Thread by @artofkot

Maximum Viable Security (MVS): a new framework for Ethereum Issuance

Excited to share a new paper in collaboration with @SteakhouseFi, where we derive a new monetary policy framework from the core values of Ethereum – security and neutrality:

🧵👇🧵ethresear.ch/t/maximum-viab…

TLDR: MVS maximizes security without compromising scarcity, while MVI minimizes issuance without compromising security.

We derive MVS from first principles, and apply it to issuance reduction by studying staked ETH concentration with Coinbase and solo stakers’ cost structures.

1. Why MVS?

Ethereum has a clear goal: build a global neutral settlement layer. Security and sovereignty are at the heart of it, coming from Ethereum’s ability to resist:

A. 34% double-signing attack
B. 51% short reorg & censoring attacks
C. Gradual coercion by state actors

Attacks B and C are the trickiest, because they are not "recognized" by Ethereum protocol. The ability to defend against such attacks is what makes Ethereum truly sovereign and neutral technology. @lex_node calls this "autonomy".

https://x.com/lex_node/status/1799489646042165662

Various existing defenses include:

RE:A – Cryptographic slashing
RE:A,B - Social slashing
RE:A,B,C - Decentralization coming from distributed validator set, ensuring no single party controls 51%/34% of validators

1st key observation: Given the context above, there is no future-proof safe level of security. For Ethereum to become a neutral settlement layer for the world, its cost of corruption would need to be in the hundreds of billions, if not trillions.

Therefore the MVI framework, aiming to make staking efficient by minimizing issuance without compromising security, does not provide a stable sustainable strategy for pushing the security value-proposition of Ethereum forward.

Instead, we suggest an alternative MVS framework, which seeks to maximize security and autonomy, making these core value-propositions of Ethereum expansive and sustainable.

MVS prioritizes expansion over efficiency, while MVI does the opposite.

2nd key observation: Ethereum's security largely relies on decentralization coming from diverse validator set.

The pic describes current staked ETH distribution; decentralization rating of validating entities is as follows:

Solo Stakers > DSM(LSTs) > LRTs > CSPs > CEXs

Thus MVS, aiming to drive value to Ethereum and ETH by maximizing security and neutrality, suggests that we should purposefully think about and nurture this fragile diverse staking ecosystem.
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To conclude with MVS, we present two value creation paths for Ethereum.

2. Applying MVS to issuance reduction.

2a. Staked ETH concentration problem. Under MVS framework, the main disadvantage of issuance reduction is the risk of staked ETH concentration with Coinbase.

https://x.com/artofkot/status/1763041411232895124

We conduct a detailed analysis of how ETF flows and 33% stake cap may affect validator set composition. The upshot is that there is a real possibility of Coinbase surpassing the 33% network control, while Lido and other DSMs lose market share.

A common counter-argument is that Coinbase will outcompete by undercutting fees in any circumstances. We show that this is not true, since Coinbase may maximize profits by charging their high 25% fee without losing customers to DSM. The fundamental reason is that..

..the staking market is highly segmented: CEXs' customers are retail (which no other yield options) and institutions (restricted by regulation), while DSM/LRTs/CSPs' customers are sophisticated nimble onchain actors.

2b. Impact of issuance reduction on solo stakers.

We argue that solo stakers' share may decrease long-term, because solo stakers have higher fixed costs and thus are less flexible in cutting costs. We show how large NOs can maintain profit margins, while solo stakers cannot.

2c. Ownership redistribution.

High issuance rates force ETH holders to stake to avoid dilution. This is users' inconvenience for the sake of more stake landing with distributed validator set - a reasonable trade-off under the MVS framework, not warranting issuance reduction.

2d. Issuance costs through taxation.

Staked ETH holders face tax obligations, resulting in a sell pressure. However, this comes down to $4.2b/year, amount easily absorbed by the liquid ETH markets over a year. Furthermore, LSTs such as wstETH make staking tax efficient.

2e. Real vs nominal yield.

Issuance reduction does result in fewer stakers getting higher real yield. However, it is not clear if there is any resulting benefit to Ethereum (including stakers since there is less of them), and MVS suggests that impact can even be detrimental.

2f. LST dominance.

If Lido or another LST captures the majority of ETH in circulation, it can hypothetically exert influence over Ethereum protocol. This argument for stake capping is relevant under the MVS framework.

(i) LST dominance risk VS (ii) staked ETH concentration with CEXs is the key trade-off. Since (i) is to a large extent mitigated by dual governance while (ii) is a direct threat with no solutions in plain view, we think that on balance risks of (ii) outweigh the risks of (i).

3. Conclusion.

Under MVS, issuance reduction can compromise security and neutrality in a direct way, through staked ETH concentration with CEXs – and this effect, on balance, far outweighs the advantages of cutting the issuance.

The natural question stands: what would be the right issuance policy under the MVS approach? This is an incredibly complex and deep question that we would like to explore in future.
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Special thanks go to @ppclunghe, @ks_kulk, @lazyleger, @entigdd, @stakesaurus, @hasufl, @lex_node, @_vshapolapov, @brettpalatiello, @BqJuancho for providing feedback.