn in that as well. That's real yield.

• 26:54Speaker 00

  And the nominal yield is really just a financial game. And with this stake targeting EIP, you know, stake tapering, we just remove the whole game around nominal yields that people do love to play, like, like people really love nominal yield games, but it's all fake. And so you don't have to do that if you just hold vanilla ETH self-sovereign with the stake targeting EIP. That would, that would be one argument. Mike, what would your response to that be?

• 27:24Speaker 02

  Yeah, I mean, I think it's, I've described it as sort of a cash accounting level of understanding of the economy, which is like a, you know, very kind of base level. Like, yeah, it's nominal yield if you have like a fixed pie, zero-sum perspective. If the economy is growing and like the issuance is less than, I guess, the growth of the economy, I mean, you still have real yield. And this yield that you're injecting back into the economy for providing valuable services like running the, the network or providing user protections helps the economy grow. Like it actually like supports the growth of the ecosystem. So looking at it in this like very sort of one-dimensional, like number go up, therefore

• 28:09Speaker 02

  bad, that is very much a Bitcoin mindset. I think you're exactly right on that and it's, I could use all kinds of expletives to describe that.

• 28:18Speaker 00

  I was using it positively. I think you're using it negatively.

• 28:22Speaker 02

  Very negative. Yeah, I have a very negative opinion of most Bitcoiners. You know, it's, it's a little bit like saying, okay, the only real way, you know, I have money is if I carry a little bag of gold coins with me and if I pay you, I give you a gold coin, like none of this crazy iPhone Cash App stuff, like what are you even sending me, bro? Like, what, like, look, we're, yeah, like if we're cavemen and we're trading, you know, seashells, like, fine, but like in a sophisticated economy, like all ETH is going to be in derivatives. Like you're, even in a world where stake, let's say they eliminate staking, they come up with some other, you know, system, you're still going to be trading derivatives, right? If there's some protocol that holds your assets and again, let's take the fractional

• 29:05Speaker 02

  reserve banking example, like you're not going to be like sending people real ETH, you're going to be sending people credits that represent, you know, a deposit certificate at a bank and there's, in a sophisticated economy, you're not going to be, you know, trading these sort of raw, you know, gold coins. So I think this, I don't know, this, this perspective that the only true ETH is like raw ETH that you hold in your EOA is, it's almost like, it's based on this lack of belief that Ethereum truly can be the foundation for a proper economy, right?

• 29:47Speaker 02

  It comes from this idea, again, of this sort of Bitcoiner mindset that I'm just going to stack my ETH and it's going to appreciate in value for some reason and that's all I'm ever going to do with it. But if you want to build an economy, you're going to build financial derivatives and institutions and protections and chargebacks and all kinds of, you know, fun stuff that needs to exist. There was a reason, you know, this stuff was developed in the, in the first place. There's value there. So the, you know, in a, in a world where Ethereum does what we all hope it'll do, you're never really going to be transacting with, you know, pure ETH in the first place because it's frankly, it's not even safe to do so. You don't want your bank to just be holding, you know, a giant wallet with a bunch of ETH stuck in it.

• 30:31Speaker 02

  You want layers of protections built around it, which is one of the services, as I said, that LSTs actually end up providing for basically zero cost for like five or 10 basis points of cost, a lot cheaper than, you know, the TradFi system.

• 30:48Speaker 00

  Yeah, I guess to take the flip side of the the argument that I was giving a second ago. One of the benefits that Ethereum has is that it has a DeFi economy. And one of the effects of the DeFi economy can also to be democratize the yield to end users.

• 31:06Speaker 02

  Right.

