Reduce ETH issuance before proof-of-stake

[lightuponlight]

Coin vote is now underway on EIP-186:

http://carbonvote.com/

As an FYI, Carbonvote set this up on their own. I think they did a very nice job and thank them for serving the Ethereum community in this way.

Please, whatever your opinion is on EIP-186, let your voice be heard by participating in the coin vote!

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Modified EIP proposal with changes, followed by the original EIP proposal. These changes are based on feedback provided on Reddit and Github regarding this EIP regarding the issuance reduction schedule and minimum issuance level under proof-of-work.

  
  EIP: 186
  Title: Reduce ETH issuance before proof-of-stake
  Author: Matthew Light | lightuponlight9@gmail.com
  Discussions-To: lightuponlight9@gmail.com
  Status: Draft
  Type: Standards Track
  Created: 2016-12-21
  Replaces:  N/A
  Superseded-By: N/A
  Resolution: N/A

Abstract
A reduction in the issuance of Ether (ETH) is very likely to be price-supportive and lead to increasing investments in the platform and to help ward off speculative attacks on the value of Ether by promoters of competing platforms who offer, or plan to offer, reduced token inflation rates. This proposal is based on a discussion on Reddit about ETH token issuance rates that many people participated in, including Ethereum Foundation member Vitalik Buterin.

In the current version of Ethereum as deployed on the network, there is already a coded schedule of reduced issuance per time period due to the "ice age" (an increase in difficulty designed to incent the adoption of hard forks). Normally, the "ice ages" in Ethereum are postponed by hard forks and the issuance is kept at 5 ETH per block. This EIP suggests that instead, the reduction in issuance from the "ice age" be implemented in a stepwise fashion within the protocol rules on a set block number schedule and with a defined lower bound (such as the "tail emission" in Monero). The proposed block reward reduction timetable has been pushed farther into the future, and the terminal issuance level has been increased in light of discussions on Reddit and github regarding this EIP.

Motivation
There is widespread interest within in the Ethereum community to reduce the current rate of ETH issuance. Uncertainty about the future total ETH token supply is a significant factor in reducing the market value of ETH which has negative externalities on the Ethereum ecosystem, by reducing the capital available by current investors to make investments in new Ethereum-based projects and by reducing the Ethereum Foundation's funds available for spending on salaries. Reducing ETH issuance in advance of proof-of-stake would provide a measure of reassurance to investors that their holdings of ETH will be diluted to a much lower degree. It would be helpful in the cryptoplatform marketplace for Ethereum to reduce issuance given that various competing platforms have or are planning lower issuance levels, such as Ethereum Classic.
Additionally, reducing block rewards in the near future helps reduce a sense of pressure on the Ethereum network architects and developers to rush a proof-of-stake implementation and try to deliver it more quickly than would be prudent.
The terminal reward value of 2 ETH / block was chosen to reduce token supply inflation to around 4% annually, gradually reducing over time until proof-of-stake is launched. This is in line with the current Bitcoin token inflation rate of approximately 4%. In comparison, current proof-of-work ETH token inflation rate is a bit less than 13% per year.
A reduction of token emission under proof-of-work could lead to a reduction in network security. However, a plausible improvement in the exchange rate of ETH because of a reduction in issuance will lead to an increase in network security. It is unclear how much the ETH token price might increase due to a lowered issuance rate, but the positive response of Bitcoin price to issuance reductions ("halvening") is encouraging.

Specification
The current issuance level for ETH is 5 ETH per block, with various kinds of uncle rewards also provided. This EIP proposes that no change to the relationship between block rewards and uncle rewards be made, but instead that all uncle and uncle inclusion rewards be downsized proportionally with the provided block reward schedule.
The proposed reduction in issuance is an approximation for providing stepwise issuance reduction approximately matching the "ice age" coin issuance reduction already built into the current specification of the Ethereum software. Vitalik Buterin gave an estimate of this reduction on Reddit:
https://www.reddit.com/r/ethereum/comments/5izcf5/lets_talk_about_the_projected_coin_supply_over/dbc66rd/
Based on the ice age blocktime lengthening data Vitalik provided, the following reduction of block reward schedule is proposed as a reduction in issuance that is smaller than the reduction already scheduled (via longer blocktimes caused by the "ice age" PoW difficulty bomb). The reduction schedule is also significantly delayed over the "ice age" reduction already contained in the code:
Block 3700000 - Block reward reduced to 4 ETH / block
Block 5000000 - Block reward reduced to 3 ETH / block
Block 7000000 - Block reward reduced to 2 ETH / block (minimum block reward until proof-of-stake)
As previously stated, all uncle rewards should be proportionally reduced along with the main block reward.
The reduction in issuance specified in this EIP should also be accompanied with a change to push back the "ice age" date into the future as best determined by the Ethereum Foundation in the context of planning for the Casper / proof-of-stake release.
In the light of discussions with members of the Ethereum community and the Ethereum Foundation, this EIP recommends a coin vote should be taken to determine the level of community support before a decision about whether to implement it.

