Ethereum’s New EIP Could Break DeFi

Transcript

Bankless Nation, there is a new EIP in Ethereum land that has caused much nashing [music] of teeth. Uh to help me go through some of the news and get some of the reactions, I've got Stonnie from A and Mike from Etherfi. Stonnie. Mike, welcome back to Bankless to you both. >> Thanks for having me. Great to be here. >> So stake targeting is the EIP stake tapering. Uh 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 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.

Uh things like staked ETH from Lido, our ETH from Rocketpool or with Mike, we have Ether's E staked ETH derivative as well. So there's no ether, vanilla ether as we know it disappears and and turns into the derivatives and the researchers are concerned about that being the dominant equilibrium inside of 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. Uh this proposal was introduced last week. Everyone hates it.

I would say everyone outside of the EF does not like this EIP. >> Even people inside of there are people >> even Yeah. Even some people inside of the EF. Yeah. Yeah. And so that's why I have Stonnie from A 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 uh creates for them and for the broader DeFi and builder ecosystem. Maybe Stonny, I'll just go with you since a came before EtherFi. Uh Stonyie, what was what was your reaction upon seeing this proposal out of the ES? Look, I think it's a um you know, it is an interesting topic to um evaluate and and

you know, if you ask the question of uh whether uh we're basically uh paying are we paying sufficient sufficiently overpaying for uh security. Um and I think that's a really uh legitimate uh question to ask. Um that is for sure. I think that um Ethereum has been built uh on security and also on the idea that you have a resilient uh network uh an ecosystem and anyone who is bu a builder for example like me and Mike uh are choosing Ethereum because of that uh security um and and what it provides uh essentially and and and that is the the sort of like a core uh value

proposition. So, so paying for security is is is big part of that. Um, I think that the uh the the real sort of like uh uh uh objective of of this proposal uh is is basically uh somehow to affect uh the Ethereum the the the ETH price and and get it up. So, I know we're in a in a qu of like um uh bearish uh markets uh and being for a while. So in this kind of a situations we see various proposals and ideas floating around about you know how do we get the ET price up and and this is this proposal um uh while it's sort of uh things like uh while it's the mechanisms are around that um uh ET

staking um and whether it should be capped um and and the uh issuance particularly on on on the staking and reducing the yields that stakers are getting um and and that way influence that's uh there is less issuance and and better pricing better appealing uh better appeal for Ethereum as an asset and I think that's uh what are the actual uh uh consequences of the proposal um aren't actually achieving uh that first of all it really destroys the uh concept of solo staking because it reduces the cash flows for solo stakers uh creates also uh very unpredictable

tax consequences. So you know and the question is then if someone gets a $500 bill for staking uh they can even go into negative as well. So it really uh reduces the opportunity to come as a solo staker. And then the second uh biggest issue there is the uh institutional side. So obviously institutions want predictability uh they want a cash flow component uh especially when they're building uh financial products and and distribution and and this is one of the uh key areas why a lot of institutions come in because they have this uh component there and third really um important is is defi. So uh Ethereum is built on D5 rails. uh

whether uh EF uh wants to acknowledge that uh now or never uh that is the real fact. um everything that is on Ethereum that is successful is about uh DeFi and that is totally fine because you know what Ethereum can really do is replace the financial system um in in in in overall and and and build on resilience resilient rails uh that ether provides um the security and and there's a lot of argumentation that if we reduce the yield on on on it staking uh you can go to places like a and defy and you know get yield there but A lot of this yield is actually being based on uh uh Ethereum uh staking. And if there's no

yield on uh on it on DeFi, what it means is that um it as an asset becomes a funding leg. So what does 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 uh to an asset that can be productive and then you can you can basically uh earn on that um asset. And a really big example is the biggest carrier trade in the world which is the Japanese yen carrier trade. So Japanese econ economy hasn't been doing well for the past decades. Uh yen has a very low or zero uh interest rate. So what typically uh is is done in this carry trade is basically yen is borrowed uh uh

just just to replace with another leg uh that actually creates uh cash flow. So this is the sort of element that uh comes when you reduce the productivity of it it as an asset and and also by reducing the yield and those are sort of my um there's bunch of things about the the process and and whatnot. So like I think the question of this whole topic is important but I think the consequences are uh extremely negative for solo stakers institutions and uh DeFi that that that actually build the the Ethereum house >> Mike from the Ether uh sector of Ethereum. What were the biggest flags that were raised in your eyes when you saw this proposal? Uh man honestly like

