The incentive model for Ethereum staking and token issuance mechanism, as well as the discussion on LSD. Written by: Ansgar Dietrich, Casparschwa, compiled by Ethereum Foundation, translated by 白丁, Geek Web3. This article is based on the discussion of Ethereum staking mechanism and ETH issuance model by Ansgar Dietrich and Casparschwa on the eth research forum. Geek Web3 has organized and edited it. These views were put forward in February 2024, and some data may be biased, but the analysis of the Ethereum staking economic model is still worth referring to, and some of the conclusions are still relevant.

Currently, the amount of ETH staked on Ethereum has reached 30 million, accounting for 1/4 of the total supply (this was the data in February of this year). This proportion is quite considerable and is still rising, with no signs of slowing down. The following figure shows the change in the amount of ETH staked over time, and it is evident that there is a continuous upward trend, which is expected to continue in the long term. In the future, a large part of the new staking of ETH will be influenced by LST (Liquidity Staking Tokens), such as stETH. This will gradually enhance the usage and monetary properties of LST, but this may bring negative effects. Firstly, LST has network effects, and larger LST projects will consume all the liquidity in this track, ultimately leading to a winner-takes-all situation in the LST track. This will intensify the competitive landscape of the LST track. In addition, if LST surpasses ETH and becomes the mainstream currency on Ethereum, users will face counterparty risks brought by LST. The currency on Ethereum should be trustless as much as possible to truly achieve economic scalability. ("Counterparty risk" refers to the risk that the counterparty may default or fail to fulfill obligations. In the LST scenario, "counterparty risk" mainly includes user asset theft, LST price slippage, and depreciation.)

Currently, there are no strict upper limit regulations for ETH staking, and theoretically, all ETH can be staked to earn rewards. However, LST significantly changes the cost structure of staking, and almost all ETH may be staked. Therefore, we believe that Ethereum's economic model and staking mode should include dynamic adjustment policies to keep the staking ratio within a certain range. In this way, Ethereum can ensure security at a controllable cost scale and avoid the generation of negative externalities. In this article, we have identified some urgent issues that need to be addressed in Ethereum's economic model.

Before discussing the current status and future trends of ETH token issuance strategy, we first explore the feasible long-term staking models under the current ETH token issuance policy. Ethereum's security depends on a certain proportion of token staking, which can be summarized as "POS Ethereum itself has a demand for attracting staking." The demand for staking in Ethereum's monetary policy is clearly defined, and based on the actual staking weight, the protocol will adjust the amount of ETH issuance accordingly and increase the staking rewards for individual nodes. However, the staking willingness of ETH holders is diverse and complex, and we can only make reasonable speculations based on existing information to roughly estimate the long-term impact of changes in staking willingness on stakers' participation.

The supply and demand relationship curve for ETH staking: Exchanging security for staking rewards. Staking ETH by validator nodes provides security for the protocol, and the protocol distributes token rewards to ETH stakers, creating a win-win mechanism. (Due to space limitations, this article does not discuss specific issues such as "what level of security is needed," for more details, please refer to the article "Paths toward single-slot finality.") The income of validators mainly comes from two parts: the first part is the rewards distributed by the protocol according to a fixed income curve (which is the rewards distributed to staking participants by Ethereum through ETH issuance each year); the second part is the MEV (Miner Extractable Value) income obtained by validators in the process of block production. (The horizontal axis of this figure represents the staking participation rate of ETH, and the vertical axis represents the staking yield, describing the staking yield that Ethereum is willing to provide to achieve different staking rates. We can view the Ethereum protocol as the buyer and stakers as the seller.)

Note: To understand the content below, readers may need a basic understanding of supply and demand curves in economics.

ETH issuance yield curve (solid green line): From this curve, it can be seen that as the number of stakers increases, the staking rewards provided to individual nodes by Ethereum will gradually decrease. When the staking participation rate of ETH is low, the system needs to provide more rewards to validators to encourage more staking; as more people participate in staking, the marginal contribution of individual validators to network security will decrease, and the demand for staking rewards will also decrease.

