The EIP That Destroys DeFi | Stani Kulechov & Mike Silagadze

**David Hoffman** (0:04)
Bankless Nation, there is a new EIP in Ethereum land that has caused much gnashing of teeth. To help me go through some of the news and get some of the reactions, I've got Stani from Aave and Mike from EtherFi. Stani, Mike, welcome back to Bankless. To you both.

**Stani Kulechov** (0:18)
Thanks for having me.

**David Hoffman** (0:20)
So, stake targeting is the EIP, stake tapering. This is around ETH issuance. So, it's an ETH monetary policy debate. There is a proposal out there from six Ethereum researchers and developers over in EF land, the EF, the ivory tower of the EF. And the concern in this EIP, the problem that this EIP is trying to address is that there is no constraint on the amount of Ether that will be staked to Ethereum. So, the idea is that there's no cap on the incentive to stake more ETH. Right now, there is about 34% of all ETH is staked. And the worry that this EIP has is that that will slowly march increasingly close to 100% because there's no reason for it not to. There is more Ether issued in sum, in total, the more ETH is staked to Ethereum. And the concern here is that with that vanilla Ether in the Ethereum financial ecosystem, the DeFi ecosystem slowly gets replaced by staked ETH derivatives. Things like staked ETH from LIDO, our ETH from Rocket Pool, or with Mike, we have EtherFi's staked ETH derivative as well. So there's no Ether, vanilla Ether, as we know, it disappears and turns into the derivatives. And the researchers are concerned about that being the dominant equilibrium inside of the Ethereum ecosystem. Another concern that this EIP has is that Ethereum is overpaying for security. We simply don't need 100% of ETH staked or even more than 50%.
Something around 30 to 40% of ETH staked to Ethereum provides ample security according to the opinions of these researchers.
This proposal was introduced last week. Everyone hates it. I would say everyone outside of the EF does not like this EIP.

**Stani Kulechov** (2:15)
Even people inside of the EF.

**David Hoffman** (2:18)
Even some people inside of the EF, yeah. That's why I have Stani from Aave and Mike from EtherFi here on the show to get some of their reactions and to elevate their voices about the problems that this EIP creates for them and for the broader DeFi and Builder ecosystem. Maybe Stani, I'll just go with you since Aave came before EtherFi.
Stani, what was your reaction upon seeing this proposal out of the EF?

**Stani Kulechov** (2:47)
Look, I think it is an interesting topic to evaluate, and you asked the question of what are we basically paying? Are we paying sufficiently overpaying for security?
I think that's a really legitimate question to ask.
That is for sure. I think that Ethereum has been built on security and also on the idea that you have a resilient network, an ecosystem, and anyone who is a builder, for example, like me and Mike, are choosing Ethereum because of that security and what it provides essentially. And that is the sort of like a core value proposition. So paying for security is a big part of that.
I think that the real sort of like objective of this proposal is basically somehow to affect the Ethereum, the ETH price and get it up. So I know we're in a quite of like bearish markets and being for a while. So in this kind of situations, we see various proposals and ideas floating around about, how do we get the ETH price up? And this is this proposal, while it sort of thinks like, while it's the mechanisms are around that it's staking and whether it should be capped and the issuance, particularly on the staking and reducing the yields that stakers are getting.
And that way influence that there is less issuance and better pricing, better appealing, better appeal for Ethereum as an asset. And I think that's what are the actual consequences of the proposal, aren't actually achieving that. First of all, it really destroys the concept of solo staking, because it reduces the cash flows for solo stakers, creates also very unpredictable tax consequences. So, the question is then, if someone gets a $500 bill for staking, they can even go into negative as well. So it really reduces the opportunity to come as a solo staker. And then the second biggest issue there is the institutional side. So obviously, institutions want predictability. They want a cash flow component, especially when they're building financial products and distribution. And this is one of the key areas why a lot of institutions come in, because they have this component there. And third, really important is DeFi. So Ethereum is built on DeFi rails. Whether EF wants to acknowledge that now or never, that is the real fact. Everything that is on Ethereum that is successful is about DeFi. And that is totally fine, because what Ethereum can really do is replace the financial system in overall and build on resilient rails that either provides the security. And there's a lot of argumentation that if we produce the yield on it's staking, you can go to places like Aave and DeFi and get yield there. But a lot of this yield is actually being based on Ethereum staking. If there is no yield on it on DeFi, what it means is that it as an asset becomes a funding leg. So what is a funding leg actually means is, is basically when you do a carry trade, you want to borrow a cheap asset. Once you borrow that, you sell the asset to actually to an asset that can be productive, and then you can basically earn on that asset. And a really big example is the biggest carry trade in the world, which is the Japanese yen carry trade. So Japanese economy hasn't been doing well for the past decades. Yen has a very low or zero interest rate. So what typically is done in this carry trade is basically yen is borrowed just to replace with another leg that actually creates cash flow. So this is the sort of element that comes when you reduce the productivity of it as an asset and also by reducing the yield. And those are sort of my, there's a bunch of things about the process and whatnot. So like, I think the question of this whole topic is important, but I think the consequences are extremely negative for solo stakers, institutions and DeFi that actually build the Ethereum house.