every aspect of it I felt was um uh was kind of frustrating. Um you know first of all it was proposed with you know a matter of days uh leading up to the meeting where where these proposals were discussed for inclusion and in the next hard fork. Uh, and so I, you know, one, I'm sure there's all kinds of arguments about why, uh, 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, uh, without much debate, which, you know, in fact had the opposite effect uh, uh, as a as a result. So, so that was um, uh, frustrating. A lot of people were

frustrated by by that. Uh the other uh part of it was and Stanley you alluded to this is that it was in a bizarre way 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 there's no economies of scale. They they have their own machine. They have their own internet connection. you know, a two and a half% yield, 2% yield is is pretty much break even at this point um in terms of the cost of operating a note.

So, if the issuance goes down, which of course it it would with this proposal, uh all solo stakers go into a loss. And so to me, I mean, it it just really represents uh magical thinking to believe that all of these thousands of people who are currently running nodes are just going to altruistically keep doing it uh 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 by done by ETH staker uh that showed that the sort of reserve price uh for most solar stakers is 2%. And they they say I mean you take them at their word or you can you know imagine that they're they're lying I guess. Um but most solar

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 entities like Coinbase and Binance and Sharlink and you know Bitmine they have no cost of capital right users are depositing uh into their exchanges into the you know the DATs um the ETH is just there if the yield is 20 basis points they'll still stake. So, uh, 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 of revenue. And so, you need massive scale for it to make any sense to pay developers and auditors and and all that. So, this is it's hugely centralizing. That seems self-evident. I think it's self-evident to to a lot of people. So seeing the the argument from the proposers being that this will help you know decentralization is just like kind of kind of bizarre. Um uh the the other aspect of it is that liquid staking tokens provide more of a service than just you know uh intermediating uh a staking. liquid staking service provide user uh 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 giant chunk of uh Ether Fries liquid stake teeth, we have the option to do a fork and that would be frankly totally reasonable I think for for us to do the proper governance process and and rescue that. you you would not do that you know at the network level u and other protections along those lines. So liquid staking tokens provide an application layer between raw you know ETH and users uh you know the the ETH that people actually use. If you look at the trady 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 that's just that's just the reality of it. So this argument that we should reduce uh, you know, the ability of liquid staking tokens to, you know, to to pull in ETH because it'll reduce uh, you know, the amount of ETH stuck in derivatives. I mean it's just it's a red herring because like that's going to happen anyway whether it's going to be a you know ae or 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 we yeah we can argue about all that but the the point is all transactions in the real economy happen using various financial uh derivatives and you know, if Ethereum becomes a real economic system, uh that's going to be the case here too. And again, last point, in a real economy, having a fixed money supply is really bad. There there no economist, no serious economist that would say, yeah, you should have a fixed money supply that never changes, right? Milton Friedman's perspective, to take one one example, was that your money supply should just grow at a fixed amount of 3% per year. Like that's one uh one argument because otherwise you have

deflation which in 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 that it's like a bitcoin brainworm that actually makes uh makes no sense in the in the real world. So again going back to what I said initially like every aspect of this is sort of frustrating because none of it actually makes uh any sense. Um, in some ways I can sympathize with some of the problems that uh, you know, the the you know, EF or I guess the the researchers are trying to solve. Uh, but there's better ways to solve them. My perspective is and I've argued this in the past is that we should just enshrine

LSTs and that that kicks ether fry taking lidos taking out of the picture. just have an enshrined LST that solves some of the issues that you know they have uh uh you know concerns about and that's a better solution in my mind than you know [ __ ] with the issuance curve uh in the way that's going to blow up DeFi and have all kinds of other externalities to >> 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 uh 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 staked teeth approaches 50%. Mike, what would happen in DeFi as a repercussion of this proposal? Yeah, I mean the seven of the top 10 DeFi protocols would face a massive capital exodus. Uh so that's I mean so I don't know if that blow that to me is seems like that's blowing up DeFi. So all the big DeFi protocols uh stop uh uh you know defying um 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 uh you

know uh are holding tea bills we're going to you know suddenly start tapering the uh the rate or making it impossible to you know to buy more tea bills. um you know like u low short-term bonds provide the sort of foundational yield layer 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 staking yield is 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 okay how much of a problem is a you know one and a half% uh

you know inflation on ETH and again that that's we're ignoring the burn right because with EIP1559 there is burn so 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. I think the case is actually stronger that the yield should be higher than that it should be lower. Uh as I 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, so it actually makes it hard to use ETH as as money in that case. I wouldn't argue for increasing the yield.