• 31:06Speaker 00

  And so it's like, it's a question of like, how do we want to get to the end result of end users having free access to the value of Ethereum security and the Ethereum economy? And I think with liquid staking derivatives and DeFi apps like Aave or EtherFi, if 100% of ETHs get staked, all of that value can be redistributed to end users with Ether in their account, effectively the same way as it would be if we like had zero issuance in the first place. And I think maybe from the perspective of the DeFi builders is that all of the the spirit of ETH tapering

• 31:47Speaker 00

  and the goals of ETH tapering is actually achieved through the application layer, the DeFi layer of Ethereum. What do we even, that's what we're here for. That's what we are here to do. We are the financialization layer and the democratization layer around Ether, the asset. This is our job and the and the this proposal is just trying to enshrine this job in Ethereum, which the DeFi ecosystem does just as well, if not better. It's like the private market is doing it better than the government more efficiently. And we've already been doing this, so don't take this role away from us. That's maybe the strong man of the other side of the argument. Would you agree with that, Mike? Or would you want to say or add anything to that?

• 32:29Speaker 02

  There's, yeah, just the one, I got the different ways of looking at this. So another perspective that I can add is you can look at the staking rate as a way of rewarding people that are saving. You know, if you're, if you, in a dollar economy, you produce some wealth, you make a widget, you sell it, you get your dollars. And instead of consuming them, instead of spending them, you save them. And in exchange for saving them, you're getting, you're, you know, they're put to work and you're earning some bit of interest because you put out wealth into the world, you're not spending it. And so you're reaping the rewards of that wealth out there, you know, doing productive things. That is perhaps another way of looking at the staking yield. People that stake their ETH generally are not selling it.

• 33:13Speaker 02

  So if you're, you did some stuff, you got some ETH in payment for, you know, your your services. You don't want to spend it, you stake it, you hold it, you help secure the network, the network which is running this economy. And in exchange, you're getting the the rewards of that asset being productive out there. And this is again, why thinking of it as nominal yield is not really the right way to think about it if the economy is growing. Because if the economy is growing at 10% a year, but the money supply is growing at 1% a year, well, then you you actually have 9% of real growth per year. And you're getting the benefit of that, hopefully, in the appreciation of ETH. And, you know, in this interest rate, which feeds back into, you know, into the the economy. So the system actually works.

• 33:56Speaker 02

  And I think maybe one of the problems here is that staking is de facto serving these two purposes. That on the one hand, it's providing security to the Ethereum network and there's lots of complications around that. And then on the other hand, it also provides this, again, de facto benefit of a staking, of a savings rate, which has, which should exist in in an economy. And when you sort of mix those two, it, you know, creates all these complications.

• 34:28Speaker 00

  Let's talk about predictability of issuance and predictability of monetary supply. I think the the the pro ETH targeting argument would be like, this is continuous of all the other changes to the ETH monetary supply that we've ever done, which is always to reduce issuance. Every single change to Ethereum's monetary supply has been to become more restrictive to ETH's issuance. And so this, while we are tinkering with the dials, we are nonetheless tinkering with the dials in the same direction that we've always tinkered them. And the social contract of Ethereum's monetary supply is minimum viable issuance. We are not yet at minimum viable issuance.

• 35:09Speaker 00

  This EIP gets us to minimum viable issuance for Ethereum's monetary supply. Therefore, we should do it. Stani, how would you react to that argument?

• 35:20Speaker 01

  Yeah, I think that's, in overall, I I do understand that, you know, you don't want to pay out more than you have to. Like, everyone wants to pay the, you know, the minimum price that you you want for whatever you're paying. And issuance for me is is simply as payment, you know, from basically

• 35:44Speaker 01

  all of the, all of the system and holders into who are doing productive work to keep the system whole and and make it basically work. And I think that there is nothing really fixed in the world. Like, everything moves in a sort of like, it's not a vacuum, as David you pointed out earlier. Like, you know, there's growth, you know, and there's like inflation and and and obviously, that's, if you can't have overly crazy issuance, right? So you can't go and issue like 20, 30, you know, percent and whatnot, because that has a a larger effect than tweaking few percentages here.

