The Debate Over ETH's Monetary Policy

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.
Ansgar's and Caspar's ethresearch post: ethresear.ch/t/endgame-stakin...
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TIMESTAMPS
00:00:00 Intro
00:03:23 Defining Monetary Policy
00:07:35 Total Monetary Base
00:12:46 M1 Chart
fred.stlouisfed.org/series/M1NS
00:15:54 M2 Chart
fred.stlouisfed.org/series/M2NS
00:20:05 Inflation + Purchasing Power
fred.stlouisfed.org/series/CP...
00:22:50 Bitcoin Issuance Policy
river.com/learn/who-creates-n...
00:30:22 Ethereum's Monetary Policy
studio.glassnode.com/metrics?...
notes.ethereum.org/@mikeneude...
ultrasound.money/
00:35:27 ETH Social Contract
00:37:23 Bitcoin Monetary Policy
00:43:09 History Of ETH Issuance
github.com/ethereum/consensus...
00:50:58 Proposal Breakdown
ethresear.ch/t/endgame-stakin...
01:01:57 ETH Supply Curve
imgur.com/pVrZ9Ii
01:13:37 David's Opinion on Moving Forward
01:19:08 Ryan's Opinion
01:25:06 Policy Option 2
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Not financial or tax advice. See our investment disclosures here:
www.bankless.com/disclosures⁠

[@Bankless]

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[@cradle_of_chaos]

There's basically two different things: - hard money that can be used for reserve of value etc. - currency, backed by the above and keeping its value day-to-day vs your basic consumption items Trying to introduce refinements in how the hard money behaves is unnecessarily complicated I feel. Monetary policy really is about the currency layer and something like the Fed would work really well if said currency was still linked to the supply of *hard money* somehow.

[@ericmatthews1588]

The change in terminology used by David between the BTC and ETH segments so obviously shows the ETH bias of this show. In the Bitcoin segment: very passive, 3rd person terms "It issues", "Bitcoin does (x, y, z)", "On this date (x, y, z) happened", "We got to a date where (x, y, z) happened" In the Ethereum segment: first person terms start being used a lot more: "We should reduce", "We can afford...", "So we did", "We created the Beacon chain", "We introduced EIP-1559", "and we started the burn", "We merged", "We deleted, and we only had...", "We do issue Ether...", "We burn Ether", "We activated withdraws".

[@MarkTaal]

David doesn't hold any bitcoin and once he said Bitcoiners understand money, but they don't understand Bitcoin. Things like that make it clear where the bias is and they're open about it.

[@rousseau327]

Congrats, you've figured out something they've been very openly expressing for the past few years

[@linkingwithnaz1295]

It's explicitly a eth focused show and they openly support eth.

[@bolognesesauce4743]

I totally agree with Ryan! Changes can be made, but not in the near future (1-2 years). We need to further study how Eigenlayer and other aspects will play out. There are numerous things that we need to understand first! Monetary policy is crucial for the credibility of the network. If the new policy isn't perfect for any reason, then we cannot change it immediately again. Please don't rush with the monetary policy; otherwise, all the network's credibility is at risk!

[@gottliebfreudenreich7352]

Thanks Ryan, I have a similar concern. One of the worst things we can do is to divide the community.

[@PatrickAyelle]

Good conversation but one MAJOR topic not covered was decentralizing eth. Home stakers who do NOT want any added risk and want to keep doing basic standard home staking will be driven out. A rational market participant MUST take on extra yield if the native staking rate is negative.

[@jimmim3000]

I totally agree... these guys have lost the narrative. One of the main reasons that ETH has the value that it does, is because it's decentralized by solo stakers. Incentives should be going to solo stakers and centralized liquid staking providers like Lido should be penalized, to encourage decentralization.

[@childsp]

Good point didn't think of that and I agree somewhat. We can then definitely agree that option 1 is ok at this time.

[@jamesnguyen-gw1yg]

This is the nail in the coffin for solo stakers.. The centralisation effect haven't been studied at all. Only LST's will exists and thrive in a low yield enviroment. Big staking pools like Lido, can still profit if the yield is negative(!) with vertical MEV, proposing empty blocks, etc...

