Grayscale’s head of research, Zach Pandl, has shared a thought experiment on X that recasts Ethereum as a tiny country running its books through money printing rather than taxes.
Pandl tagged his post as a “Quasi brainstorm on $ETH issuance.” He then went into the details, where he stated that Ethereum “is akin to a minimal nation-state” that has one job, which is to guard property rights and the exchange of value.
He also discussed how Ethereum will be funding its spending, having written that “Ethereum does not raise taxes to fund government services.”
Pandl said that the network funds itself through money printing; in this case, that will be $ETH. This revenue source is called seigniorage by economists, and it is the profit a currency issuer earns simply by creating money.
Who will be protecting Ethereum’s property rights in Pandl’s setup?
Stakers are the group that will be providing the service of protecting Ethereum. The stakers are then compensated for their services with newly printed $ETH, according to Pandl.
The setup brings fiscal and monetary policy into one loop, something that most economies tend to separate.
This is happening in Pandl’s quasi-brainstorm as the act of securing the network is also the act of expanding the money supply.
It also highlights a difference between Bitcoin and Ether. BTC’s supply is capped at a fixed number. However, $ETH issuance floats instead, rising and falling with how busy the network is and how much of the token is staked. This makes scarcity harder to pin down for anyone who sees $ETH as a store of value.
Why is the $ETH issuance math currently contested right now?
Ethereum validators collectively earn around 700,000 $ETH a year in staking rewards, but currently, the ecosystem is reportedly short on cash to pay its core developers.
In June, former Ethereum Foundation coordinator Trent Van Epps pointed out that keeping the network’s client teams running costs about $30 million a year. He highlighted the dangers of not having a clear source of funding lined up as the Foundation cuts spending.
There have been various inputs on what the foundation can do to fill that gap. One camp believes that the gap can be filled by taking out from the rewards that go to validators.
However, critics of that move say that there is no point in doing that if validators are willing to part with some yield. Their main argument is that there is no need to build a new distribution layer; instead, the network could simply issue less $ETH.
While Pandl’s nation-state sketch is not a solution to the funding gap, it highlights that issuance is the treasury, and every argument about funding is an argument about how large that treasury should be.
