# Some personal musings on the Ethereum issuance debate

> “If it's not broke don't fix it. Looking at you - ETH issuance rate change advocates.” [@ViktorBunin](https://twitter.com/ViktorBunin/status/1774494069860777996)

> “the potential (or really the NEED) for a change in issuance must DRAMATICALLY outweigh possible harm in order to achieve the social consensus needed to make a change to a parameter like this. and making changes to issuance now seems to suggest (to me) more potential harm than indisputable good at this point” [@iamDCinvestor](https://twitter.com/iamDCinvestor/status/1775209275993784421)

> “Simple curve adjustments invite future adjustments. If the previous magic number wasn't sustainable, why should this new proposed number be sustainable? Analysis can't put this question to rest. It's a political issue.” [@ryanberckmans](https://twitter.com/ryanberckmans/status/1774159998517445003)

> “Recall all the similar things historically - btc miner *(bitmain), eth pool *(spark + f2pool). Tend to believe eventually (native player such as) Lido > 30% problem will be relatively easy to solve. The bigger problem is what if there are big corp/state own huge nodes >30%.” [@suji_yan](https://twitter.com/suji_yan/status/1715654531491725511)

> “Are a handful of Ethereum devs really going to be comfortable socially slashing millions of dollars of ETH of Coinbase customers because Coinbase *follows the law* by censoring OFAC'd smart contracts? I doubt it, and it seems Vitalik also doubts it (now advocating privacy pools).” [@lex_node](https://twitter.com/lex_node/status/1730993185990590587)

> “You might ask, ‘but James, don't you think Ethereum's issuance policy is junk science made up by Federal Reserve LARPers?´ Yes, son I do. And I will happily defend their motivations even tho I think their ideas and qualifications were both pulled from their asses” [@_prestwich](https://twitter.com/_prestwich/status/1778498269854973967)

> “Last night I dreamed that I was given The job at the Federal Reserve. I walked in and announced that 1) every economist with an academic origin would be laid off, 2) every statistician who used "variance" in a research paper would be immediately terminated.” [@nntaleb](https://twitter.com/nntaleb/status/1046692680875618304)

## Complex systems don't lend themselves well to magic formula

When dealing with something as complex as our climate or financial system, it’s very hard to reliably predict what the downstream consequences of even small changes will be.

In the words of the legendary investor Seth Klarman:

> “**Modern economies are too complex to be reliably modelled**; their connections and correlations too loose and imprecise, the second-and third-order effects largely immeasurable, the fickle vagaries of individual and aggregate human behaviour utterly unknowable”

Philosophically speaking, this should bias our actions towards keeping things as they have been (e.g. [simply aiming to keep CO2 levels within the range that has proven conducive to the development of human civilization so far](https://pubs.giss.nasa.gov/abs/ha00410c.html) rather than trying to guess where the points of no return might be), and resisting the urge to try to incorporate these systems into [magic formulae](https://www.linkedin.com/pulse/stock-market-magic-formula-john-garrett) (however tempting the search for mathematical purity might be).

To [borrow the words](https://www.theguardian.com/commentisfree/2020/mar/25/uk-coronavirus-policy-scientific-dominic-cummings) of complex systems scientist Yaneer Bar-Yam and Nassim Taleb:

> “**Our research did not use any complicated model with a vast number of variables… We called for a simple exercise of the precautionary principle** in a domain where it mattered: interconnected complex systems have some attributes that allow some things to cascade out of control, delivering extreme outcomes.”

## Systemic risks need to be viewed holistically
Behind many of the technical arguments I’ve seen so far, there seems to be an implicit assumption that the less ETH is staked, the easier it will be for the social layer (whatever that means exactly) to act if something goes wrong at the staking layer (i.e. if a dominant provider misbehaves).

Personally I’m very skeptical of this line of thought. The arguments, on the whole, feel very hand-wavy. And I think there are many, plausible, scenarios under which it won’t be any easier for the social layer to punish a dominant Coinbase or Blackrock (even if only 25% of total ETH is staked).


If an issuance cut does end up inadvertently causing stake to centralize amongst big corporations I think there’s a fair chance that, even with constraints on staking, Ethereum will be significantly worse off than it is today.


When we think about an entity or agent becoming systemic to the community, we need to think of it through a holistic lens. I’d argue that Coinbase is already pretty systemic as is. Though some of the softer dimensions are impossible to measure, you can look towards its ties to Base, Circle ([undisclosed equity stake](https://www.reuters.com/markets/deals/coinbase-invest-circle-shut-down-jointly-managed-centre-2023-08-21/)), Farcaster, etc.

There’s a plausible (perhaps even likely) future where Base becomes the dominant rollup hub and distribution mechanism for Ethereum, and Farcaster the dominant social platform. Do we really want to risk increasing the chances that Coinbase becomes the dominant staking solution too? Are we absolutely certain the perceived benefits are worth it?

## What do the people want, anyway?

My, admittedly unscientific, read of the room is that the broader ethereum community (at least those with a presence on CT) is against an issuance change today, particularly one which would add a significant cap on staking. Though admittedly, it is very difficult to gauge the strength of this sentiment.