Total staking yield curve (dashed green line): The fixed issuance yield of ETH plus MEV income constitutes the total staking yield for stakers. It is worth noting that the calculation method of MEV yield is: total MEV income (which was about 300,000 ETH last year) divided by the total amount of staked ETH. Since the total MEV income is basically fixed, as the number of validators increases, the MEV yield will rapidly decrease, eventually causing the staking yield to approach the pure ETH issuance rate. It is worth noting that Ethereum's MEV income has been quite stable in the past period (refer to the MEV-Boost Dashboard), although this may change in the future, for the sake of simplifying our discussion scenario, we temporarily consider it as fixed.

From the above curves, we can read two key pieces of information: In order to avoid a low staking participation rate, Ethereum sets high returns to encourage more staking when the staking participation rate is low. The marginal utility of each staker decreases, that is, as the staking participation rate increases, the issuance rate of ETH tokens gradually decreases. However, the above staking yield curve does not ideally regulate the staking participation rate. Firstly, this curve cannot effectively limit the threshold of the staking ratio, even if all ETH is staked, the staking incentive will still be maintained at about 2%. In other words, at the incentive design level, Ethereum does not have precise control over the final achieved staking ratio. Overall, apart from ensuring the system has the minimum security through high incentives in the initial stage, the protocol does not guide the staking level to reach a specific range. It should be noted that the above-mentioned is only nominal income and does not consider the dilution effect brought about by the issuance of more ETH. As more ETH is issued, the dilution effect will become more significant. We will temporarily ignore the impact of the dilution effect and discuss it in detail later.

Supply-side analysis of ETH staking: The previous discussion focused on the demand curve for staking, that is, the staking yield that Ethereum is willing to provide to achieve different staking ratios. Now we will turn our attention to the supply curve. The staking supply curve shows the staking willingness of ETH holders at different yield rates, revealing the conditions required for different staking participation rates. In general, this curve will be upward sloping to the right, which means that the network needs higher incentives to achieve a higher staking participation rate. However, since staking willingness cannot be directly observed or accurately measured, the shape of the supply curve cannot be specifically described, and we can only speculate through qualitative analysis. In addition, the supply curve is not fixed, and we will explore the changes in staking costs over time and how these changes affect the staking decisions of ETH holders. In other words, the change in staking costs will lead to a shift in the supply curve, causing ETH holders' demand for staking incentives to change. We can only fit the observable staking levels in history into an approximate staking supply curve, and the intersection of the demand curve and the supply curve at specific points in time reflects the real staking participation rates achieved in history. The horizontal axis of this figure still represents the staking participation rate of ETH, and the vertical axis represents the staking yield. As shown in the figure, since the launch of the Ethereum beacon chain, the total amount of staked ETH has continued to increase, and the supply curve of staked ETH has shifted downward. Even at lower staking yields, the staking willingness of ETH holders will still increase. From the historical trend, the continuous downward shift of the supply curve in the short term is a reasonable expectation. However, what is worth exploring is the issue of long-term staking balance, and we need to carefully analyze the composition of the supply side. When any ETH holder decides whether to stake, they usually consider two main factors: staking rewards and the required costs. Overall, the staking yield per unit asset in the hands of validators is the same, but there are significant differences in the cost structure between different types of stakers. The following will delve into the differences between independent stakers and Staking Service Providers (SSPs).

Independent stakers vs. Staking Service Providers (SSPs) accept users' ETH and stake on behalf of users, charging a certain service fee. In most cases, they will provide LST as a staking certificate for users, and users can use LST for secondary market transactions (such as stETH).

