MVI - Minimum Viable Issuance

Transcript

So uh next up we uh he will talk about um minimum viable issuance. Um, please welcome Chom Tish from Ethereum France. Let's burn more. Print less burn more. Sorry. Yeah. MVI. Hello everyone. Very glad to be here again. Um, I'm Jerome. You can find me at uh this handle everywhere. JD Ty Cy. Um, couple of disclaimers before I start this presentation. I sit on the shoulders of giants such as Ensgar, Henders, Caspar, Justin Pachy and so on, Pintel as well. So a lot of the uh

pictures sorry the graph that I'm going to be showing are from their uh work. I'm just here to pass the message. So about the message uh let's talk about minimum variable issuance or issuance as a whole. But for that we need a little bit of glossery. So what is issuance and delusion? uh when I say issuance and dilution what I mean is the amount of new we are minting each year usually expressed in percentage most of the time percentage of the total of the supply so you can think about issuance delution as the growth of the total supply of EH um it's most usually expressed row I mean without taking into account the burn

that comes from activity on the network um what is a deposit size. The deposit size or the D for short. It's the percentage of E if that are at stake. We have a staking contract on Ethereum and you can deposit if on this contract and if you count the number of EF on this contract and you divide it by the supply you get the the staking ratio or the deposit size. And it's very often wrongly simplified as the bigger the deposit the better. Uh big deposit good, bad deposit, small deposit bad. uh wrongly for a different reason. I'll get into it. We have a reward curve uh which is simplified form here is 166 time the square root of the deposit size. That's

the uh the if that we give to the to the to the validators for their uh for their work. Uh it's aggregated of course. It's also known as our security budget. It's a bit simplified also because um it assumed that the the validators are working well, not being offline too much and so on. Um it's been defined circa um 19 20 2019 um without knowing much what was going to be uh going on at stake if we were going to have a lot of people going at stake few people going at stake whatever uh how and when we will be able to withdraw and so on. So a lot of guesses and unknown unknown uh when we pick this curve and finally there is the staking yield. Ah that's the easiest

thing right the staking yield how much is the staking yield that's the percentage received by stakers um it's often not always but most often giving given row um I mean without subtracting the dilution uh of um the issuance so if you have a staking yield at 2.8 and a dilution at 08 your real yield should be 2% right but most of the time we just look at the 2.8 because that's the biggest number so oh staking is 2.8 um it's not always giving you the breakdown between what you get as tips like as a staker you know sometimes you propose a block and in the block there are some tips so you get some tips so the 2.8 8 is usually taking into account the the tip um the MEV as well. Uh we have some uh ordering of the transaction

that gives a little extra for the block builders that's not taking into account this me and most of the time if you're using a third party staking services provider uh they are taking also some basis points. So uh advertising the sticking yield does not always give you the the real yield that you get at the end of the fees and so on. Okay. Okay. So, now that we got the glossery out of the way, let's look at the beautiful picture. Have you seen this picture before? Yeah. Some No, no one. Okay. So, I highly encourage you to see this picture when you visit Paris in the Louvre. It's the money changer and his wife from Kenton Metses. Um, at first glance, it's a J John scene like classic Flemish paintings uh where you see uh people at

work, the newly uh newly new services, the border getting richer and so on. Um but um at at its core it's more of um an allegory and moralizing representation of the um the money lender profession. Uh you have different signs of vanity, different signs of Christian momento mori reference such as the scale the the candle of the last judgment being uh uh turned down and it's it's been analyzed as a way to denounce avarice. Um you know even the the lady here is is lured out of the way of her praying book and looking at the the money being wed. Um and like the painter here wanted to encourage the bankers to be uh more gearing towards Christian Arasmian

morals uh about moderation in their business dealings and it was later demonstrated in another painting from contentsis about um uh the user where you have a really grotesque figures uh having super high interest rates and so on. What what I personally love about this painting is the diversity of the the point of views and different levels of interpretations. Like you can talk about this painting for for hours. Uh and also it includes a really nice uh really nice thing to catch if you visit flea markets. There is a a a banker mirror here. It's like a spheric mirror where you can look at the mirror and see the whole uh room at the same time. So you'll be counting the money and at the