Some questions on my mind that I believe are worth mulling over:

What do we mean, exactly, when we say social layer? Do we predominantly mean the technical community or the wider community? Might the precise definition even potentially depend on the nature of the decision at hand?

How much influence does the technical community have over the wider community? How does this affect the legitimacy of the decisions we are making? If there’s a disagreement between the two groups, what is the best way for the debate to progress?

e.g. If we care about meaningful buy-in from the wider community then clearly bamboozling them with increasingly technical models is not the optimal path forward.

## One way vs two way door decisions

Bezos categorizes [decisions into two types](https://www.youtube.com/watch?v=rxsdOQa_QkM). One way door decisions (type 1) are consequential and potentially irreversible, requiring careful consideration. Whereas two way door decisions (type 2) are reversible and can be made quickly and changed if they don’t work out.

My perspective here is that changing issuance in this way is very much a one way door decision (going back through the door will be an extremely painful process), and as such requires long and careful deliberation (measure twice, cut once sort of thing).

If the analysis advocating for an issuance cut is wrong for whatever reason, and the change ends up making Ethereum less resilient than it is today, I think it will be impossible to backtrack (increase issuance again) without killing the ETH as sound money narrative (not in the ultrasound sense but in the sense that issuance can’t be manipulated by a select few): this will, in turn, push a lot of people and projects to exit the ecosystem.

On the other hand, I think that reducing the staking ratio at a later date will be painful, but still possible without fracturing the ecosystem (assuming some sort of consensus on guiding philosophy, which feels like a prerequisite to this whole discussion anyway).

## Narrative economics
Most crypto natives understand that the impact of narratives on economics should not be taken lightly. But if you’re an academic in this space and still doubt the importance of narratives in shaping economic events, you should get yourself a copy of Nobel laureate Robert J. Shiller’s book “[narrative economics](https://press.princeton.edu/books/hardcover/9780691182292/narrative-economics)” immediately.

In Shiller’s words:

> “Though modern economists tend to be very attentive to causality, as a general rule they do not attach any causal significance to the invention of new narratives… new contagious narratives cause economic events, and economic events cause changed narratives… We must be wary of many (but not all) economists’ supposition that the causality always runs from economic events to narratives, and not the other way around… this mode of thinking misses what may be the essential elements that cause change in the economy… **A key proposition of this book is economic fluctuations are substantially driven by contagion of oversimplified and easily transmitted variants of economic narratives.**”


I actually think that cutting issuance is fine from a narrative perspective (prior issuance changes have all been in this direction so far). But if Ethereum were to flip flop on issuance (i.e. cut issuance and then reverse course due to unforeseen consequences), there is little doubt in my mind that this would create an especially contagious and destructive narrative. Even a 1% chance of this happening should be taken extremely seriously.

## A lesson from the past
In Seth Klarman’s book [Margin of Safety](https://www.finect.com/image/003cf0e07d9011f2318e64b22e7afa1012fc10706ea), there’s a section in chapter 4 titled Greed and the yield pigs of the 1980s. The first paragraph reads:

> “There are countless examples of investor greed in recent financial history. Few, however, were as relentless as the decade-long “reach for yield” of the 1980s. Double-digit interest rates on U.S. government securities early in the decade whetted investors’ appetites for high nominal returns. **When interest rates declined to single digits, many investors remained infatuated with the attainment of higher yields and sacrificed credit quality to achieve them either in the bond market or in equities**. Known among Wall Streeters as ‘yield pigs’ (or a number of more derisive names), such individual and institutional investors were susceptible to any investment product that promised a high rate of return.”

In sum, finding government bond yields unacceptably low, many investors poured money into stocks and junk bonds at the worst imaginable times.The lesson here is that **even so-called sophisticated investors can become fixated on current returns**, and psychologically refuse to accept a sudden drop in yields (instead choosing to climb further up the risk curve).

Issuance cuts aside, the restaking hype that Ethereum is currently experiencing makes me feel like we are already well on our way to speedrunning the 1980s junk bond mania. Cutting issuance at this point in time would only serve to add fuel to the fire. Is there someone out there thinking deeply enough about these potential 2nd/3rd order effects? I personally haven’t come across anyone who is.

## We're missing a higher level vision
The biggest questions here are philosophical in nature, not technical. I think it will be hard to gather meaningful consensus (in the sense of deep rather than shallow agreements) around proposed technical changes without formulating and gathering support for an overarching guiding philosophy.

For one, consensus around issuance changes is effectively downstream of a more philosophical schelling point (whether implicit or explicit). But perhaps more importantly, members of the wider community are more qualified to voice their opinions on a higher level vision than they are at wading into the technical weeds of issuance debates (so having this softer discussion is perhaps the only way to ensure a deeper more meaningful consensus around the suggested technical changes).

Achieving even one bit of agreement on what a higher level vision looks like (for example, on the need for a widespread [trustless base layer asset](https://twitter.com/fradamt/status/1760808900792594593) that can suffer minimal dilution through time) can help prune the design space and give shape to a more productive discussion around what the right path forward looks like.