[@collinwoods7151]

I don’t think they have any intent to change it again rather the proposal and rejection can show in court that ETH isn’t a security and isn’t controlled by the foundation

[@royale_spice7954]

Option 2 will break things. Option 1 is ok. Current situation is best for now, too early to determine what will happen, 100% of ETH staked is impossible. Supply and demand wont allow 100% to be staked. There will always be liquid ETH.

[@ignatzly]

If the monetary policy change overshoots the mark and issuance needs to be readjusted back up, that would be very bad for the narrative. Go slow, and don't break things. Let's see if the EIP to change the MAX_EFFECTIVE_BALLANCE does good things for the number of validators in the system. The increasing number of validators is the main problem that lowering issuance seeks to mediate. Also, we always will have some raw ETH, even just to pay for the Virtual Machine. But what is wrong with locking up 99.9% of ETH? That 0.1% ETH left over is still divisible to twelve places or something. And price go up!

[@maxmusterman3371]

Having option 2 could make proof of stake vulnerable to a bad actor driving other stakers out of staking. If they have enough to push the stake reward curve unto the negative, other stakers would unstake therefore making the chain more vulnerable. So you might need less of the total eth to perform a 51% attack.

[@Brennus390bc]

Highly Misleading! One mistake people make with these dollar charts showing the decline in purchasing power, it assumes you held that dollar under a mattress which virtually no one does. You need to show the value of a dollar held in an interest bearing account, or a dollar held in short term us treasuries. For most of the last 100 years the US had an interest rate either slightly below or above the rate of inflation. That $1 would have turned into $50 at 4% annual compounded interest over 100 years. inflation is bad, but there's no reason to distort what happens in the real world with fiat

[@davi_lemos]

Could you PLEASE do an episode explaining ETH governance and the relationship between consensus, core devs and the EF?

[@Jaesango]

lol “ethereum is not like the fed reserve, it’s only changed it’s monetary policy 4 or 5 times”….that’s 4 or 5 times over 10 years…

[@NappyWayz]

49:25 the biggest problem that I see with continuing to change the monetary policy is, as a user, I would have no certainty of what Ethereum is going to do in the long run. For example, if I fell into a coma, and woke up. I would not know, what the issuance rate of Ethereum would be compared to my bitcoin bag. In addition, if I were building on Ethereum, that I’m going to have issues with determining where the platform is going because I wouldn’t have a basis for what I can expect. With bitcoin, I know what I’m getting, I know the rules. They are well defined.

[@MindFieldMusic]

I support whatever is best for the health of the network. Ryan mentioned solo stakers at the end... What would negative issuance mean for them? If it's only profitable to stake it you're also restaking, that adds extra complexity for home stakers and might push them off the network.

[@jordanmiller11]

I love how Ethereum has stumbled its way into a Federal Funds Rate.

[@eliekfouri2043]

This subject is the essence of modern society witch is how money rule our lives. Congratulations Bankless

[@lostledger]

Ethereum people sound so much like the Fed.😂😂😂

[@yindoh]

Except instead of 12 FED governors making all the decisions, emergent social consensus (we all) make the decisions. The market itself (again everyone involved in the ecosystem) sets the interest rate which is a much more accurate and sustainable way of setting an interest rate; in fact the only accurate way to do it. HUGE difference between FED and Ethereum.

[@Pinello485]

I'm puzzled by the perceived issue with having a high percentage of Ether in staking. Not long ago, there was discussion about "economic bandwidth" and the balancing of Ether quantities between DeFi and staking, which was expected to lead to a price increase. Another point of confusion for me is the certainty around reaching 100% of Ether in staking, especially since it was previously assumed a natural equilibrium would be found. Moreover, the assumption that the rate of Ether staking would accelerate after passing the 50% threshold, as mentioned in a podcast, lacks clarity for me. Why should the move from 50% to 100% happen more quickly? Regarding the economic bandwidth issue, the concern over having a limited amount of Ether in circulation puzzles me, considering its divisibility up to 18 decimal places, with the potential for even more. I conclude that no action should be taken until it's clear why excessive Ether staking would pose a problem. Having a small amount of Ether circulating seems a minor issue compared to executing a hard fork that would alter monetary policy

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[@user-ql8he3dm1t]

I believe currently 25% of ETH is staked and i assume the majority is staked as LST. whats the rush we are not even close to 50% let alone 100%. This should be talked about much longer than a few weeks .... Maybe a few years and could be implemented during rhe next bear market. I dont think ETH Foundation implementing something like this while SEC is sniffing around is the best thing for the protocol

[@sunnysworldnft]

Great show guys ! great alpha!

