Electra: Issuance Curve Adjustment Proposal

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The decision to reduce issuance / implement stake capping should be accompanied with a well-analyzed model for economic security. As is presented now, the current thinking is that we should be okay with 1/4 staking ratio, and presented arguments are [1], [2], [3].

With the current stake distribution these arguments may seem reasonable. However, a severe change in the institutional adoption is happening right now, with the advent of ETFs:

  1. Bitcoin ETFs are rapidily growing, currently custoding 3.7% of BTC [4]

  2. 8 out of 11 ETF issuers use Coinbase as BTC custodian [5]

  3. As of Q4’23 Coinbase custodies 17.5m ETH, of which 4.4m ETH is staked. So now Coinbase custodies ~14.5% of all ETH in circulation [6]

  4. ETH ETFs are expected to launch as soon as in May, and there is little doubt they will attract lots of institutional flows. Coinbase will likely service most of ETF issuers.

  5. Given (1-4), it is quite likely that Coinbase’s share of ETH custodied will grow significantly, up to 30m ETH.

  6. The market forces imply that all the ETH in Coinbase Custody, Coinbase Prime and future Coinbase ETF Custody will be long-term staked.

  7. This means that of the future 30m ETH custodied by Coinbase, easily half of that – 15m ETH – will be staked, if not more.

  8. If the staking ratio 1/4 is targeted (~30m ETH), we arrive at the very much possible scenario of Coinbase controlling 51% of staked ETH.

I understand that the proposed curve doesn’t strictly cap the issuance and doesn’t target the 1/4 level. However, it is a move in this direction, and I think the premise of this direction is under-analyzed. In particular, this proposed lowering of issuance has the repercussions discussed by VS above.

Bottom line:
A. I think that the premise of the staking endgame (capping and targeting 1/4 level) is dangerous and may allow 51% attacks in the future, in the view of very strong institutional flows into staking market.
B. Most importantly, partially in the view of A, I think the proposal lacks analysis from all the relevant viewpoints, and requires significantly more scrutiny.

I think it makes most sense to not add this into Electra fork, and wait for more analysis and clarity on these issues. We should push for more external research on issuance change impact on stake distribution. From our end, we have recently launched a grant specifically dedicated to this.

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