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- [00:00]
A
You're listening to a brief segment from one of the Bits and BIPS episodes this week. The full show is now only available on its own dedicated Bits and Bits channels, so be sure to go to X, YouTube and your favorite podcast platform and search for bits. Plus, sign bits spelled B I P S and subscribe
- [00:21]
B
There is a proposal. Correct me if I'm wrong. It's like bip8361 I believe to something right around here. 33 thank you. Which is basically this it's bringing Ethereum staking rewards down significantly, possibly to zero, where what it does is burns a rising share of validator rewards as the staking ratio climbs, hitting a 100% burn rate at 60 and a quarter million ETH, or roughly half of the supply. Authors of this included Justin Drake of the Ethereum foundation and ETHCC co founder Jerome de Taichi. I'm pronouncing that wrong. Phases in over about 18 months and burns only newly issued ETH. This is not transaction fees or tips. Right now about 41.5 million eth is staked 34% of supply, with 2.5 million more in the queue. So here's the case for under the current curve, yield Never drops below 1.5%. Even with all ETH staked, the incentive to stake never switches off. Where does it stop? It doesn't. The entry queue is saturated at max churn, adding 1.75 mil per month at the current rate. By January 1, 2028, over 55% of supply will be staked and past a point more staked makes Ethereum less secure. The social layer loses its fork backstop against a captured validator set. So that is the argument. There's 48 hours to comment on the monetary policy change Mike Silagodze has been complaining about that one being this is a very rapid thing. Seven of the top 10 protocols could face an exodus. This is a dramatic loss of confidence in governance and stability to be done this way. There is also a statement that this is one of the most resisted Ethereum protocols or proposals ever. That was from Stanley at AAVE. Basically, the EF's ivory tower academic approach will not solve these challenges. It's disconnected from the builders in the trenches. Let's talk about the institutional side. So Joseph Shalom, Sharplink CEO Former Guest Sharplink opposes it. Validators earn roughly 2.75%. Newly created E TIPS only account for 15% of staking yields. Validators would be asked to go on securing Ethereum to earn no issuance for it living on transaction tips alone being proposed at a moment of tremendous momentum for Ethereum. So I'm going to pause there because there's more that's happened over the next 12 hours. But Seth, I want to take a breath and ask you, without getting into the details of the ongoing fight on an initial proposal basis, how are you looking at this? How are you seeing at this? Is this solving a real problem or is this academic theorizing?
- [03:34]
C
I mean, look, I'll be honest, I didn't see this problem as something that was front and center going into the proposal. So I kind of go to the latter view, which is that this is a little bit of an academic push, one that, look, there's some very big stakeholders around ETH now in a post dat world where the largest holder of ETH is Bitmine, you really need to work in a very coordinated way. There should be a broad lead up discussion to fundamental changes like this. And this came as a surprise broadly to the community. Now I think the pushback would be, well, this is the proposal, let's talk about it now. But it seems a little bit like a solution looking for a problem, at least right now. But Chris, I know you have some strong views around this as well.