• 36:28Speaker 01

  But at the at the same time, if you have inflows and the actual ecosystem is growing, there's more things happening. And also the fact that that's sort of like a yield has an effect where, you know, what Mike pointed out as a, as a sort of like a wedge to to hold ETH, especially from an institutional perspective, that looks into fundamentals, looks into, okay, how, like, if you think about institutional perspective, they don't care about, you know, things like deflationary systems. It's more about how is an asset, well, let's say, like a business, from business perspective, is growing.

• 37:11Speaker 01

  And and then if there is a some sort of like a payout, whether it's in form of cash, issuance or whatnot, whether the growth is higher than actually the the the the payment. And sometimes, especially at the early stages and growth stages, that payment can be actually even, you know, large compared to the growth because you're effectively buying a market share, you might be buying a distribution and whatnot. And I think one of the most interesting posts I read recently about this whole topic

• 37:46Speaker 01

  was Joseph Shalom's post from from Sharpling about basically the timing of everything. Obviously, there was also like more on this substance, but the timing is interesting question is that, you know, we're basically in sort of like the last mile of Ethereum as an asset in terms of distribution. So we see institutions coming, we have ETH ETFs and and there's more and more distribution. And and institutions are actually interested in this asset. And depending whether Clarity Act passes or not, there's going to be

• 38:29Speaker 01

  in a lot of banks, custody, lending, and ETH is going to be one of the main assets there. And the fact that ETH actually has a sort of like a saving straight does position it better than, for example, Bitcoin, that is sort of like a more known and has its own peculiary, peculiar properties. But then there is obviously, there's Solana, you know, there's other opinions on that, there's Canton. And like, there is real competition there as well. And if Clarity Act passes, obviously, what it means that every single bank in in in the US

• 39:08Speaker 01

  can actually set up crypto-based businesses without any sort of a pre-approval or an ask. They can just set up that business, basically. So this is what I'm, when I refer to that last mile, why it's sort of like a wrong also from the timing perspective is that if we kill that yield, we also kill a lot of these inflows and how institutions are thinking about ETH as an asset. And also the institutions that are already here, that actually under, has underwritten ETH as an asset with a cash flow. So this predictability is really important. So like, and we can all be sort of like, think about, you know, like,

• 39:53Speaker 01

  we don't have to care about institutions, like, you know, ETH is about basically like decentralization and that's the focus and and and, you know, all this like a hippie dippy stuff. But the reality is that if we really want to see Ethereum to succeed, it has to replace the existing financial system, which is absolutely garbage. And to get there, we need to have the right levers to do that. And and and having that yield issuance that then brings institutions, brings solo stakers, makes this sort of like a staker base very diverse, secures the system. That is what basically Ethereum holders want to pay because they see inflows and they see more interest.

• 40:32Speaker 01

  You know, otherwise, if that doesn't exist, all that value goes into stablecoins and also competing networks. And that is the worst outcome for Ethereum because it sort of has been in the beginning of the whole story of of blockchains.

• 40:48Speaker 00

  Yeah, I think it's probably very important to take the perspective of Tom Lee. Tom Lee as the guy who is like the biggest espouser of ETH ever. And he just punted like $10 billion into Ether, the asset. And he's using the staking yield as one of the greatest tools of espousing Ether to other institutions who might ever follow through in copying Tom Lee. Same thing with Bitmine or Sharplink. And imagine what that message would be like if like one year after Tom Lee buys $10 billion of ETH, the ETH protocol kills yield and now he doesn't get any yield.

• 41:33Speaker 00

  It would be a terrible look. It would be terrible for Tom Lee's business, which he just bought $10 billion of ETH. Let's not piss that guy off. But then it would also be very terrible for all future Tom Lees as well. What's up, Sonny?

• 41:49Speaker 01

  David, if they don't have any yield, they will have to do Ponsonomics, like what MicroStrategy is doing. Like that is sort of like, you know, alternative that the yield actually guarantees cash flow. They can underwrite ETH as an asset from like a cash flow perspective. And, you know, and they're not complaining like, you know, if, if, if anyone like institutions like that might be complaining about, oh, we have too high issuance, let's reduce that. But like, no one is, everyone wants ETH to be in a growth mode. Like it has to have good leadership and, and basically, and I think that the whole focus of this point is completely wrong. We shouldn't be focusing on optimizing issuance.

