The Ethereum Foundation wants to change Ethereum's monetary policy again. The reason is the growing number of validators…
Change in monetary policy during the Electra fork?
Faced with Vitalik who proposes to establish a maximum limit on the number of validators, Mike Neuder instead pleads for a reduction in the issuance of new Ether paid to validators.
“We believe that modifying the reward issuance curve should be seriously considered for the Electra fork”has declared the Ethereum Foundation researcher in an article published on March 30.
Some are already opposing it, arguing that such changes to Ethereum's monetary policy would undermine trust in the Ethereum network.
Eric.eth, co-author of the major Ethereum improvement proposal (EIP-1559regarding the calculation of transaction fees), said:
“I see that researchers are increasingly considering changing the pace of ETH issuance. The general disregard for our decade-long effort to make ETH a currency is worrying. I will fight this idea with all my might. »
His comments echo those who say frequent changes in monetary policy erode user and investor confidence. For them, such instability does not fit with Ethereum's “Ultra Sound Money” slogan.
On this subject, do not miss our article comparing the rates of issuance of ETH and bitcoins: Bitcoin vs. Ethereum. We wrote there:
“Ethereum’s money supply depends on two parameters. There is creation of ETH via the rewards paid to validators. The more validators there are, the faster the quantity of ETH increases. This system is called “staking”.
This monetary creation is more or less compensated by the destruction of part of the transaction costs (“burn”). The increase in the number of transactions causes an exponential increase in transaction fees and therefore the number of ETH destroyed. »
From Pow to PoS
Block rewards have declined several times throughout Ethereum's history. They were 5 ETH when it was launched in 2015. They fell to 3 ETH following the Byzantium fork in 2017. And then 2 ETH from 2019.
Everything has changed since the move to Proof of Stake in 2022. Rewards are now issued at a rate of 166 times the square root of the sum of ETH deposited in staking. This formula means that the rate of creation of new ETH increases as staking increases.
Samuel Haig explains in this article that one million ETH deposited in staking generates rewards of 166,000 ETH per year. If 100 million ETH is deposited, the annual issuance increases to 1.66 million ETH.
Currently, around 31 million ETH have been deposited, or roughly 26% of all ETH in circulation. However, for Mike Neuder, another researcher at the Ethereum Foundation, staking will further increase in the years to come.
Knowing that, inevitably, ETH deposited in staking are ETH which no longer circulate. This is as much ETH as will no longer generate transaction fees. Clearly, the increase in the number of validators causes a vicious circle:
Increase in the number of ETH paid to validators and decrease in ETH burn.
It seems that the concept of Proof of Stake is turning into a fiasco…
The problems of a growing number of validators
For developers @adietrichs And @casparschwathe turn of events is worrying for several reasons:
-Reduction in real staking yield: “Real returns tend toward zero as staking approaches 100% of ETH in circulation.”
Indeed, if everyone deposits their ETH in staking, no one gains. The rewards are canceled out by the inflationary effect.
-Spoliation of users: “A staking approaching 100% would greatly increase inflationary pressure on users ».
And what could be more natural? The more validators there are receiving more and more ETH, the more inflation there will be. These newly issued ETH dilute the value of ordinary users’ ETH.
-Centralization: “A few staking tokens like Lido (which currently holds 30% of all staked ETH) could exert undue influence on the Ethereum protocol. This would pose risks for decentralization and network governance ».
In short, now that Staking is no longer the preserve of a minority of profiteers, the rules are changing… We must now reduce the incentive to become a validator. The idea would be that the rewards tend towards zero beyond a certain level of staking.
The yield is currently 2.65% per year for validators. At 80 million ETH deposited in staking, this yield would drop to 2%. It would only be 1% with the new formula proposed by certain researchers from the Ethereum foundation.
So, eighteen months after The Merge, we discover that Ethereum not really having any real utility, we will have more and more validators and fewer and fewer transactions.
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