Grayscale Head of Research Zach Pandl said in a post on X that Ethereum can be thought of as a “small country,” using the comparison to examine the link between ETH issuance and network security.
In his view, Ethereum has one core “government function”: protecting property rights and value exchange inside the system. Unlike a traditional state that funds public services through taxes, Ethereum mainly pays for security through “seigniorage,” meaning the issuance of new ETH.
Staking rewards as security spending
Under that framework, stakers who maintain network security are comparable to the group that provides public services, and they are rewarded with newly issued ETH. Pandl argued that Ethereum’s staking model and ETH issuance policy therefore act as both the network’s fiscal policy and its monetary policy.
He said the Ethereum community needs to decide how much “new money” should be created to cover the cost of security. More security protection may mean stronger protection for property rights, but it also comes with higher ETH issuance and possible additional risks.
Questions around neutrality among large staking providers
Pandl gave one example: if network security becomes increasingly dependent on a small number of large staking service providers, there is still room for debate over whether those providers can remain fully neutral in protecting the asset rights of all users.
He also said that, in traditional economics, no one knows the “optimal level” of government spending and money issuance, and Ethereum faces a similar problem.
Three key security thresholds
Pandl pointed to several important thresholds in Ethereum’s security model:
- 1/3: an attacker at that level may affect finality;
- 1/2: an attacker at that level may affect fork choice;
- 2/3: an attacker at that level can control the finality process.
According to Pandl, some community members believe Ethereum’s monetary and fiscal policy design should take these security trade-offs more fully into account, while the current mechanism has not yet adequately incorporated them.
He added that the “small country” analogy is not fully accurate because it does not include other important factors such as ETH burning, MEV, and governance.