One of the most significant debates for the Ethereum community is token issuance. The token issuance policy hasn't had as structured a design as the technology strategy, and I believe this can be seen in this chart that shows its evolution up until 2022.

I think it's fair to acknowledge that despite all these changes, there has been one constant in the issuance policy: a gradual reduction, leading to a point where we've even seen negative inflation for a few months. The total supply never reached 121 million tokens, and the current inflation has been reduced to 0.7% in the last week, which would imply about 850,000 additional tokens annually. However, we're at a low point in network demand, and it seems likely that increased demand would further reduce this issuance.

The presentations at ECC on this ongoing debate are truly interesting, and the Ethereum Foundation is doing an excellent job with their research on this topic.

The debate over changes in issuance has recently emerged due to the risks associated with the increase in staking on Ethereum, particularly the architecture surrounding liquid staking with tokens like LIDO or Coinbase. These are beginning to become points of centralization, which pose significant risks to the ecosystem. Currently, more than 33 million ETH are staked, representing over 28% of the total tokens. This is still a relatively low percentage compared to other PoS networks. For instance, Solana has around 65%, and SUI exceeds 80%.

However, it seems to be a trend that, due to the incentive structure, could lead us to a scenario where the majority of Ethereum would be staked

       *Is it necessary to pay validators to maintain the security of the network?*

The answer seems obvious: it is necessary to pay validators if we don't want to rely on the selfless financial efforts of community members, which would lead to a model more similar to Open Source.

However, it wouldn't be expected to maintain nearly the million validators we currently have, whose primary incentive is an interest rate that has ranged from 7% to the current 3.2%, and is gradually decreasing according to the design of this mechanism, ultimately ending at a 1.81% return. This declining return should also have a disincentivizing effect on certain investors, although not as much on staking protocols that benefit from economies of scale.

However, the emergence of additional yield on staked ETH, especially through Restaking, makes this activity attractive again by potentially adding significant extra returns. This situation fuels the trend, even leading Restaking protocols to position themselves within the validator rankings as they perform staking directly in some cases.

However, the emergence of additional yield on staked ETH, especially through Restaking, makes this activity attractive again by potentially adding significant extra returns. Although these platforms primarily integrate stakers, they also engage in direct staking, which moves away from the ideal scenario the network should aim for—being primarily composed of independent validators. Even if independent validators integrate into these platforms, if they ultimately delegate control of their assets to the smart contracts of these protocols, decentralization will be compromised

Reducing issuance has a positive aspect for the asset, bringing it somewhat closer to Bitcoin's social contract with its 21 million limit. However, it also creates uncertainty about how the network of validating nodes will be structured when incentives become nearly marginal.

One of the greatest guarantees of the censorship resistance of a network like Ethereum is its deployment across millions of nodes, making it virtually impossible to shut down the network or take legal action against those millions of individuals. This is likely one of the most significant assurances underlying the resilience of these architectures. This vision fundamentally involves a scenario where everyone can participate in validation, with discussions even considering future validation on our mobile devices. Such an approach would also lead to one of the broadest distributions of wealth by sharing the income generated by the network among millions of people. However, this goal is compromised by the current incentive environment, which promotes the delegation of staking.

This brings us to a complex question: is a future scenario with only stakers truly viable?

My opinion is that we must work to make this scenario viable or enforce this architecture despite the current implementation challenges. Issuance certainly plays an important role because it can either support or hinder the desired final goal.

The delegation of staking has had a significant impact on the balance between the supply and demand of staking

Flattening the demand curve due to delegated staking

In the current state, the most likely scenarios could be the following

All of this leads the foundation to outline the main problems posed by this scenario, and why they consider reducing issuance to be the best strategy to address them.

Nominal Vs Real Yield

The rationale behind this point is that if the percentage of staking is very high, the actual return becomes marginal. Since we are distributing the new issuance to almost all token holders, our share in the project remains essentially the same, meaning we're not gaining any real profitability. Staking would then be seen more as a way to avoid dilution rather than as a return on this activity, making it feel more like an obligation than a rewarding task.

I believe that encouraging a large portion of token holders to stake is positive, and I certainly think it's a better scenario than having very few validators. However, if this situation leads to the forced delegation of that activity, then the effect indeed introduces greater risk. What happens in other networks where this situation is already present, such as SUI or Solana? I think the concept of dilution isn't straightforward, and in fact, with our fiat currencies, where we have a similar effect, the average investor doesn't perceive it that way. Therefore, it's likely that in general, holders will continue to view it as a return.