same time looking at uh the people in the shop, see if they are stealing something or doing something. uh uh nasty with your with your honing. Anyway, um it's it's it's um it's a little bit like we have in the in the issuance discussions right now. Uh we have lots of different point of views and it's um it's not helping uh to take a decision when to move, how to move. Um the subject matters assume uh uh some form of expertise in blockchain and security uh in economics as well and a lot of curiosity to dig into it. uh we have LLM now to help us uh uh get better at this type of curiosity but yet um and having those discussion from past year

now uh I often end up into different cruxes like people that are looking at this and be like yeah but we need to consider this we need to research more we need to do more and so on and I think like it's a bit of an allegory of our situation right now uh we have consideration about the security and credible neutrality of Ethereum we have consideration about the deterioration of the moneyiness of our currency but also a consideration about fundamentals of uh supply growth moderation notably and also looking at the the dwindling sometime or mostly dwindling purchasing power of uh our own currency if so it's it's kind of worrisome to see that at play when you're advocating for issuance reduction uh there are very strong

security reason to do it uh and they should prevail above all yet those security reason can be downplayed trade can be overshadowed uh notably when you are taking into consideration some very short-term effect that uh that can be uh can be uh advocated regarding DeFi and such does the conversation can often turn into but what is the impact on the E price are you going to destroy this are you going to impact that did you take did you take into consideration and so on but the beauty of issuance reduction is that it's fundamentally improve both Ethereum and if as a strong asset let's have a look at a few numbers Here's the issue in practice. Uh, currently at stake, the deposit side is give or take

79 million E. So that's 32% of our current supply. It's up three points since November. We have a yield of 2.8. Uh, issuance is 2.64. And you have some tips and some mev of course. So post burn the issuance is 82. Um, it's it's all right. Um it's a lot by some standards, it's a few by other standards, but it's also something that's trending up considerably. The more if we have at stake, the more issuance we will have because of our yearly insurance curve, our reward curve. If you if we compare with the uh the best in class in that uh in that consideration is Bitcoin. Um the

securing supply will grow uh 04 uh next halfing so in two years and it's currently at 0.8. So the proposal that I'm championing is minimum viable issuance uh setting a maximum amount of new e created per year of 0.5% of the total supply. And you can immediately think about that as um um a strong reference point regarding uh what's the delta between what we have today and what we will have if we get into this. That's $720 million extra dollar of ETH that will not be minted.

So that's kind of a strong something that's uh really uh uh sizable I would say. Why is it urgent to to address the problem? Um we have a dam in place that's preventing a total innovation but the tide is rising and it's rising pretty fast. As you know, we are entering a phase where more and more institutions are getting uh into the mix. Um they are starting ETF, DATs, ETPs and so on and they are getting approval from the regulator to stake and they are staking uh Grayscale notably stake 70% of their EF. Uh maybe they will consider to stake more as they perceive less and less risk. So that's an enormous influx of new ETH that going

to come at stake and we have some unknowns of course on the centralized effect of this. Uh some custodians in the US are proposing stakings notably coinbased prime sorry cobbased custody and the way the protocol handles those new E is by imposing an entry queue that only allow for a few E to go at stake every epoch. So currently the entry queue is full. Yeah, it takes 60 days to uh get into staking. So while they are not at stake, they are just boarding day eve and waiting for an opportunity window to go at stake. But this will go at stake more and more and more and more and more and more. If you're interested, there is a hillb that gave a presentation about that uh back in November during uh defconnect sticking

gathering. So as I said in the in the um in the introduction, we have security reasons to do it. Um it's um it's not always perceived immediately as such, but our proof ofstake system is by far the most sophisticated there is in the market, which when we compare with other proof of stake, we are like, "Yeah, but this blockchain says they have 80% of their tokens at stake and it's great." In our case, um it doesn't work this way. Um we were aiming initially for having 15 20ish% of the E at stake. We considered that to be sufficient.