[@michaelthoma4423]

what if an ETF get approved but it only allows "vanilla" ETH and no staking? That could create an enormous vanilla ETH sink that may help offset all this LST/LRT stuff

[@keithkatane4854]

You're reminding me that I haven't finished reading 'Layered Money'... (:

[@brandoner]

Funny how you guys skipped over the ICO premine issuance when talking about ETH issuance Why?

[@yindoh]

Because that wasn't ETH issuance. People paid in ETH for the new tokens from ICOs. New ETH wasn't issued

[@avi6819]

@14:12 The reason the m1 chart jumps that much was because they started to include savings accounts in m1. You can see that m2 (which includes m1) doesnt jump by 10T (because it already included savings accounts all along). Covid stimulus can be better seen in m2. Most of what you were speculating at 14:00-14:50 is just wrong as you misattributed the jump in m1.

[@Brennus390bc]

They are out of their depth...

[@ivangarciaescobar35]

thanks for the info

[@an-eios7125]

Option 1 seems acceptable but option 2 is just plain stupid

[@robertkennedy9188]

Just ask Jay Powell what to do, he’ll tell you

[@GentlemanJamesWin]

Reducing the supply advantages current holders at the expense of future buyers.

[@MindFieldMusic]

I'm 1hr in. Great discussion, so far. Thanks for covering this topic.

[@yindoh]

1:11:36 the interest rate itself isn’t as important as its certainty. The certainty of it staying roughly the same or at the very least, being more smoothly and accurately guided by market forces. Tweaking the algorithm constantly turns the governance into the FED (albeit, a more accurate one since it is based of market consensus which is much better and more accurate than 12 FED governors). Certainty > algorithm changes/tweaking. The FEDs muddling and tweaking is one of the main reasons our financial system is shittier than it should be

[@vmura]

i wonder how credit creation theory of banking affects M1/M2. Banks make money out of thin air ! Can crypto do that?

[@yindoh]

1:02:24 market won’t allow option 2 to happen. It’s irrational. Unless other real yields like that on USD are worse. Option 1 and current will auto balance via market forces to a rough equilibrium and likely fluctuate around there. Option 2 is a terrible idea. That artificial limit on the stake will create major artificial demand for “stake” space and that will undoubtedly lead to centralized counterparties offering “stake space” for a fee in an OTC manner, many of which will turn out to be scams. It will centralize staking into a few hands due to the demand for the stake space I think.

[@permaweave5104]

If y'all want to call ETH "ultrasound money" then you should probably voice your opinion that the monetary policy should straight up never be changed again. Otherwise, it's extremely unsound money, as a precedent will be set for it changing quickly, repeatedly, and easily.

[@elyeyo286]

Block Sailor's self-governing model is innovative; let's investigate its implications.

[@MarioZuniga-pi3cz]

Block Sailor Token's $10 potential is interesting. Time to dive into its whitepaper!

[@johny3406]

This channel is an advert for ethereum.

[@KyleSector]

Stupid proposal, dont change the issuance at all

[@ThePHATBASTURD]

Option 1 for sure

[@kesler171717]

Human tech tree, David has been playing Civ or age of empires

[@qwertykeyboardwarrior]

The thing with bitcoin is nothing can be upgraded. This can be a problem in a changing world. Thats why something that adapts to its enviornment has great value also

[@iulianserban10]

money should not change, it has to be boring.

[@qwertykeyboardwarrior]

@iulianserban10 That kind of money is very useful. But other kinds have uses also and can add great value. I don't think we should have just 1 version of anything especially money.