For LST holders, the liquidity of these tokens depends on the overall usage rate of LST and the support of third-party protocols. We will focus on analyzing SSPs like Lido that issue LST. As for SSPs that do not issue LST, they can be considered as a special case where the liquidity value of LST is zero and will not be discussed in this article. For most people, staking independently does not require trust in third parties, but the barrier to entry is high and the operation is cumbersome. In contrast, LST requires a certain level of trust but has significant simplicity and liquidity advantages. After comparing these two staking methods, we can draw two important conclusions: 1. There are significant differences in the cost structure of independent staking among different ETH holders. The level of technical expertise, hardware conditions, operational costs, and confidence in custody security make the supply curve of independent stakers steeper. This means that if the number of independent stakers is to increase significantly, either staking rewards must be significantly increased, or the UX of staking operations must be improved. 2. In contrast, the cost structure for users staking through SSPs is basically the same, with the main difference being the evaluation of operational risks of SSPs and concerns about the exchange slippage between LST and ETH. Therefore, the supply curve of SSPs is relatively flat. This means that to attract more ETH holders to participate in LSD liquidity staking, a relatively small increase in yield is needed, and the staking participation rate can be smoothly expanded. In addition, the cost of independent staking is not affected by the staking participation rate, while the cost of holding LST may gradually decrease over time and with the increase in SSPs' usage. The reasons for this are as follows: 1. Enhancement of the "monetary properties" of LST: When the popularity of a certain LST increases, we can expect it to receive support from more and more projects, surpassing the native ETH usage scenarios, such as more DeFi protocols integrating LST, and second-layer networks defaulting to liquidity staking of bridged ETH. When the staking ratio of ETH is high enough, LST may even surpass unstaked ETH in terms of liquidity, reversing the liquidity gap between the two. 2. Reduced smart contract risk: Over time, LST's smart contracts will undergo extensive practical testing and further risk reduction through formal verification and other means. 3. Improved robustness of governance systems: With increased usage, the governance mechanisms related to LST will become more mature and robust, as reflected in proposals such as the LDO + stETH dual governance. 4. Reduced expectations of large-scale risks: When a certain LST occupies a sufficiently large proportion of the overall market, it may be seen as "too big to fail." Therefore, users believe that various forces in the market will remedy any issues with SSPs in a timely manner. 5. Profit balance of LSD service providers: When the usage of LST is high enough to provide sufficient liquidity, SSPs can lower unit service fees to maintain profitability and attract more users. Overall, the existence of SSPs and LST significantly flattens the staking supply curve, meaning that the increase in staking incentives is not necessary to drive the overall staking amount on Ethereum. It can be inferred that LSD will continue to play an important role in driving the growth of staking. However, in the long term, staking incentives are not the shackles of ETH staking growth. So, how large can ETH staking ultimately reach? Considering factors such as demand and supply, we can speculate on the long-term equilibrium state that ETH staking can maintain. As mentioned earlier, when the staking participation rate is low, the demand curve shows a clear tendency, but there is no clear conclusion on the specific staking ratio that may be reached in the long term. We then explained that as staking costs and risks decrease, the supply curve will gradually shift over time, making more and more people willing to participate in staking, with LST playing a major driving role. However, the shape of the supply curve itself cannot be quantitatively analyzed, and it is currently unclear whether it is steep enough to provide reasonable regulation of staking participation. Therefore, the equilibrium point of the overall staking ratio cannot be accurately calculated and has a wide range of possibilities, possibly even close to 100%. The following figure