When we add more if at stake we are not adding much security beyond certain thresholds and when we reach higher thresholds at 50% there are actually strong arguments to explain that the extra if is actually diminishing the security. Our last resort in term of security for Ethereum is to have if available on the execution layer to come at stake and defend neutrality. So that revolves around different u different different problems that we have to face. First the credibility of the of a large slashing event. Um as we get bigger deposits it is centralizing.

Um there are economies of scales at play. There are consideration regarding big too big to fail at play and thus it benefit the biggest stakers. Uh while you are watching the delution as someone that is not staking, you are more and more considering to go at stake. If I tell you the dilution is 1% and you are holding your E and not doing anything with them, uh you should go at stake to prevent the delilution effect. So this this snowballs eventually. Um there are strong consideration now about having large slashing events being not credible anymore. Uh we had a few events in the DeFi space where restaking tokens were involved and people were like yeah we need to build them out because the effect is going to be huge. So all in all we are less and less if to defend

the decentralization and the neutrality of the network. Um so that's for me the most important thing to consider but it gets into the weeds of uh the security and things to consider around that. But that's not all. Um the effect of reducing delution is improving the marketability and the moneyiness of the asset. So of course to advocate for EF as an investment as a long-term holding you need to consider the marketability of the asset itself. When we have a finished supply and you don't have to consider delilution or having to consider little dilution it makes it a sound money. If um something is even uh having a um a negative growth in supply

it's an ultrasound asset and that was the the the highest of the the hype around Ethereum. we have ultrasound money. So of course printing less doesn't necessarily mean im eventually we immediately burn more but that's a part of the equation and that's something we should definitely consider in terms of the fundamentals of the the asset itself. Pushing if towards staking is removing if from the execution layer. So having less if available for doing things on defi plus when you consider uh the defi activity we need to have if that is available to go do something on defi to promote the innovation on defy itself.

As we get into the snowboarding effect of uh having more if at stake um we pinpoint problems regarding liquid staking tokens and also staking derivative. when all the e are at stake or almost or most of the e are at stake those derivatives become the de facto money of our network and thus we lose our monetary premium. Um it can be very shortsighted to argue that uh you know you see those tweets sometimes just saying like look there is almost no if left on the no if left on the centralized exchanges all the are going at stake this is great yet this is definitely a clear uh indication of uh confidence into if the assets but at the same time this create liquidity squeezes

so you have less if available to buy and it's hindering adoption and hindering uh large players to come at play and furthermore more uh we are putting Defi in a Kudosak. Um okay, bear with me on that. The staking yield is going to continue to trend. The staking risk is going to continue to trend lower. Um as more Eve go at stake, it's going to be less and less risky to go at stake. And currently staking pays twice as much than depositing your E on a yet. security analysis, the risk analysis should probably not be this way. Um, and capital naturally flows towards what's yielding the most and

having the less risk. So, what we have today is that we have artificially fabricated in protocol an unfair competition to our own product market fit. There is no way DeFi can be competitive to staking without just embracing staking massively. This is um implying something about moral hazard regarding DeFi being brought into consensus and vice versa problems in consensus being brought into DeFi. And furthermore, um if we print more than we need, we are technically subsidizing this by printing more. So we have an opportunity to fix this once and for all.

