EF Researcher: Current ETH Issuance Curve is a Trap, "Bull Horn Bread" Issuance Model Should Be Adopted

Original Author: Justin Drake, Ethereum Foundation Researcher

Original Translation: Felix, PANews

The ETH supply currently grows by 0.5% per year. This is the result of the annual issuance rate of 1% minus the annual burn rate of 0.5%. To achieve excess returns again, either the issuance rate needs to decrease or the burn rate needs to increase. I personally believe both will happen.

ETH vs BTC

Before diving into Ethereum's issuance and burn, let's briefly introduce ETH and BTC.

Internet-native money is a massive opportunity, potentially worth tens of trillions of dollars. Rarely does a money premium scale. You need a genuinely attractive asset with outstanding properties for societal coordination.

At first glance, monetary properties are a zero-sum game. In the Internet era, gold has been derisked for demonetization. Only two candidate moneys can replace it and win the Internet money wars: BTC and ETH. No other money can compete. I believe the decisive factors are trusted neutrality, security, and scarcity.

Since the Ethereum merge, ETH has become scarcer than BTC. Notably, the BTC supply has increased by 666k, equivalent to $660 billion, while the ETH supply has remained steady. Currently, the BTC supply grows by 0.83% annually, 66% faster than ETH. For those looking ahead, the ETH supply will decrease again.

Scarcity matters, but ultimately, the Internet money wars might be won by security. Ironically, the famous 21 million BTC cap is the culprit. The BTC issuance will go to zero—a most potent social contract for Bitcoin. After a few halvings, issuance becomes inconsequential.

Some data here: in the past 7 days, only 1% of miner revenue has come from Bitcoin fees, 99% from issuance. Despite a 16x reduction in issuance over 4 halvings, despite 15 years of seeking Bitcoin's transaction utility, that remains the case.

I believe the Bitcoin blockchain has become outdated. To persistently 51% attack Bitcoin, it takes roughly $10 billion and 10GW of power. For nations, the cost is trivial. Regarding power, Texas can produce 80GW. BTC's security ratio is 200:1, securing a $2 trillion asset with $10 billion in economic security.

Any BTC mining-related short instrument would incentivize a 51% attack. Bitcoin mining stock valued at $20 billion — these stocks would immediately face a "nuclear explosion." BTC open interest contracts total $40 billion — a direct shorting exposure. Not to mention the potential shorting exposure generated through a $100 billion ETF and $100 billion MSTR.

Can BitVM solve the fee issue? Any BitVM bridge incentivizes a 51% attack on Bitcoin. In fact, a 51% attacker could review fraud proofs during the challenge period and deplete the BitVM bridge. Ironically, BitVM could be seen as a direct attack on Bitcoin.

If BTC's price increases 10x, surpassing gold, is Bitcoin still secure? Assuming this scenario occurs within the next 11 years. BTC would become a $20 trillion asset, but due to three halvings, the supply would reduce by 8x. The security ratio would exceed 1000 to 1. I personally believe this is untenable, especially as BTC becomes more institutionalized, more liquid, and ultimately easier to short. Imagine $1 trillion in perpetual open interest contracts with only $100 billion in economic security.

Can Bitcoin somehow self-heal before it's too late? Bitcoin is the epitome of blockchain ossification. Can it have a 1% tail emission annually? Perhaps Bitcoin can switch to PoS and rely on minimal fees? PoS is sacrilege. Perhaps Bitcoin can switch to another PoW algorithm? No, that nuclear option is futile. Maybe Bitcoin can have large blocks and mass sell-offs for data availability? Well, there was once a holy war over small blocks.

If you've read this far and understood the above content, then congratulations. Even today, few realize the long-term impact of Bitcoin's PoW and its implications for BTC as an asset. This is an opportunity that can be preemptively acted upon, but it requires patience. The time frame is not one month, not even one year — it's 10 years.

Regarding the long-term framework, Lummis's proposal to lock up BTC for 20 years is a bit crazy — Bitcoin will be obsolete by then. Even worse, if the U.S. holds trillions of dollars worth of BTC, this would directly incentivize America's enemies to launch a 51% attack. Contrary to popular belief, Bitcoin has no resistance to nation-states — countries like Russia can easily launch a 51% attack.

ETH Issuance

Back to ETH. The current issuance curve is a trap. Unfortunately, just like Bitcoin's issuance, Ethereum's issuance design is also flawed. It guarantees a 2% tail APR, even if 100% of ETH is staked. Since the staking cost is far below 2%, every rational ETH holder is incentivized to stake.

When the majority of ETH is staked, it faces a loss:

→ ETH Substitution: Liquid staking tokens like stETH and cbETH have replaced original ETH as collateral. This injects systemic risks into DeFi (custodial risk, slashing risk, governance risk, smart contract risk). This substitution also undermines ETH's role as a unit of account and triggers further chain reactions on currency premium.

→ Actual Yield and Tax Rate: Actual yield, i.e., yield adjusted for supply growth, decreases as ETH staking increases. When 100% of ETH is staked, all ETH holders face equal dilution. Worse, income tax is levied based on nominal gains. If stakers do not enjoy positive actual yield and all ETH holders have to bear billions in sell-offs annually, it will be a tragedy.

Personally, I believe the issuance curve should be driven by staker competition to facilitate fair issuance rate discovery—rather than arbitrarily setting a 2% floor. This means as ETH staking increases, the issuance curve must eventually decrease and return to zero. My personal suggestion is "Croissant Issuance."

「Croissant Issuance」 is a simple semi-elliptical curve with two parameters:

→ Soft Cap: Staking ratio when issuance goes to zero. A 50% staking soft cap feels credible, neutral, and pragmatic.

→ Peak Issuance: Theoretical maximum issuance borne by ETH holders. Any arbitrary integer (e.g., 1% per year) will do, as the final rate will be dictated by the market.

Ethereum Foundation researchers have been studying issuance for years—personally, I believe the current curve is broken and needs change, which is a rough consensus. Guiding the social layer to change issuance is not easy. For champions, this is an opportunity to address this and coordinate changes to the mainnet over the next few years.

ETH Burn

Personally, I think a sustainable way to burn significant amounts of ETH is to enhance data availability. Having 10 million TPS with transactions costing $0.001 DA is more advantageous than having 100 TPS with transactions costing $100.

I won't be surprised if we see hundreds of ETH worth of blob being burned daily this year, and then this burning amount may plummet suddenly due to peer data availability (DAS) in the Fusaka fork.

Yes, the blob introduced by EIP-4844 has somewhat reduced the total burn rate, which is a natural supply-demand phenomenon. When the demand for DA catches up with the supply, it is expected that a significant amount of blob will be burned. Several months later, the Pectra hard fork will double the number of blobs. The short-term goal is growth, with significant growth expected.

Over the next few years, the game between supply and demand will continue like a cat-and-mouse chase until the full Danksharding deployment is completed. If this year sees hundreds of ETH worth of blob being burned daily and then this burn suddenly collapses again due to the peer DAS crash in the Fusaka fork, it would not be surprising.

Looking ahead, this is about building infrastructure for the next few decades and centuries. The fundamentals will manifest themselves in the coming years. Whether it's Bitcoin security, ETH issuance, or ETH burn, patience and confidence must be maintained.

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