reflects that even a small difference in the long-term supply curve can lead to a shift in the equilibrium point of the staking ratio. The key is not how high the staking participation rate will be, but the potential risks that such a high staking rate may bring once it appears. This article proposes some policy adjustment suggestions to prevent this situation from occurring. Staking ratio analysis: When is a lower staking rate better? The staking ratio can be defined as the ratio of the amount of ETH staked to the total supply of ETH, with the current total supply of ETH being approximately 120 million, of which about 30 million are staked, resulting in a staking ratio of about 25%. Before discussing the potential problems that a high staking rate may bring, we need to first clarify a standard: what level of staking rate can ensure the security of Ethereum. According to a previous discussion record of the Ethereum Foundation, the current staking level is sufficient to ensure the economic security of Ethereum. This raises a question - if the current staking rate is already sufficient to guarantee network security, is it necessary to pursue a higher staking rate and achieve "excessive security"? In our view, although a high staking rate can enhance network security, it may bring some negative externalities, affecting ETH holders, independent stakers, and even the operation of the entire Ethereum protocol. Network effects of LST's monetary properties (LST): Refusing to bear risks. The competition for the monetary properties of LSTs is fierce. Due to the existence of network effects, this competition often presents a situation of "winner takes all." As the application areas of LST continue to expand and its utility increases, its market share will gradually rise, and the monetary properties of LST will be strengthened in various aspects, such as on-chain and off-chain integration, liquidity, and the ability to resist governance attacks. In an environment of high staking rates, if a single SSP controls the majority of the staking ratio, it may be seen as "too big to fail." If most ETH is staked with that SSP, it is difficult to find a way to effectively penalize it. If a dominant SSP penetrates the core of Ethereum protocol governance but does not bear corresponding responsibilities to users, this centralized governance risk will undoubtedly have a profound impact on the decentralization of Ethereum. If most ETH is used for liquidity staking, in most scenarios other than Gas Token, the true currency will be LST. However, whether LSTs issued by ETFs, CEXs, or on-chain staking pools, they come with different trust assumptions and significant risks. Ultimately, users will inevitably bear additional risks from operators, governance, legal aspects, and smart contracts, which is clearly not an ideal state. In addition, although LST boasts the ability to restore the liquidity of staked ETH, its effectiveness as collateral in DeFi is definitely not as good as native ETH. For Ethereum to achieve true economic scalability, its currency must be as trustless as possible, preferably using ETH itself. Minimum Viable Issuance - Serving user experience. The Minimum Viable Issuance (MVI) is the minimum issuance required by the Ethereum network to maintain its security and functionality, aiming to balance the network's security and ETH inflation rate. According to the MVI principle, it must be ensured that there is enough staking participation to guarantee the security of the protocol, but the staking amount should not be excessive. When the staking level reaches a critical point, the security of the protocol is already sufficiently stable, and the additional staking brings diminishing marginal utility, and may even lead to negative effects (such as increased network load, dilution of ETH holders' interests, etc.). In addition, staking is a basic service required by the protocol, and the protocol should attract users to participate in staking by providing reasonable rewards for staking, rather than forcing users to participate due to asset dilution pressure. If the issuance of ETH continues to increase, it will lead to greater dilution risk for all ETH holders and stakers, but SSPs will not be negatively affected. This is because the ownership of staked ETH does not belong to SSPs, and SSPs only generate income by charging service fees, unrelated to the dilution of ETH value. Moreover, if more people participate in LSD staking to hedge against inflation, the service fees charged by SSPs can increase.