enters the MVI. The writing has been on the wall for the past four years. So, it's not a new proposal. It's just uh now now we think that we have more than enough research being done on the matter and we have such an emergency to act that we need to act now. What's amazing about MVI for core devs and holders alike is that it's super easy to implement. It's not a big change in the protocol. It's not a big change in the staking uh in the um um soft s node software and it's also super high impact and to represent the minimum viable issuance and max issuance is 0.5 we can consider different type of curves you probably remember the quason from Justin Drake we can have things that are like

the this class of curves the red one or the purple one there's different classes of curves to consider and they can all implement uh MVI together. Whoop. If you want to dig about the on the on the topic, uh I highly recommend those reference uh practical endgame from Enders uh that demonstrate how credible, simple, and small but positive this kind of AVI approach is. Um if you want to get into some more economic analysis uh notably with Tim Rog Garden u the economist that gave the analysis on uh 1559 uh you can check this one economic limits of permissionless consensus and uh overall there is a

great thread on if magician called issuance curve adjustment protocol but some uh private research uh funds firms uh like the research team of uh Gayscale recently started to take positions like hey okay it it needs it this staking model needs an update. It's obviously not going the right direction right now. So what you should keep in mind about that it's compatible with different type of curves. It's high enough to keep the system valuable. Uh it's reasonable yield at typical state level and it's also a durable policy anchor we can advertise that is simple to understand.

What's the dilution? 0 five max. What's the real dilution? Well, let's look at the end of the year. We'll probably be more at 32 whatever. And it gives us a way to position oursel clearly against the contender Bitcoin and against all the rest. So 21 million bitcoins. Yeah. Forever 21 infinity divided by 21 million. Yet Bitcoin hasn't figured out its security budget. We have we have a content road map. We have a a lower delution guaranteed for the next five years and likely for the next 10 years and very likely forever. You have yield bearing option in DeFi. uh you have no downtime, no competition against AI data center, Ethereum should be the first blockchain by far. And when you

consider all the layer ones, they are diluting like crazy. So what are we waiting for here? And we can also get 50 cents to present the thing like MVI.5. Um now I want just to address two uh usual critics. Um we should never touch a monetary policy. We only have one chance to do it. No, don't change it. Don't change it. Well, actually we have a history of maximizing the security neutrality by stop overpaying for this like almost eight time we did the thing. It's great to consider like uh the signaling uh it's great to consider information is good to be clear and that's why 0 five is a clear way of saying like max is 0.5 current max is probably 1.5 and lastly we have um uh something that we very often hear about

uh the issuance uh discussion is inflation. I've been very careful on not using inflation so far because when we hear 82 is our inflation, it's wrong. It's not our inflation. It is our delusion. The inflation is the rise in price that we observe on basis but also by extension the loss of purchasing power in exterior external goods of our currency. So inflation is not delusion. Um inflation is measured by the rise in price and as you can see with the lowering of the gas price with our scaling with L2 with Ee and so on we are actually in a deflationary situation for Ethereum like we pay less for the same good services but at the same time our

token is not performing well so it's technically uh what we call an oversaving trap uh in economics uh we have a high risk free rate which is a toxic illusion of everything is going fine don't touch The effect of delution from the market perspective when it comes to lowering our purchasing power is uh not straightforward but we can we can sum it up this way. The market observes that our delution is going up. It's trending up. It's not not going good for our security and at the same time we show no signs of wanting to take care about the problem. So having a delusion of8 raising up towards 1.6 killing the economy at the same time. Uh it's actually much worse than uh inflation

itself. All right, so I want to conclude on that. It's a massive win for everyone. If you have E, it's great for you. It's going to be a transfer of surplus towards the holders. We're going to do more security for cheaper and it's going to improve the fundamentals of Eve. It's going to push the innovation into the DeFi industry likely also bring more activity towards the L1 and thus printing less and burning more. Here are 10 reasons why we should do it. Uh and we should have done it yesterday and um we have now also analysis on how the surplus transfer is being handled depending on the reward curve that you consider and uh consideration about the

implied cost for the stakers. And I'm three minutes late. Very sorry for that. But uh happy to answer any questions and I'll be here the whole day for uh getting into questions if you want to mingle. That's it. Out of time for questions. >> Yeah, I see the hands raising, but please find Jerome around. >> I'll be I'll be there to answer your questions. >> Really? >> And um if you're too shy to come to me in person, you can uh just give me a message on Twitter. I'll be very happy to respond.

>> Yeah, please. Thank you so much.