Uh I argue for not [ __ ] with it. That's my uh uh that's my position. >> Sonny, what what resonates with you there? >> Yeah, it's sort of um [clears throat] it I I think for DeFi protocols, DeFi protocols are agnostic to uh uh different assets and and obviously use cases. So assets will change. Um but it it does point out what Mike basically said is that it really removes the pro productivity around uh it as an asset.

So if you don't have the yield component um you won't have that yield component in DeFi unless you go high up on the risk curve. So this is the the the basically the the the biggest argument that actually the auditors of the proposals uh the proposal are making uh is that you know let's just let's just cut the cut the uh issuance uh we cap it um no more issuance yield goes down um all the way to to zero basically um 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 uh don't really uh realize and and many of them uh very barely use

DeFi and understand how D5 works but a lot of the yield actually comes from these u uh uh liquid staking um uh 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 supply and withdraw without sort of going to the uh cube process. So if you remove that component and remove you move the underlying yield effectively what happens is that users have to go higher in the risk curve where uh on on basically ET yield um I don't particularly know many yield sources at a scalable way where you can actually get yield on ETH beyond the sort of like a uh kind of like a

risk-free or this low uh risk um yield that is derived from uh native uh uh staking. So what actually happens then is that uh the users of defi and the holders of it are starting to actually look for uh other sources sources of cash flow. Um and I think there uh the biggest the biggest winners are actually stable coins and let me explain this uh in a more concrete example uh how it works in uh in trady. So whenever uh the interest rates are low set by you know when we have a low interest rate environment that that stimulates uh the the equities and the stock markets and commodities and so forth and even uh the

the crypto markets when uh the uh and that that that that's logical um that makes logical sense because you don't want to sit on uh zero yielding cash because your inflation is just basically eating your uh capital. So you you're finding new opportunities. It works the same way around. So if you don't get um you know sufficient beta or cash flow um and you have a yield component uh in cash uh funds move towards uh cash for example. Um this is sort of like how the money movements are in uh in the in the traditional finance. What will actually happen is that those uh uh holders of ET that are comfortable with the beta uh of

ET and uh appreciate the cash flow um they might actually then uh switch their uh positions uh from it uh into uh stable coin yields because they there there's a big difference there and and doing that on chain. So that is like a really big uh challenge there and and then obviously what happens uh to eat 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 the sort of like the the the big Japanese yen carry trade. Um why does it exist is because there's cheap yen available uh that you can borrow and then sell it for

dollars uh and then basically take those dollars and and earn um at a software rate for example or or higher. And I think the similar approach applies into uh into the same scenario where you have a a zero yielding asset. Uh you simply borrow it uh to just swap it into a more productive asset and then to do strategies and that creates sell pressure for ET as an asset. Um and that is why sort of like uh it has an impact for that user base that is coming and 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 uh this point is because that is what

the others of the proposal are trying to achieve. They are trying to make a more sort of like a better eat as a money uh sort of like or better like a value capture asset. But in fact it really creates u you know uh circumstances and consequences that go against that uh objective and goal. And I don't blame them because um I don't think there has been many sort of like economical reviews that I've seen based on true economics that actually review uh this proposal or the argumentation is based on.

>> I've been trading crypto assets for almost a decade and I've used so many wallets exchanges aggregators frontends and I'm kind of always looking for the same thing. One interface with deep liquidity across a bunch of chains and assets and the ability to act in private and I still control my own funds. and I've never really found it and I'm always switching wallets, juggling gas fees, or getting eaten by [music] slippage. Near.com feels fundamentally different to me. My account is easy to use and I can take all the actions I want from any chain while my activity remains confidential. It runs on Near, which has moved over $23 billion crosschain using postquantum signing and has over 5 years of uptime.

Near.com is the best way to be on chain and be in control. Get 20% of your trading fees back through the bank list link. It's in the show notes. Not investment advice. Self- custody won, but it still has a usability problem. A seed phrase on paper is still a single point of failure. Phones get lost, devices break, backups disappear. Bitkey is a self-custodial hardware wallet built for that reality. It uses a two of three multi-IG with keys split across your phone, the Bit Key hardware device, and Block. No single key can move your Bitcoin, and [music] Block can never move it alone. There's no seed phrase to lose or expose. And if you lose your phone, your bit key, or both, built-in recovery gives you a path [music] back.