Assuming a scenario: Ethereum staking participation rate is 90%, staking annual yield is 2%, liquidity staking accounts for 90% of the total staking value, and the average SSP fee rate is 10%. This translates to an annual fee equivalent to 0.16% of the Ethereum market value, approximately 200,000 ETH, which is about 5.3 billion US dollars at the current price. This 5.3 billion US dollars is actually a kind of hidden tax on all ETH holders. Real yield: Nominal yield - dilution effect Similar to nominal interest rate and real interest rate in finance, the real yield is the actual yield rate obtained after removing the dilution effect from the nominal staking yield of ETH. As more and more people participate in staking, and with Ethereum's inflation, the nominal yield generated by ETH staking will gradually be diluted, and the real yield can more clearly reflect the true incentive of staking, while the staking yield curves we discussed earlier are all nominal yield curves. The figures below reflect the impact of the dilution effect on the yield of stakers and non-staking ETH holders. For ETH holders who do not stake (as shown by the red line in the figure), their nominal balance remains unchanged, but they bear the dilution effect brought by inflation, so their real yield is obviously negative. To describe this impact clearly, we can analyze the staking ratio "S" in two scenarios. When the staking ratio is low (left side of the curve), the real yield curve (solid green line) is close to the nominal yield curve (solid gray line) because there are fewer stakers, and the protocol distributes fewer rewards through ETH issuance, resulting in a low inflation rate and a lighter dilution effect. In this case, the main incentive for staking comes from positive yield, i.e., the green area in the figure. When the staking ratio is high (right side of the curve), the gap between the real yield and the nominal yield curve gradually increases. As more and more stakers participate, the issuance of ETH increases, and the dilution effect becomes more pronounced. In addition to the decrease in real yield, part of the incentive for stakers comes from "dilution protection," i.e., hedging against inflation through staking. In extreme cases, when the staking ratio approaches 100%, the real yield from staking will only come from MEV yield, and the inflation rate of Ethereum will be very high because tokens need to be continuously issued as rewards for stakers. In summary, the biggest difference between high and low staking ratios is the different composition of staking yield. With a low staking ratio, users will receive actual positive yield, but as the staking ratio increases, due to the higher inflation rate, users will only receive less yield to offset the dilution effect, i.e., "dilution protection." The higher the Ethereum staking ratio, the more new ETH is issued, and the nominal yield for stakers is higher. However, a high nominal yield does not necessarily mean a high real yield. It is important to emphasize that the change in the composition of yield does not reduce the incentive for staking. If we only look at the results, dilution protection and actual positive yield are equally attractive to users. However, the significance of these two different types of yield to users is completely different: when the staking ratio is low, staking is a profitable service paid for by the Ethereum protocol; conversely, when the staking ratio is high, staking becomes a helpless hedge against inflation. Therefore, if the staking ratio moves to the highest level, we may end up in the worst situation: the actual yield provided by staking is extremely limited, and it poses a threat of asset dilution to those who are unwilling to accept LST. Under the same staking policy, any staker will choose the strategy that provides a higher actual yield for themselves. However, in Ethereum's protocol design, users cannot choose because the issuance curve of the protocol determines the final equilibrium state of staking (under the condition of a fixed long-term staking supply curve). For profit considerations, any user can only choose to participate in staking. Feasibility of independent staking SSP costs are fixed, and the more staking, the lower the unit cost, naturally possessing economies of scale. As the amount of ETH managed by SSPs increases, their marginal efficiency will also improve, allowing them to lower costs and charge lower service fees, attracting more users and achieving higher profits. Based on these advantages, successful SSPs may be seen as "too big to fail," reducing their tail risks and further strengthening economies of scale. (Tail risk: the risk of extreme events, which have a very low probability but can lead to huge losses once they occur) In contrast, independent stakers need to bear all costs themselves, and the costs will not decrease with an increase in staking, but may even rise due to increased network load, which is one