• 42:29Speaker 01

  We should be focusing on how do we make Ethereum like a better product? It's, it's still incomplete product to replace the financial system. Doesn't have a good privacy yet. It doesn't have good scalability yet. It does have security. Now we're trying to act also the security side. These three components needs to be sold until we actually have a complete product. This is where the whole sort of like a community is trying to get EF and all these sort of like participants to focus on, not sort of like a tweaking, you know, this sort of like a gaming, like playing sort of like issuance games.

• 43:10Speaker 01

  The real problem is in the demand side and fixing, improving the product.

• 43:15Speaker 02

  Yeah, I couldn't agree more. I think that's exactly right. It's, uh, there's two aspects of it. One is security and risk mitigation. The other, many people directly or indirectly are basically looking at this as a way to reduce issuance as if that'll accrue value to ETH. And it's just, you know, it'll obviously have the exact opposite result. You're reducing issuance by, you know, half a percent or 1% or whatever it'll be with the negative externality of basically killing the thing that actually makes Ethereum valuable. And David, I think you made actually a really good point in the example of someone like Tom Lee, who's using the issuance to go out and advocate for ETH.

• 43:59Speaker 02

  I think that's, that's probably a good way to look at essentially all of the issuance that is taking place. All of this issuance is going back and feeding into the ecosystem. And that issuance has been used to go out there and grow the ecosystem. And so, uh, yeah, you're saving whatever, you know, it is 0.8% of inflation, but at the cost of starving the thing that's actually helping the ecosystem grow. Uh, I think that that obviously would be disastrous. It's very, I think, short sighted, very sort of zero sum thinking.

• 44:34Speaker 00

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• 45:23Speaker 03

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• 46:10Speaker 00

  I think it's worth noting that just the yield of Ether, ETH staking is just fundamental to ETH. It's fundamental to Ethereum. There's no taking the yield out of Ether because that's how Ethereum has its security. And we don't need that yield to be double digits. It doesn't need to be 10% yield. The way, this is just me strong-arming another, steel manning another argument. Like the way to have Bitcoin or properties about Ethereum is to have very conservative yield, not no yield. No yield is Bitcoin. Conservative yield is Bitcoin or Bitcoin or mindset appropriately applied to the Ethereum structure

• 46:56Speaker 00

  is like the way to do that. Like 2% yield, the low, like Ethereum is already the lowest yielding issuing blockchain ever. That's pretty Bitcoinery. It's, it's way better than any sort of, you know, nation state bond. The, that's the way, that's a better way to apply a Bitcoin or mindset to the Ethereum structure rather than trying to turn Ethereum into Bitcoin. I feel like that is another argument that that one could, could make.

• 47:24Speaker 02

  Yeah, totally agree.

• 47:25Speaker 00

  Donnie, Mike, any other topics? I know there's so much more to talk about. We could talk about solo stakers. I'm mostly into the DeFi ecosystem and like the monetary impacts on Ether. There's other things we could talk about, about the legitimacy of the process, but I think crypto Twitter is really handling that pretty well. Are there any other aspects of this that you guys want to talk about before we close this out?

• 47:46Speaker 02

  Well, I think I, I don't think we've talked enough about the, um, look, real or not real, the perception of this was that it was sort of a last minute thing that was thrown up. Um, and again, real, I don't think this was the intention, but the perception of it was that this was an attempt to jam this change in without much debate. And I think managing that perception is very important for Ethereum because if I look at an institution or a nation state, like it's not, you know, there's a reason El Salvador chose Bitcoin as their, you know, their, their bet,

• 48:26Speaker 02

  I guess, for their national reserve asset and, you know, their, I guess, the parallel monetary system. And I think that reason was largely because, look, it's ossified. We know what it's going to do. Whether you like it or not, we like, it's, it's very predictable. We can trust it. There's, there's not going to be some rug, you know, through, through some governance process that's going to all of a sudden, you know, dramatically change Bitcoin's properties. You know, the founder is long gone and dead. Like this is a system that we can rely. It's as close as you can get to a natural money, like a, you know, like a gold.