The hardware screen also lets you verify the destination before approving a transaction. And that's the point. More control without one mistake putting everything at risk. So download BitKey today and use promo code bankless to get 10% off of your BitKey. This episode has been sponsored by BitKey. Travel rewards have gotten way more complicated than they need to be. You've got points that expire, transfer partners, blackout dates, and somehow you still end up wondering if you actually got a good deal. Coinbase is taking a much simpler approach. When you book flights, hotels, rental cars, or vacation rentals through the Coinbase 1 travel portal using your Coinbase 1 card, you'll earn 5% in Bitcoin on eligible travel bookings. Book a $400 flight and you'll earn about $20 back in Bitcoin. No reward charts, no transfer

partners, no redemption games, [music] just Bitcoin that you can hold or trade. and every other purchase on your Coinbase 1 card can earn up to 4% back in Bitcoin. Plus, new card holders earn a $50 Bitcoin bonus after spending $100 in their first 30 days. So, if you've got travel coming up, check out the link in the show notes and see if you're approved today with no impact on your credit score. Or just visit coinbase.com/banklist. Terms apply. That's coinbase.com/banklist for more information. There are a few elements of this proposal that I find interesting and I'll say even like good but good in a vacuum not good in reality. Uh and maybe maybe I'll go through some of those. The the idea of preserving vanilla ether and enabling

end users to hold vanilla ether without being uh uh inflated away uh is is noble to me. 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 rocketpool or etherfi because those are all intermediaries in a sense. These are all uh 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 a in order to keep up with the rate of issuance and to get the yield. 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, a stani to to a little bit of your point, the 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. And the nominal yield is really just a financial game. And with this stake targeting uh 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- sovereignly with the stake targeted EIP. That would be one argument. Uh Mike, what would your response to that be?

>> Yeah, I mean I think it's um I I' I've described it as sort of a cash accounting level of understanding of the economy which is a like a you know very kind of uh base level. Uh like yeah it's nominal yield. If you have like a fixed pi zero sum perspective, if the economy is growing and like the the issuance is uh uh less than I guess the growth of the economy, I mean you still have real uh 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 that it actually like supports the growth of the the ecosystem. So looking at it in this like very sort of

one-dimensional like number go up therefore bad that is very much a Bitcoin mindset. I think you're exactly right on that. And it's uh I could use all kinds of expletives to to describe that. >> I was using it positively. I think you're using it negatively. >> Very negative. Yeah. I have a very negative opinion of most Bitcoiners. Um uh 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 I 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. Uh you're still going to be trading derivatives, right? If there's some protocol that holds your assets. And again, let let's take the fractional reserve banking uh example. U 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 it there's um in a sophisticated economy, you're not going to be, you know, trading these sort of raw, you know, gold coins. I think this um u I don't know this this perspective that the only true ETH is like raw ETH

that you hold in your EOA is um um it's almost like it it's based on this lack of belief that Ethereum truly can uh be the foundation for a proper economy. Right? It 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's a reason, you know, this stuff was developed in the in the first place.

There's value uh there. So, uh, 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, uh, 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, uh, stuck in it. you want layers of protections built around it, which is one of the services as I said that LSTs actually end up uh providing for basically zero cost for like five or 10 basis points of cost.

>> Uh a lot cheaper than uh you know uh the chaty system. >> 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 uh effects of the DeFi economy can also to be democratize the yield to end users, right? Uh, 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 Ave or or Etherfi, if a 100% of ETH

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 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 to that? >> There's yeah just the one there different ways of looking at this. So, another perspective that I can add is um 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. Um, that is perhaps another way of looking at the staking yield. People that stake their ETH generally are not selling it. 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. 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 the 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 uh you know into the the economy. So the system actually works and I think maybe one of the problems here is that staking uh 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 uh rate uh which has to which should exist in in an economy. um uh and when you sort of mix those two it it you know creates all all these uh complications. >> 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 uh supply that we've ever done, which is always to reduce

issuance. Every single uh 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. This EIP gets us to minimum viable issuance for Ethereum's monetary supply. Therefore, we should do it. Stonnie, how would you react to that argument? Yeah, I think that's um in overall I I 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 is simply as uh payment um you know from uh basically um all of the all of the system and holders into who are doing uh productive work to keep the system whole and and and make it basically work and I think that uh there is nothing really fixed uh in in the world like everything moves in in a sort of like a it's not a vacuum as as David you pointed out uh earlier like you know there's growth um you know and there's like inflation and and um and obviously that's