of the reasons for Ethereum's EIP-7514 proposal. As analyzed earlier, as more and more staking yield is used to hedge against inflation rather than to obtain actual yield, the actual yield of stakers increasingly depends on MEV, and MEV yield is highly volatile, causing fluctuations in the total yield of independent stakers. In comparison, SSPs can distribute the total MEV income proportionally to all Validator nodes they manage, effectively reducing the impact of staking yield fluctuations on their overall operations. With the increasing usage of LST and the strengthening of its monetary properties, the gap between independent staking and LSD staking will widen. In other words, as the staking ratio increases, the competitive disadvantage of independent staking compared to LSD staking becomes more pronounced. In many jurisdictions, governments tax staking income based on nominal income rather than adjusted actual income after the dilution effect. Through certain structural designs, LST can provide a certain level of protection for holders, avoiding the impact of this tax, which independent staking usually cannot achieve. As the gap between nominal yield and actual yield widens, the level of yield for independent stakers is further surpassed by LSD stakers. Based on this, we propose the following viewpoints: 1. Holding native ETH should be economically viable, ensuring a good user experience, and avoiding value dilution issues caused by security risks, in order to better protect the interests of ETH holders. 2. To achieve true economic scalability, Ethereum's native currency should be as trustless as possible. Only in this way can the robustness and wide applicability of the entire system be ensured. 3. Dilution protection of asset value becomes the main incentive for staking, which is not ideal for both stakers and ETH holders. Relying on dilution protection as an incentive may lead to unnecessary market fluctuations, undermining the original intention of the staking mechanism. 4. A high staking participation rate will further exacerbate the competitive disadvantage of independent stakers in the market, possibly leading more users to prefer staking through SSPs, resulting in centralization of staking, which is detrimental to the decentralization and security of the network. The future staking ratio that Ethereum can reach is still uncertain, and we need to take proactive measures to determine the optimal staking ratio to prevent negative impacts from an excessively high ratio. Even though a high staking ratio may be beneficial for some, this choice should be made after careful consideration, rather than being randomly influenced by external market factors. The ultimate goal of the staking participation ratio I believe that Ethereum's staking policy should be based on the staking ratio, not the amount of staked ETH. The supply of ETH is affected by EIP-1559 and issuance mechanisms, causing fluctuations, and using the staking ratio as a benchmark can adapt to these supply changes. Although the current supply of ETH is changing very slowly, decreasing by about 0.3% annually since The Merge, its long-term impact cannot be ignored. Establishing a policy based on the staking ratio can maintain stability over a longer time frame without the need for frequent adjustments. As mentioned earlier, although the current issuance curve ensures the minimum staking level, the lack of a mechanism to limit the upper limit of the staking ratio may lead to an excessively high staking ratio. We believe that a comprehensive token issuance policy should set upper and lower limits for the staking ratio to ensure network security and maintain reasonable participation. Specifically, this policy should strive to keep the staking ratio within the "best range that ensures network security and avoids negative external effects." To achieve this, Ethereum can set high rewards for a staking ratio that is too low, and set low or even negative rewards for a staking ratio that is too high to adjust the staking ratio. In this way, Ethereum can regulate staking participation. The curve of this policy design can refer to the example proposed by Vitalik, which shows how rewards are adjusted at different staking ratios to guide staking behavior. As shown in the issuance curve in the figure, rewards are generous when the staking participation is low, consistent with the current policy. As the staking participation increases, staking yield gradually decreases until it becomes negative. In other words, staking yield will eventually decrease to the point where it is no longer attractive, thereby suppressing staking behavior. However, this negative yield state will not persist in the long term, and the staking participation will gradually decrease due to the adjustment mechanism, reaching an equilibrium at a suitable level. Therefore, a model that presents this yield curve pattern can ensure that the staking ratio remains within a reasonable range.