- [04:50]
D
I think this is great because I think the EF is about to eat its own cooking. You know, when people get all crazy about crops and this and that and you know, for people who don't know what crops is, Ethereum is really like leaning into what differentiates it, which is its decentralization, its million validators, censorship, resistance. And I do think that that is Ethereum's edge. But the EF is not a centralizing force and we're seeing other nonprofits coming along as well. And I think what you're going to see here is this is going to fail. Why is it going to fail? Because the community, the applications that are accruing a lot of value and have the potential to probably accrue more value because many of us believe the FAT protocol thesis is not where that value is going to be. So they're eating their own cooking in a sense because they don't control Ethereum and that's a good thing. And I don't think they want to. Now, as you start looking at it, probably the most concerning part of this is that if there's a perception that they have control of the network and they're controlling a direction, then the. You don't want to recreate the Fed here. This is not recreating the Fed where you have a bunch of people go into a spoke filled room and come out and tell you what the rates are. That's not how it's supposed to work. This should be a community driven environment. Now the other thing that I'm glad is starting to bubble up, the light bulb has not gone out yet, but it's coming and that's that Interest rates rule the world, yield rates rule the world. Why do we care so much about the Fed? It drives everything in the economy. Ethereum's yield rate, you invented something called Caesar, like disclaimer disclosure. I was a big part of that. It's risk free rate, right? But that rate drives the economy. And these ecosystems, these blockchains, these layer ones, their economies, those rates matter. And you can't have people manipulating them or messing with them. Then you get Libor. So I'm all about, I'm not saying that the EF is manipulating anything by the way, but I'm just saying this is what we don't want. We don't want that. So any type of change needs to be open and transparent, gradual, brought about by the community. Because when you mess with the risk free rate of any blockchain, it controls the economy. Let's. One more second. Because I'm, I go off of this stuff. You know what, if you have no yield, you become the yen carry trade. Potentially you're that source that people are going to borrow and sell and they're going to go to another ecosystem that has that yield. Do you want Ethereum to become the source of the end carry trade? Something to think about. I realize it's not a perfect, it's not exactly a perfect analogy, but it's close, right? Yield is too high. Everyone's going to stake. That's not good either. Right. So you have to have a Goldilocks interest rate, interest rate policy and it should be dynamic. It's just super important. I'm glad that this is actually coming out. I think it's really healthy for the ecosystem. And not just Ethereum, hyper liquid Solana, all these different yields, I think they're going to be much more in focus because as the big institutions come on board, they're wired through a fixed income lens. All right. Sorry for my long soliloquy. Couldn't help it.
- [08:13]
C
I love the little tradi dig in there. The manipulation is Libor.
- [08:19]
D
Well, it did, right? Like, like we have to learn the lessons of the past. Like we're trying to make the better that the one thing that I've always been obsessed with about, about like just Crypto is that you have fixed income markets are $145 trillion in size, they're based on interest rates. Interest rate swaps are $500 trillion market notional. And like this is one area of exploration that we just haven't seen yet in crypto. But fixed income is staring us in the face. And I think as we approach the institutionalization of crypto, that market's poised to finally do something. I think that's one of the biggest issues. But you're seeing like all the sensitivity. Who's opposing it? Institutions, the guys who understand fixed income, you know, the guys with the background from Blackrock, you know, our good, our good friend Joseph, etc. So super fast. I think the whole dialogue is very healthy actually for the entire community.
- [09:11]
B
Yeah. If I'm looking at this and trying to figure out what do I think of it, what do I think of the proposal? One thing I would hit on is even if I was inclined to vote yes for it, 48 hours is way too short. So I would be a no right now purely from the basis of you don't make a change this big without making sure that everybody material is relatively on board. Because your nightmare scenario is it passes with yes at like 51% and then some very big holders just start unrelentingly dumping and pulling out. Like the last goddamn thing you want is like a day later after that vote, Larry Fink comes out, goes, you know, I like Avalanche better. Right. You have a big problem if that happens because the whole thesis was institutional adoption. So Chris, to your point, if you alienate those people with the process, you have a really big issue too. I think there's sort of been a glossing over in crypto to your point, Chris, earlier, because there haven't been fixed income people in there of how intricate all this stuff is and how much it matters. And I think there are some core fundamental assumptions that quite frankly have never been really challenged. Like one of the ones I occasionally ask people that I haven't truly gotten a good answer for is how does economic security and proof of stake work if we're really putting all of the real world assets on Ethereum, the net value of those things is hundreds of trillions of dollars. Are you arguing to be ETH will be worth hundreds of trillions of coins? Because then your transaction fees are insanity. And this is why a lot of tradfi systems ultimately ground down to some form of proof of authority or proof of trust is the cost of economic security done economically is very, very high. If we're doing this. And so I think this is starting to become shades of that debate because if I can earn 3.5 sitting at a US government money market fund and you're going to cut ETH yields to zero, I've got to have a really strong forward belief in the economic value of ETH to own that over the money market fund. And Chris, to your point, there's some subset of people who are going to borrow E or sorry, loan eth, borrow dollars and just put it in a money market fund and that as we know, does this. So one of the things I think the EFF is forcibly coming into contact with here that they may not have expected is global macro.