if you can't have overly crazy issues right so you can't go and issue like 20 30 you know percent and whatnot because that has a uh a larger effect than tweaking few percentages here. Um but at the at the same time if you have inflows and the actual uh ecosystem is growing uh there's more things happening and also the fact that uh that sort of like a yield has an effect where you know what Mike pointed out as a as a sort of like a wedge uh to to hold it especially from an institutional perspective that looks into uh fundamentals looks into

okay how like if you think about institutional perspect perspective they don't uh care about uh you know things like deflationary uh systems. It's more about how is an asset or let's say [clears throat] like a business from business perspective is growing and and then if there is a some sort of like a payout uh whether it's in form of cash uh issuance or whatn not uh whether the growth is higher than actually the the um uh the the payment and sometimes especially in the early stages and growth stages that payment can be actually uh uh even you know large compared to the growth because you're effectively buying uh uh

market share, you might be buying uh uh distribution and whatnot. And I think uh one of the most interesting posts I read uh recently about this whole topic was uh Joseph Shalom's uh post from um uh from Sharpling about basically the timing uh of everything. Um obviously there was also like more on the substance but the timing is interesting question is is that you know we're basically in sort of like the last mile of um uh Ethereum uh as an asset in terms of uh distribution. So we see uh institutions coming uh we we have uh uh ET uh ETFs and and there's more and more distribution and and institutions are

actually interested in this asset and um depending whether clarity act passes or not uh there's going to be um in a lot of banks um custody uh lending and ET is going to be one of the main assets um there and the fact that Eid 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 uh peculiar uh pec peculiar um uh properties but then there's obviously uh there's salana you know there's other opinions on that there's cont and like there there there is real competition there as well and um uh if clarity act passes obviously what

it means that every single bank uh in in in in US can actually set up uh crypto-based businesses without any sort of a pre-approval uh or um an ask. They can just set up that business basically. Um so this is what I'm uh when I referred to that last mile why it's sort of like a uh wrong also from the timing perspective is that if we kill that yield we also uh kill a lot of these uh inflows and how institutions are thinking about uh it as an asset and also the institutions that are already here um that actually under has underridden uh it as an asset with a cash flow. So this predictability is

really uh important. So like and we can all be sort of like think about uh you know like we don't have to care about institutions like you know it is about basically like decentralization and that's the focus and and and and you know all this like a hippie 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 uh 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 security system. And that is what basically Ethereum holders want to pay

because they see inflows and they see more interest. Um you know otherwise if that doesn't exist all that value goes into stable coins um and also competing uh networks and that is the worst outcome for Ethereum because it sort of has been in the beginning of the whole story of of of blockchains. >> Yeah, I would 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 dollars 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 in copying Tom Lee. Same thing with Bitmine or Sharplink. Um, 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. It would be a terrible look. It would be terrible for Tom Le's business, which he just bought 10 billion dollars of ETH. Let's not piss that guy off. Uh, but then it would also be very terrible for all future Tom Lees as well. What's up, son? David if they don't have any yield they will have to do you know ponzenomics like what micro strategy is doing like that is the sort of like a

you know alternative that the yield actually guarantees cash flow they can underwrite eat as an asset from like a cash flow perspective um and and you know and and they're 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 it to in a growth mode like it has to have good leadership and and and basically and I I think that the whole focus of this point is completely wrong. We shouldn't be focusing on optimizing issuance. We 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 uh

good privacy yet. It doesn't have good scalability yet. Uh it does have security. Now we're trying to ax uh also uh the security side but these three components needs to be sold until we actually have a complete product. This is where the the whole sort of like a community is trying to get EF and and and all these sort of like uh participants to focus on not sort of like a tweaking you know this sort of like a gaming uh um like playing sort of like issuance games. the real problem is in the demand side and fixing improving the product.

>> Yeah, I 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 is as if that'll acrue value to ETH. Um 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 uh the negative externality of basically killing the thing that actually makes uh 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 uh go out and

advocate for ETH. I think that's that's probably a good way to look at essentially all of the issuance that is taking place. uh all of this issuance is going back and feeding into the ecosystem and that issuance is being used to go out there and grow the the ecosystem and so uh yeah you're saving whatever you know it is8% 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 uh thinking >> markets don't move one asset at a time.