• 49:06Speaker 02

  And the way this process, the perception of how this process was, you know, was run with Ethereum, I think is the opposite of that. I mean, imagine you're a nation state and you're considering, all right, should we, should we go all in on Bitcoin or go all in on Ethereum? This kind of thing, I think, creates a zero chance that they choose Ethereum. Because if they look at it and say, all right, we're going to base our national economy on ETH, and then tomorrow they're going to fuck with the governance and the issuance and, uh, you know, staking, uh, staking is out or the network suddenly gas fees go way up or, or like the rollup-centric roadmap was, you know, all the rage now that's like,

• 49:49Speaker 02

  these are the types of things that make it, all right, well, we, like this thing is just not something that's ready for us to, uh, to build on. And that applies to nation states, to large institutions. Like Ethereum, I think, already has the credibility that on, among smart contract platforms, it is the most secure, the most stable, the most credibly neutral. But this is a way to undermine that. Like this is, this is where like, well, Solana does this shit and Ethereum does it. What's the difference? So I just think managing the perception of how this process is run is, uh, is very important, even if the reality is everyone is, is just trying to do their best, which I think is actually probably very close to what the reality is, uh, you know,

• 50:34Speaker 02

  in the Ethereum community today.

• 50:37Speaker 01

  Yeah, I think that's the legitimacy piece that is really important. And over the years, and I've been in the Ethereum ecosystem since 2016. So that's already a decade. And I think that's what I've really learned about what's important over the years is that the reliability, but the legitimacy is really important. Like what Ethereum has been based on? How do you sort of ensure that everything goes through a process? Because one of the fears that there is in the community at the moment is that there's

• 51:22Speaker 01

  going to be a lot of feedback, the same way as with some of the earlier proposals as well that got some backlash, not as big as this, obviously. But the fear at the moment is that there's a lot of feedback and then EFT won't listen to what's being actually discussed. And I think this is going to be a really problematic moment because effectively the proposal doesn't really benefit all the relevant stakeholders, not the solo stakeholders, not the institutions, not the DeFi. And overall, it doesn't help.

• 52:02Speaker 01

  Like in theoretical aspect, there's components that are really interesting and really good. But when you put into practice and also run through some of the economical review processes, you won't end up into the same outcomes that you are trying to achieve. And the big concern amongst the developers particularly is the disconnection between the EF sort of researchers, developers from like the rest of the ecosystem and DeFi

• 52:37Speaker 01

  and sort of like the fear is that there's no listening of that feedback, which is quite concrete, actually. So that's what I think is the biggest fear at the moment.

• 52:54Speaker 00

  It's Donnie, Mike. Thanks for coming on the show. I think I started this podcast in being a supporter of the EIP in a vacuum, but a non supporter of it in reality. And I think in this, and after this discussion, I'm also just not a supporter of it in a vacuum either, simply because Ethereum's DeFi layer is actually its strength and it should lean into it rather than pull ETH away from it. The DeFi ecosystem is the private market. It'll solve problems. Private market's efficient. It has already solved the problems. And this thing is trying to solve a problem that it's not really that much of a problem in the first place. And so I thank you guys for coming on and helping me see your perspective.

• 53:38Speaker 00

  And ultimately, I don't really think this thing is going to pass anyways. But that's because we're doing conversations like this and we're telling the rest of the Ethereum ecosystem exactly what we think. So thanks for coming on and helping me tell that story.

• 53:49Speaker 01

  Thank you, David. Thanks.

• 53:51Speaker 00

  Bankless Nation, you guys know the deal. Crypto is risky, but that is why we are here. The institutions have landed, so we are going even further west. This is the frontier. It's not for everyone, but we're glad you are with us on the bankless journey. Thanks a lot.