[@qwertykeyboardwarrior]

Like the dollar sucks as a store of value money but its awesome when you have a mortgage ... especially with an intrest rate that's less than the inflation rate/ rate of devaluation

[@qwertykeyboardwarrior]

Abilty to change is not bad.. aslong as the descision is sufficiently decentralized

[@childsp]

Exactly right and right now the stakers are the captains of the ship. So the more decentralized we can get that the better.

[@bearwolffish]

Cartesi looks interesting. Good episode. Love the organic back and forth.

[@Saltatory_]

The persistent use of the word "we" is a jarring verbal tick. Even for researchers doing inside work, "we" should only refer to conversations or work product they were directly involved in. Use "Ethereum" instead.

[@Bankless]

understood - its a natural thing for me to use 'we' since i identify with the tribe. but ofc i understand most people dont think like that. - David

[@Saltatory_]

@@Bankless awesome reply. Thank you

[@gordyhydro5774]

Give me strength please. ETH is a controlled blockchain by a few people. Charles Hoskinson is the true visionary in the crypto space. Cardano the only decentralised blockchain with the vision of equality for all.

[@johndensmore7336]

It's time to start slashing centralized liquid staking providers like Lido, to keep ETH as decentralized as possible and encourage solo staking.

[@MM-eg2pc]

Great discussion. Some kind of differentiation of solo stakers and LSTs would be helpful. I know it could be a cat and mouse hunt in the long term.

[@GereGThePhysicist]

I strongly believe that both these options are very misguided. The whole point of Etherum is to be decentralized computational/financial network. That means that we want the validators to not be correlated. Currently we have issuance that is deliberately chosen to not be sensitive to efficiency of staking(in another words small staker might have at most ~1% lower earnings than coinbase, lido and such which have tremendous scale). if we change issuance to any of these proposals, staking will very quickly become game of pennies, which immediately destroys all small and all but few uncorrelated stakers. I dont buy the argument that percent of ETH staked would just snap to 100% with current issuance curve. by definition of eth being used as gas there will always be demand for vanilla eth.

[@user-co8vc5nd7l]

What I don’t understand: If issuance goes negative, what happens to solo stakers? I haven’t heard of this guy and don’t see any evidence from him that preserves and promotes solo staking above pools. Pools don’t have much capital themselves so they are not really at risk of losing anything. They will have way more time to ride out any negative issuance periods on the backs of brainless lido stakers. Solo stakers will be infinitely more sensitive to any dip into negative and unstake sooner. So until I see some simulation or solid numbers that protect solo staking it’s kind of dead in the water for me.

[@markkovachis2932]

The fact that eth community can’t foresee obvious problems with eth then need to make knee jerk changes makes this a clown show

[@RenSylvain23]

Now that was the episode I needed.

[@running11]

Iceland Calling, Thanks for the debate. There is a lot of good information here.

[@BtheBALLER]

Never watched these guys before. Painful

[@TheKapers83]

I think it's obvious we need to move to option 2 in the future, and it's best to do so before the amount of staked ETH is higher than the target in the new algo.

[@400volts]

I recall the monetary policy from the earliest days when the chain was launched. It might even have been in the white paper.

[@400volts]

Issuance was like 2% of supply but at a fixed value per block. This meant that the rate of inflation in percentage terms would always be decreasing.

[@400volts]

The changes that we saw a few years ago were meant to accommodate the transition to proof of stake and the launch of the beacon chain.

[@robgroove]

My guess is Satoshi played blackjack, hence 21.

[@MrGWAMPO]

TEAM ETHEREUM

[@markkovachis2932]

Eth btc chart lol

[@hectoryearnney4119]

Bitcoin cash is actually the real Bitcoin 👀🙈

[@Rawsavon]

Remember when these “takes” episodes were supposed to be 30 minutes long...This is why editors are so important. Also, you guys are great when it comes to (most) crypto topics (this episode was informative and insightful in the last half hour when it got to the actual topic/debate), but it is flat out painful to listen to you try and discuss things beyond your ken - like monetary policy, inflation, and the modern dollar based system (assuming it was meant to be a store of value vs a tool to facilitate spending and, thus, spur activity and growth).

[@hdttyson]

Great comment

[@maximed8411]

ETC = BTC + ETH