Rationale
This design is deliberately simplified from the issuance function Vitalik used to calculate his predicted blocktime schedule with relatively few block reward amount transition changes in order to minimize implimentation difficulty across the various Ethereum clients. No change in the relationship between block and uncle rewards is made to avoid introducing unforseen game-theoretic changes in mining strategy. Minimum planned proof-of-work issuance is set to 2 ETH / block to provide a baseline level of security rewards for proof-of-work close to Bitcoin's current issuance rate until the transition to proof-of-stake.

Implementation
This EIP must be implemented in all Ethereum validating nodes by a hard fork, either in a currently-planned hard fork such as Metropolis, or in a separate hard fork.

---

Original EIP proposal below

  
  EIP: 186
  Title: Reduce ETH issuance before proof-of-stake
  Author: Matthew Light | lightuponlight9@gmail.com
  Discussions-To: lightuponlight9@gmail.com
  Status: Draft
  Type: Standards Track
  Created: 2016-12-21
  Replaces:  N/A
  Superseded-By: N/A
  Resolution: N/A

Abstract
A reduction in the issuance of Ether (ETH) is very likely to be price-supportive and lead to increasing investments in the platform and to help ward off speculative attacks on the value of Ether by promoters of competing platforms who offer, or plan to offer, reduced token inflation rates. This proposal is based on a discussion on Reddit about ETH token issuance rates that many people participated in, including Ethereum Foundation member Vitalik Buterin.

In the current version of Ethereum as deployed on the network, there is already a coded schedule of reduced issuance per time period due to the "ice age" (an increase in difficulty designed to incent the adoption of hard forks). Normally, the "ice ages" in Ethereum are postponed by hard forks and the issuance is kept at 5 ETH per block. This EIP suggests that instead, the reduction in issuance from the "ice age" be implemented in a stepwise fashion within the protocol rules on a set block number schedule and with a defined lower bound (such as the "tail emission" in Monero). The proposed block reward reduction timetables and the issuance floor are open to alternative suggestions by the Ethereum community if desired.

Motivation
There is widespread interest within in the Ethereum community to reduce the current rate of ETH issuance. Uncertainty about the future total ETH token supply is a significant factor in reducing the market value of ETH which has negative externalities on the Ethereum ecosystem, by reducing the capital available by current investors to make investments in new Ethereum-based projects and by reducing the Ethereum Foundation's funds available for spending on salaries. Reducing ETH issuance in advance of proof-of-stake would provide a measure of reassurance to investors that their holdings of ETH will be diluted to a much lower degree. It would be helpful in the cryptoplatform marketplace for Ethereum to reduce issuance given that various competing platforms have or are planning lower issuance levels, such as Ethereum Classic. If a large amount of opposition to this EIP for issuance reduction is seen in the community, this EIP could be submitted for a coin vote.
Additionally, reducing block rewards in the near future helps reduce a sense of pressure on the Ethereum network architects and developers to rush a proof-of-stake implementation and try to deliver it more quickly than would be prudent.
The terminal reward value of 1.5 ETH / block was chosen to reduce token supply inflation to around 3% annually, gradually reducing over time until proof-of-stake is launched. This is in line with but slightly less than current Bitcoin token inflation rate of approximately 4%. In comparison, current proof-of-work ETH token inflation rate is a bit less than 13% per year.
A reduction of token emission under proof-of-work could lead to a reduction in network security. However, a plausible improvement in the exchange rate of ETH because of a reduction in issuance will lead to an increase in network security. It is unclear how much the ETH token price might increase due to a lowered issuance rate, but the positive response of Bitcoin price to issuance reductions ("halvening") is encouraging.

