Ether Issuance Emerges As Hotly Contested Issue – The Defiant

Debate surrounding whether to reduce the rate of new Ether issued through staking rewards is raging throughout the Ethereum ecosystem.

On March 30, Mike Neuder, an Ethereum Foundation researcher, published an article advocating a reduction in new Ether issuance, drawing on discussions with fellow Ethereum Foundation researchers Caspar and Ansgar.

Neuder argued that the staking landscape has undergone “seismic” change since the Beacon Chain — Ethereum’s staking layer — was first deployed in 2020, and could necessitate changing ETH’s reward curve.

“Since the Beacon Chain genesis, the Proof of Stake issuance has not changed,” Neuder said. “We believe changing the issuance curve in the Electra fork is important and should be seriously considered… With the upcoming Electra fork, we argue for making a conscious decision.”

However, many community members have pushed back against making changes to the issuance curve, arguing that making drastic changes to Ethereum’s monetary policy undermines the project’s credible neutrality and could harm confidence in the network.

Past changes to Ether issuance

The rate of new ETH rewards has repeatedly decreased throughout Ethereum’s history. Block rewards started at 5 ETH with Ethereum’s July 2015 Proof of Work mainnet launch, before falling to 3 ETH with the Byzantium upgrade in October 2017 reduced rewards to 3 ETH, and dropping to 2 ETH from February 2019 until The Merge transitioned Ethereum to Proof of Stake consensus in September 2022.

Staking rewards were introduced with the launch of the Beacon Chain in December 2020, initially entering supply alongside Proof of Work issuance until The Merge, and have followed the same issuance curve the entire time.

Staking rewards are issued at a rate of 166 times the square root of the sum of staked ETH annually. The elaborate equation means the rate of new Ether issuance increases steadily falls as more ETH is deposited for staking — with 166,000 Ether emitted yearly if 1 million ETH is staked, and 1.66 million Ether entering supply if 100 million ETH is staked.

“The parameter selection… aim[s] for a modest but reasonable 3.3% yield with 30 million ETH [and] highly incentivizing at least 10 million staked ETH,” Neuder said. “Today, there are more than 31 million ETH staked; the 30 million ETH target may have underestimated the staking supply… the number of new validators far outpaces the number of validators exiting the protocol.”

Arguments for changing Ethereum’s monetary policy

Neuder said several factors are contributing to the sustained onboarding of new validators, including Ether’s price appreciation, the convenience provided by liquid staking protocols, additional yields from MEV, airdrop farming, and restaking, and a lack of perceived risk amid the continued stability of the Ethereum network.

They expressed support for a reduced issuance curve recently proposed by Caspar and Ansgar that would limit Ether’s annual supply increase to a maximum of 0.4%, down from the current rate of 1.5%. However, the proposal would also reduce Ether staking yields by roughly 30%.

Neuter said the risks posed by the number of staked ETH continuing to grow at its current rate include diminishing staking rewards, greater dilution of non-stakers, and an outsized share of ETH’s supply controlled by third-party protocols such as Lido and EigenLayer.

“There are many reasons to believe that the demand for staked ETH will increase in the next 12-24 months,” Neuder said. “Changing the issuance curve should only be done with careful consideration… Indecision is a decision; inertia is real. Defaulting to doing nothing may be embracing a difficult-to-reverse trend.”

Pushback from community members

However, other members of the Ethereum community do not believe that changing the rate of new Ether issuance is not a measure that should be taken lightly, emphasizing the blow such a change could deliver to Ethereum’s perceived neutrality.

Ryan Berckman of 3cities, a web3 payments app, said the risks associated with leaving issuance unchanged are lesser than the “guaranteed immediate hit to neutrality caused by a simple curve adjustment.”

“There’s no way we change issuance in Pectra,” Berckmans continued. “Simple curve adjustments invite future adjustments.”

James Spediacci, an early Ethereum investor, said that changing Ether issuance would undermine ETH’s status as “sound money” by creating a situation where the network’s monetary policy could be “tampered with” on a regular basis. “If it’s not broken, don’t fix it,” Spediacci added.

Smartprogrammer, an Ethereum core contributor, also emphasized that Ether issuance has been negative since The Merge as Ethereum’s burn rate has outpaced emission amid high transaction volume on the network. “I don’t see the problem you guys are trying to solve here,” they said.

Meanwhile, Post Polar, the author of a book on Ethereum, argued that most of the pushback stems from dissatisfaction with an apparent lack of input on upgrades from the broader Ethereum community.

“It seems to me it’s not really issuance that is at stake (heh), so much as people have a sense that EF-associated devs and researchers appear to have an outsized power [and] are not engaging in the appropriate level of ‘rough consensus’ from the wider set of stakeholders,” they said.