- [11:46]
D
Yeah, that's the beauty of what you just said. What better a convergence theme. Now Ethereum's yield is competing with treasury yield, it's competing with the yen, the yen yield. This is the next step in the evolution of our markets and that's why I welcome this. I think it's a great time to have this debate.
- [12:05]
B
And also I think there's another interesting part of this proposal that I think was mistaken was lumping a number of concepts together that could have been disaggregated because for instance, something like, hey, we don't want more than X percentage staked because that does kill our ability to have like liquid trading and usage does not also imply. And we need to just cut the base staking rate at the exact same time. Right, because like hypothetical proposal here, right, that I'll throw out for the Ethereum community. Our staking rate is going to be pegged to SOFR, right? Just to match it to the US dollar rate. But if more than, I don't know, 2/3 of ETH, whatever threshold you want is staked, it just starts degrading by x percent every day until we get back below 2/3.
- [12:59]
D
Austin, real or nominal?
- [13:02]
B
Okay, I think you have to do all of these things in nominal terms, right? How, how does one define real yielded eth? Chris?
- [13:15]
D
Well, it's pretty obvious. You go to ultrasound money and, and you can see the burn, right? And, and there is an inflation rate associated with, with the supply. So I, I do think that it's, it's definitely something you can calculate.
- [13:29]
B
Okay, but nobody is using ETH as a unit of account to buy real goods.
- [13:33]
D
So like I did for NFTs,
- [13:37]
C
that
- [13:37]
D
was a bygone error.
- [13:38]
B
This is a, this is a purely self referential argument. You know it, I think we need to use nominal until it's a unit of account.
- [13:44]
D
All right, fair Enough.
- [13:45]
B
So, all right, second part of this topic that I wanted to raise. We've had 12 hours of like escalating arguments. DAP Lion, a co author, said how to publicly admit that the network has been captured by a small group of interested parties is holding ETH still economically aligned with the upside of the network. So tax ETH holders billions so these select parties can make hundreds of millions. You can't bribe me like this. It goes on. What if Your eth makes 1.7% APR and inflates by 1.7%?
- [14:24]
C
Right? There's your real yield.
- [14:26]
B
Right. The real yield is zero. And so I wonder if you. There's. Excuse me, I wonder if users weighing on this EIP consider today's reality or a 5 to 10 year horizon. And where I am going to throw the ball back as we're talking about this is if we're talking about a 5 to 10 year horizon. Is any part of this proposal even in the top 10 most relevant things to make a projection on that basis? Right. Or are we having a really narrow academic fight? Because look, I'm a dumb trader and practitioner, but to me the number one question of eth's future value is are you getting people issuing assets on ETH and using them on eth? I think you're like for alarm fire is the fact that DTCC went with stellar.
- [15:23]
D
Go ahead, Seth.
- [15:24]
C
I also think there's a question of like, was it in the interest of ETH holders to have over $10 billion come into ETH over the last year through the broader set of DATs and before that the ETS? The institutional wave of flows has been unambiguously positive for the network broadly. So to dismiss that cohort of owners as being capture seems to me to be a little bit of a narrow take on what's happened with the ETH network. But to your longer term question, I mean we need to have activity increasing. We need to have real world use cases. Let's talk about, rather than constantly dealing with tokenomic tweaks and try we're doing tokenomic changes in an environment where there still isn't a lot of activity. Like let's think about ways to drive that crossover activity. Let's think about ways of bringing the traditional financial infrastructure onto eth. To your point about dtcc, let's think about ways to drive that top line rather than constantly tweaking the tokenomics to try to get the token moving higher.
- [16:51]
B
All right.
- [16:51]
C
Amen.
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D
Amen. He's totally right. Like, we need activity. You want to increase the Burn drive. More transaction fees, right? That's what you need.
- [17:01]
B
If you like this segment, please like subscribe and tune in every Monday at 4:30pm Eastern Time. I'm Austin Campbell, the host of Bips and Bips, along with my friends Rahmalawalia and Chris Perkins and our slate of exceptional guests every week going to discuss macro, crypto and the collision of worlds, covering topics that move markets and shape the financial landscape.
- [17:24]
A
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