Specification
The current issuance level for ETH is 5 ETH per block, with various kinds of uncle rewards also provided. This EIP proposes that no change to the relationship between block rewards and uncle rewards be made, but instead that all uncle and uncle inclusion rewards be downsized proportionally with the provided block reward schedule.
The proposed reduction in issuance is an approximation for providing stepwise issuance reduction approximately matching the "ice age" coin issuance reduction already built into the current specification of the Ethereum software. Vitalik Buterin gave an estimate of this reduction on Reddit:
https://www.reddit.com/r/ethereum/comments/5izcf5/lets_talk_about_the_projected_coin_supply_over/dbc66rd/
Based on the ice age blocktime lengthening data Vitalik provided, the following reduction of block reward schedule is proposed as a very rough approximation of the existing specification's reduction in issuance (via longer blocktimes caused by the "ice age" PoW difficulty bomb):
Block 3700000 - Block reward reduced to 4 ETH / block
Block 3900000 - Block reward reduced to 3 ETH / block
Block 4100000 - Block reward reduced to 2 ETH / block
Block 4150000 - Block reward reduced to 1.5 ETH / block (minimum block reward until proof-of-stake)
As previously stated, all uncle rewards should be proportionally reduced along with the main block reward.
The reduction in issuance specified in this EIP should also be accompanied with a change to push back the "ice age" date.

Rationale

This design is deliberately simplified from the issuance function Vitalik used to calculate his predicted blocktime schedule with relatively few block reward amount transition changes in order to minimize implimentation difficulty across the various Ethereum clients. No change in the relationship between block and uncle rewards is made to avoid introducing unforseen game-theoretic changes in mining strategy. Minimum issuance is set to 1.5 ETH / block to provide a baseline level of security rewards for proof-of-work close to but slightly below Bitcoin's current issuance rate until the transition to proof-of-stake.

Implementation
This EIP must be implemented in all Ethereum validating nodes by a hard fork, either in a currently-planned hard fork such as Metropolis, or in a separate hard fork.

[realcodywburns]

Delaying the bomb isn't a problem, it is currently included in parity, nor is changing issuance rules. As for a coin vote, Vitalik bomb 2.0 proposal from a few months back offered a mechanism to choose a path and kill the other fork that may be useful.

[surg0r]

I would support this proposal.

Ethereum is an amazing project with aims far greater than the simple monetary goals of bitcoin. But it is the digital scarcity of cryptocurrency that gives value to underlying tokens for a chain. Do not forget that ethereum already has 87M ether in existence with another 13M expected in the coming years. For ethereum to work as a cryptocurrency then ether must have value - or PoS will not work and the numerous startups with ICO's held in ether risk failure.

Perception is everything and general perception is that ethereum has a loose inflationary monetary design. This isn't accurate because of course bitcoin will continue to inflate for a long time. But bitcoin has a perceived hard cap and everyone knows the mantra that 'there will only ever be 21 million bitcoins'. Ethereum has no hard emission schedule published for post-PoS or an upper limit / upper bound to inflation decided. This is surprising for the second biggest cryptocurrency asset in the space in terms of market capitalisation. Developers openly saying that ethereum is not a store of value is also extremely unhelpful in my personal opinion when trying to grow an ecosystem based at it's root upon programmable digital money.

Lowering coin emission and monetary inflation to anything below 2% in the short term would improve things dramatically. Further implementing a hard cap at 100M with exponentially falling rewards until then (say over 100 years) would also be positive, especially in the context of ethereum post-POW. Even if this did not alter the actual emission schedule much - appearances are everything.

[jibuji]

I agree that the reduction of issuance should be done in the near future. But, I think the issuance mechanism should be simple. The simplicity will not only reduce the risk of bug, but also make the mining reward easy to calculate.

In this EIP, there are two reduction mechanism: one is the ice age, which is to lengthen the blocktime and has been coded in current Ethereum version; the other one is to reduce the rewards per block. Both of these two mechanism are great, but I prefer to choose only one of them.

As to reduce the inflation to 3%, I prefer to change the parameters, instead of combining these two mechanism.

[aakilfernandes]

I haven't gone into the technicals, but I agree with the spirit of this proposal. I'd like to see the block subsidies based an on-chain oracle, or some other system where contracts can read them. Maybe a simple BLOCK_SUBSIDY op code would suffice.

[larspensjo]

Some arguments against this request (but a delay in the Ice Age is probably going to be needed).

1. It is supposed to help investors. Although a play of words, but I see investing into the ether value as a speculation. With investment into Ethereum, I see investment into tools, contracts and other related services. This type of investment does not benefit from an increased value of ether.

2. Changing the consensus rules to encourage a higher ether price is not going to be seen kindly upon from outside of the Ethereum community. There is a risk that it will be interpreted as profits going first. The issuance rate is one of the fundamentals people look at when analyzing a cryptocurrency. It should not be changed lightly. One reason for the proposed change is uncertainty of the future issuance. I believe the proposed change may increase this uncertainty, not decrease it.