Solo Staking Viability

This is likely one of the most significant challenges, and the points raised objectively highlight very important advantages for delegated staking. It's complex to think of protocol-level strategies that could penalize the profitability of delegated staking compared to solo staking, but doing so would lead to the best scenario for Ethereum. I believe there are many possibilities to explore in this area, such as server response times, downtime, or even the development of bio-staking. However, this would require the development of external structures to the protocol that could support these oracles. Another option being discussed is the distribution of airdrops to validators, although this seems to rely on uninterested actors for something critical, which, at first glance, does not appear to be a sustainable strategy.

Another option could be to explore the possibility of introducing liquid staking within the Ethereum protocol itself, allowing the protocol to mediate that issuance instead of relying on an external protocol. This approach could help maintain decentralization while still providing the flexibility and benefits of liquid staking, potentially mitigating some of the risks associated with external staking platforms

Protocol Staking

This additional reflection delves deeper into the security scenario that this trend leads us to, in a much more visual way. It particularly highlights the impact of slashing on the percentage of staked ETH, emphasizing how slashing could affect the overall staking dynamics and the security of the network.

Network Effects

In any case, paying with Ethereum is not something that will be commonly used by retail on Layer 1 (L1), and on Layer 2 (L2), payments will often be subsidized or handled with other tokens. Additionally, paying directly with ETH will always be much more efficient in terms of gas fees, especially if L1 evolves—as it ideally should—into a layer with higher transaction fees

Minimum Viable Issuance

In this context, a 2% rate to cover infrastructure costs is quite high, and reducing it wouldn’t have much impact. One of the key value propositions of these assets for investors, unlike Bitcoin, is that they offer a return. Therefore, it’s debatable to think that removing the asset's yield in favor of zero issuance would make it more attractive. Generally, having high APRs is one of the most important marketing tools, and this can be seen in tokens from other PoS networks, which often attract investors precisely for this reason, even though the real returns can sometimes be negative.

Conclusion

This slide would summarize the main issues associated with high issuance.

   **The real question is: does reducing issuance actually mitigate these risks?**

Why does an investor choose to stake? What are the main incentives or disincentives to do so? Objectively, staking, and specifically solo-staking, is a capital-intensive activity in addition to its technical difficulty. This was the main barrier to staking, and the ease offered by delegated staking has driven demand, which is certainly also incentivized by the returns. In this context, I believe the final solution must involve making solo-staking easier so that it can compete with delegated staking and making it significantly more profitable than delegated staking. I don't believe that reducing issuance will have a meaningful impact on changing this situation.

In my opinion, the most optimistic scenario would be that reducing issuance could limit the percentage of staking, but I believe it would do so at the cost of more delegated staking. In a low issuance environment, this would be especially detrimental for solo stakers who don't benefit from economies of scale. As a result, we would likely end up with less validation that is more centralized.

I believe this would likely be a decisive blow to the solo staker, who would face an almost unprofitable activity, compared to the current situation that at least offers a chance to make it viable.

Regarding security and the 'too big to fail' scenario, the situation is actually quite similar. It's true that with 90% delegated staking, executing a slashing event would be challenging, but it would be equally difficult with the current 30%. In both scenarios, carrying out a slashing would lead to a very complex situation to manage without decisions beyond the usual consensus.

Regarding holding Ethereum directly, I believe it will always be perceived as the asset with the least risk. In the end, having liquid staking inevitably leads to a riskier environment that many large investors are unwilling to take on, and if we venture into restaking—which seems to be the most likely scenario—it carries even more associated risks. This is not unlike the risks investors face when using DeFi protocols. Whether these protocols use ETH or liquid ETH falls into the category of investments, and the demand for the asset is crucial for capturing value as an asset. The narrative of Ethereum as an 'Internet Bond' is incredibly powerful, and I think reducing staking returns to marginal levels undermines that narrative, all in the name of reducing an issuance that is already relatively low.

Exploring a scenario with high staking returns and a high percentage of staking is the most common scenario for successful PoS networks, where part of this success is directly linked to these staking returns. Introducing a zero-issuance scenario in PoS leads us into uncharted territory, where the incentives to maintain the network's security disappear, creating significant uncertainty regarding security. This might be the endgame, but perhaps such explorations should be carried out in projects where the responsibility isn't as significant as what the Ethereum protocol currently bears.