In fact, to achieve a reasonable staking ratio range, it is not necessary to choose a curve where the yield quickly turns negative. Curves that control staking rewards to zero or near zero after a critical point may be sufficient to achieve the same effect, both suppressing excessive staking and maintaining system stability. Impact of determining a reasonable staking ratio range The advantage of determining a reasonable staking ratio is that it effectively avoids various negative impacts of a high staking rate. However, this strategy is not without its drawbacks. A clear example is the volatility of rewards faced by independent stakers in this scenario. Similar to the environment of a high staking rate, under the strategy of determining a reasonable staking ratio, a large part of the incentive comes from MEV yield, which can strengthen its volatility. Therefore, while there are many advantages to determining a staking ratio range, it may also exacerbate the existing yield volatility. MEV risk can be addressed by introducing mechanisms such as Execution Tickets or MEV Burn, or by mitigating it through the way staking fees are set, to some extent balancing the volatility of yield. Some people oppose setting the staking ratio within a certain range, with a representative view being that doing so may reduce the overall equilibrium yield, exacerbate the competition between independent stakers and SSPs, and the competition among different SSPs. The logic of the opponents is that a decrease in overall equilibrium yield leads to insufficient capital supply, and some staking forms adopted by SPPs may be more beneficial to the Ethereum protocol, but due to their lack of project competitiveness, they may struggle to sustain profitability and survive, resulting in lower overall utility of Ethereum. To address this issue, it is still necessary to distinguish between nominal yield and actual yield. Although the strategy of determining a staking ratio range may reduce nominal yield, actual yield may not necessarily be affected. The following diagram further illustrates this point. The upper diagram represents the scenario where the system reaches long-term equilibrium with a determined staking ratio range, while the lower diagram roughly depicts the scenario under the current Ethereum token issuance curve. These two examples are based on the same assumption: approximately 100 million ETH are staked, i.e., the long-term staking supply remains consistent, making the comparison meaningful. In the lower diagram, most of the staking incentives are used for dilution protection, so the actual yield rate is maintained at around 0.5%. In the scenario on the left, the system would reach a lower equilibrium point of nominal yield, but due to the lower inflation rate, the actual yield rate would increase to around 1.4%. This example clearly demonstrates that determining a staking ratio range can reasonably increase the actual yield rate and alleviate the competitive pressure among stakers. Additionally, this is also beneficial for ETH holders who do not participate in staking, as it maximizes the reduction of dilution risk. Open issues The strategy proposed in this article is to determine a reasonable staking ratio. However, there are some pressing issues that need to be addressed. 1. What is the ideal range for the staking ratio? We have discussed the undesirable range for the staking ratio, but have not explicitly proposed an ideal staking ratio range. In fact, this issue is quite complex and requires in-depth discussion within the community, and will also consider some opinions from Vitalik and Justin. The core of this issue lies in the balance - a lower staking participation rate increases the risk of protocol attacks, while an excessively high staking participation rate may lead to negative external effects. To better determine the staking range, we can model the utility at different staking ratios. One possible utility curve is as follows: 2. How to choose the appropriate staking yield curve to achieve the target range? After determining a reasonable staking ratio, the designer also needs to choose the appropriate staking curve to achieve the equilibrium of Ethereum's staking participation. The designer needs to carefully evaluate the advantages and disadvantages of different curves to select the most suitable solution. At the same time, the designer can continue to explore other mechanisms, such as a feedback control system similar to EIP-1559, to dynamically adjust the staking issuance curve based on network conditions to ensure the optimal match between the curve and network demand. 3. How to ensure incentive compatibility in near-zero or negative issuance situations? Incentive compatibility, proposed by Nobel laureate Leonid Hurwicz, is an important principle of mechanism design, which specifically means that if a mechanism can unify individual interests within the system with the overall interests, the system is incentive compatible. The original intention of Ethereum's PoS issuance is to attract validators to participate in consensus through economic incentives. However, at certain staking participation rates, issuance yield may approach zero or even become negative. Although in this situation, validators may continue to stake for MEV yield, if there is a lack of regular staking rewards, validators may lack sufficient motivation for block production and validation, meaning that when staking issuance is too low, the consensus mechanism may face the risk of failure. To address this issue, the Ethereum protocol can charge a certain fee to all validators and redistribute it based on the competence of the validators, re-establishing incentive compatibility. However, the implementation of this solution will increase the complexity of the protocol, so its feasibility and effectiveness need further discussion. 4. How to set the target range in relative (staking ratio) rather than absolute (fixed ETH amount) terms? It is also possible to set the staking issuance level to a certain absolute amount of ETH, such as 30 million or 40 million ETH. However, to make the issuance policy more forward-looking and adaptable, it is best to directly use the staking ratio as the assessment parameter. To make the issuance policy target a specific staking ratio, the protocol needs to control the amount of staked ETH and the supply. 5. How to restore the staking participation rate to the target value when it exceeds the target range? If the current staking participation rate is within the target range, that is the most ideal situation. However, if it exceeds this range, measures must be taken to reduce the staking participation, causing some stakers to exit staking due to insufficient rewards. Even if we use the mildest means to reduce participation, this process will still have a negative impact on some stakers. How to minimize this impact is still a problem that needs to be addressed. Conclusion We have discussed the current Ethereum staking incentive policy and token issuance scheme, detailed the negative externalities of this issuance scheme, and explored a new policy that can address the issue, which is to set the staking ratio within a target range. However, given some unresolved issues, especially the lack of a validator fee mechanism and on-chain MEV capture mechanism, it will take some time to transition to this policy. We propose that during this period, the current ETH staking and token issuance policies be reformed as a key step towards the target policy. To this end, we have proposed a proposal to reform the staking issuance policy in the upcoming Electra upgrade (related content can be found in the article Electra: Issuance Curve Adjustment Proposal).

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