3. The Ethereum Foundation is one of the bigger holders of ether, and would benefit the most from an increased value. Also, some of the members of EF hold large amounts of ether. Again, very questionable. What would be the next step, a hardfork that mints 1 million new ether dedicated to the EF? ETH's price is something completely external to the development of the Ethereum protocol.

4. There is a risk hash rate will fall proportionally. Do we really want that?

5. Until POS, this change of reward is a temporary change. Suppose we are talking about one extra year, running with lower rewards instead of the current 5 ether/block. With POS, we will get the lower reward system anyway, so it is only one year of difference.

6. A discussion around this subject is prone to self confirmation. If you own ether, you may be influenced positively by the idea.

7. POW need higher rewards than POS because it has higher operational costs.

8. Any reference to another cryptocurrency is irrelevant for this discussion. That is, a change based on competition to other currencies is not a good change. The decision to adopt this EIP should be exactly the same as if Ethereum was the only existing cryptocurrency.

9. There is a risk that the hard fork will not be accepted 100%, leading to another split of the community. This could be very damaging.

[ethernian]

There is a risk that the hard fork will not be accepted 100%, leading to another split of the community.

Exactly my thoughts! It is very dangerous!
This EIP implies that 99,9% of all miners will follow the fork decision. This implication is wrong.

Any attempt to take away somebody's money (here the miner's) for common weal is not quite fair and very risky. Even democratic ballots is not the suitable governance model for miner's community, because the minority have strong and continuous chain of incentives to rebel and split off the coin.

So, don't relay on decision. Let us relay on incentives:
Ethereum could make an offer to miners to convert theirs freshly mined ethers into Casper mining deposit. I would also give an extra stake voting power to those stake.

Pros:

• Inflated Ethers become sterilized as Casper deposit.
• PoW miners become fair transition path to PoS
• Ethereum/PoS becomes better distribution of stakeholder (not only the oligopoly of ETH whales)

Contras:
?

[AlexeyAkhunov]

It would be a mistake to try to bundle this EIP into Metropolis. This EIP needs to stand on its own, and in such case, I would vote against it. Given the current Ethereum roadmap, it will not make a lot of positive difference, but it carries quite a few risks, mentioned by others, like falling hash rate, split in the community, increased confusion for the users. It is not worth it

[Nogreedy]

reduce inflation now
reduce fast
reduce strong
I "vote" for Original EIP 186 proposal.
Inflation now (1Million ETH/month) is totally insane

[mjdillon]

Can you cite any sources to support your assertion that

Uncertainty about the future total ETH token supply is a significant factor in reducing the market value of ETH

[rcawston]

I suspect nearly the entire mining community is likely to be against this. Do we really want to alienate the group that maintains and secures the network when casper PoS is still a glimmer off in the future? I say no - instead, remove the ice age, leave block subsidy static, and get PoS ready.

[matttrichards]

@mjdillon I am not investing nearly as much as I otherwise would simply because I am not yet confident in the economics of ethereum as many parameters have yet to be defined (final token supply being one of them). I imagine I am not alone in this hesitancy - hence the effect on market cap.

[alex-miller-0]

I would like to see more discussion on this EIP.

The argument that miners will reject this out of self interest is weak IMO. Mining follows profitability. If we assume constant demand, the price will increase at a rate proportional to the decrease in issuance (leaving profitability unchanged) and in my estimation there is a very high probability of demand increasing significantly.

The price is extremely important for attracting developers to the ecosystem and, more importantly, incentivizing them to provide value. An increase in price pays for the time of developers who could otherwise be providing value elsewhere.

I don't think the ecosystem needs this, but frankly I don't understand the resistance. This one's a no brainer to me because we're not going to see PoS this year. Package it into metropolis.

[simondlr]

I don't think the ecosystem needs this, but frankly I don't understand the resistance.

@larspensjo & @AlexeyAkhunov gives good reasons.

The main resistance is the uncertainty around the drop in hashrate security for short-term, short-sighted price gains.

Mining follows profitability

Why stop at 1.5 ETH/block? How do we know that a specific hashrate is good enough? Do we calculate a dollar amount to buy hardware to 51% and collectively decide at a nr? $100m? $50? $25m? How do we know what's a good nr? You can't assume constant demand either.

Don't change something that's not broken, especially if it's just a short-term thing (max 2 years, if not sooner).

There's way too many uncertainties with manipulating this. Split community, uncertainty about price events, magic numbers.