EIP-8363: Tapered Issuance Burn

[knoshua]

The authors of the EIP claim that the current issuance curve forces solo stakers out:

@EIP-8363

Solo stakers are forced out. Dilution erodes everyone’s real return as the ratio climbs, but solo stakers, who in most jurisdictions pay income tax on their nominal yield, cross into negative dilution-adjusted returns well before large operators and holders of tax-shielded positions do (this includes accumulating exchange traded products (ETPs) and non-rebasing or wrapped liquid staking tokens (LSTs)).

Pintail expands on the logic behind this here:

@pintail

The problem is that paying more yield actually does nothing for you at high staking ratios. You get taxed on your nominal yield, even though your ETH holding is actually shrinking as a proportion of the ETH supply. Some concrete figures (I’ll use the 40% tax rate that I pay as a UK-based solo staker).

Once the staking ratio reaches 60%, you earn 1.9% nominal yield, against dilution of 1.2%. But 40% income tax applies to nominal yield so you only get to keep 1.2% of it, which is exactly cancelled by dilution. Above 60% staked you’re in negative yield before even thinking about trying to offset other costs. Why would you be a solo staker in those circumstances?

In the motivation section of EIP-8363 and the issuance discussion more generally (e.g. issuance.wtf), “real return” or “real yield” is often used to mean nominal staking yield minus ETH supply growth. A much better term for this, that’s sometimes used as well, is dilution-adjusted yield. In economics, real yield has a standard meaning: it’s the nominal rate adjusted for price inflation of a basked of goods, not for supply growth of the asset.

• Dilution adjusted-yield is a supply-share metric that answers “how does my fraction of all ETH change”?
• Real yield is a purchasing power metric that answers “how does my ability to buy goods and services change?”

Conflating these two leads to statements like “solo stakers have negative real yield” when what’s actually shown is “solo stakers share of ETH supply shrinks”. A falling share of total ETH does not automatically mean that the value of their position, measured by what it can buy in goods and services, is falling too.

What matters for the long‑run viability of solo staking is real return in their consumption currency after tax and costs, not just their percentage of the ETH supply. A world with negative dilution-adjusted yield can still have positive real returns. Conversly, a world with positive dilution-adjusted yield could still have negative real returns. To make the EIP’s claim that “solo stakers are forced out” rigorous, you would need to model not only after-tax staking income and cost structure of solo staking but also ETH’s expected price dynamics relative to fiat as well as fiat inflation, to then show that solo staker’s real returns fall below what is needed to cover costs and justify risk. Showing that dilution-adjusted yield goes negative alone doesn’t establish that conclusion.

To see how reductionist a pure dilution-adjusted-yield argument can be, consider a holder of unstaked ETH in the snail-issuance world. For staking ratios above 0% and below 50%, annual issuance is positive, so a holder of unstaked ETH has negative dilution-adjusted yield (up to -0.5%). If you treat “dilution-adjusted yield <= 0” as sufficient to make a position untenable, you are saying that it is irrational to hold unstaked ETH whenever the staking ratio is above 0% and below 50%. Taken seriously, that logic pushes you toward an equilibrium in which either:

• no ETH is staked and there is no issuance or
• more than 50% of ETH is staked and there is no issuance

To be clear, my position is that “dilution-adjusted yield <= 0” is not a relevant threshold for viability of a position, and I reject both that solo stakers are forced out under the current issuance curve as well as that snail issuance automatically leads to 0 issuance, based on a dilution-adjusted yield argument alone. I would ask the authors to either:

• retract their claim that solo stakers are forced out under the current issuance curve or
• provide an argument for it that doesn’t rely solely on dilution-adjusted yield or
• clearly communicate in the EIP that under their world-view snail issuance will lead to zero issuance as an expected outcome