One day it's Bitcoin, the next Nvidia, then gold, and then the S&P. But most traders are still managing their portfolio across different platforms, different accounts, and different pools of capital. Bit just changed that. Their new stocks 2.0 product lets you trade tokenized equities directly with USDT, all inside the same app you already use for crypto. This is not just another tokenized stock product. Stocks 2.0 is designed around deeper liquidity, faster execution, and the lowest fees in the market at just 0.04% and 1:1 economic exposure to the underlying stock. Dividends, stock splits, and other corporate actions are reflected automatically, helping your position stay aligned with the asset you actually want exposure to. One platform, one account, multiple markets, crypto, equities, commodities, and more. All accessible with USDT, Bitcap, trade

smarter. Start trading today through the link in the show notes. This is not investment advice. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the DeFi Report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has [music] been absolutely on point. I've been following him for years and this year we started recording weekly podcast episodes. Each one we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin and Ether, and where we are in the cycle. There's new episodes that are released every Wednesday. They're 30 minutes. They're short. They're punchy. I think this crypto cycle is harder to navigate than

most. So, let's do it together. Go subscribe to this podcast. Search the DeFi Report wherever you get your podcast. YouTube, [music] Apple, Spotify, or find a link in the show notes. There's a new episode waiting for you. Now, I 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 the this is just me strong arming another uh steelmaning another argument like the way to have Bitcoiner properties about Ethereum is to have very conservative yield not

yield. No yield is Bitcoin. Conservative yield is Bitcoiner a Bitcoiner mindset appropriately applied to the Ethereum structure is like the way to do that. like 2% yield. The low like Ethereum is already the lowest yielding uh issuing blockchain ever. That's pretty bitcoinery. Uh it's it's way better than any sort of uh you know nation state bond. The that's the way that's a better way to apply a bitcoiner 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.

>> Yeah, totally agreed. Donnie, Mike, any other topics? I I know there's so much more to talk about. We could talk about solo stakers. I'm mo mostly into the DeFi ecosystem and like the monetary impacts on 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? Well, I think I 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 lastminute 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. Um 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 there El Salvador chose Bitcoin uh as their uh you know their their bet uh I guess for uh uh their national reserve asset and you know their I guess the parallel monetary uh system and I think that reason was largely because look it's oified we know what it's going 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. Um um and the way this process uh the perception of how this process was uh you know was run with 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 say

all right we're going to base our national economy on ETH and then tomorrow they're going to [ __ ] with the governance and the issuance and uh you know staking uh staking is out or or the network suddenly gas fees go way up or or like the rollup centric uh road map was you know all the rage now that's like 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 uh 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. Um but this is a way to undermine that like this is this is

where like well Salana does this [ __ ] and Ethereum does it what's the difference? Um so I just think managing the perception of how this process is run is uh uh is very important even if the reality is everyone uh is is just trying to do uh their best which I think is actually probably very close to what the reality is uh uh you know in the Ethereum community today. Yeah, I think that's the the the leg legit legitimacy piece uh that is really important and over over the years and [clears throat] and I've been in the Ethereum ecosystem uh since 201.

So that's that's over a decade. Um, and I think that's uh what what I really learned about um what's important over the years is that um you you like the the reliability but the legitimacy is is really important like what uh Ethereum has been based on um how do you sort of uh uh ensure that everything goes through a a process because one of the the fears that there is in the community at the moment is that um there's going to be a lot feedback the same way as with with um some of the earlier like uh uh proposals as well that got some uh backlash. um not as big as this

obviously, but the the fear at the moment is that there's a lot of feedback and then um EF won't listen to what's being actually uh discussed and and I think this is going to be a a really uh problematic moment because effectively the proposal doesn't really benefit all the uh relevant stakeholders, not the solo stakers, not the institutions, not the um in overall it doesn't help like in in theoretical aspect it it there's components that are really uh interesting and really good but when you put into practice and also run through uh some of the uh economical uh uh review processes uh you won't end up

into the same outcomes that you are uh trying to achieve and and and the the big concern amongst the the the developers particularly is the uh the disconnection between the um EF uh sort of uh researchers um developers from like the the rest of the ecosystem and DeFi and and and sort of like uh um the fear is that there's there is there is no listening of the that feedback which is um quing quite uh concrete actually. So that that's what what I think is the biggest fear um at the moment.

>> Donnie Mike, thanks for coming on the show. Uh, I think I started this podcast in being a supporter of the EIP in a vacuum, but a nonsuporter 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. Uh, 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 markets 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. Uh and so I thank you guys for for coming on and helping me see your

perspective and ultimately I don't really think this thing is going to pass anyways. Uh 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 help me tell that story. >> Thank you David. >> Thanks Bank. And 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 bank's journey. Thanks a lot.