Vitalik Buterin, ethereum’s founder, has seemingly opened a debate on quite a complex matter following a meta-joke on Aprils fools that might actually not be a joke at all.
“I do now believe that fixed supply is worth considering,” Buterin says, providing three initial arguments in favor of it:
“With ASICs, PoW issuance fails at making coin distribution more egalitarian. With PoS, PoW issuance not needed for security. With rewards coming from rent and other burned fees, can have rewards without issuance.”
That latter part isn’t fully clear at this stage. How much would be expected from rent, or burned fees, what would such expectation depend on, how might it vary, what would affect such variance, and so on.
But more widely Buterin says “long-run-inflationary tokens are a bad idea” because as he has previously concluded:
“Relying purely on the medium-of-exchange argument to support a token value, while attractive because of its seeming ability to print money out of thin air, is ultimately quite brittle… it is a kind of model which always has an unavoidable risk of collapsing at any time.”
This is entering a very ancient debate. Inflation vs Deflation, saving vs spending, and more widely perhaps Keynes vs Hayek.
The general response of ethereans, however, has been in favor of a fixed supply, but not quite unanimously so. For example Nick Johnson, an ethereum developer, stated:
“It seems to me that for a network like Ethereum, costs (security, primarily) can be paid for by inflation, transaction fees, or a combination of both. Funding solely from TX fees incentivises hoarding and disincentivises use, which seems bad.”
He further says that Buterin’s article which led to the conclusion long-run-inflationary tokens are a bad ides “seemed focused on appcoins, rather than a native cryptocurrency like Ether. I can see parallels, but I’m not convinced the economic model is the same.”
A clear cap would have the advantage of certainty, but it would have considerable implications for usability especially if it means high fees.
Especially when one considers the alternative is a fixed yearly supply of 500,000, which initially brings inflation down to 0.5%. Then, as the supply is fixed, inflation keeps reducing to effectively zero.
However, as new coins would still be produced, lost coins can be replaced. In a way thus gold would be more realistically replicated as new gold mines still increase supply by an insignificant amount or keep it stable if lost coins are taken into account.
Which all shows this is a very nuanced topic, but where volatility is concerned it does look like something is being missed.
That is the role of miners or stakers that receive the coins either through fees or inflation. Specifically, what exactly they do with them.
If they instantly convert it into fiat, then cryptos might always be volatile due to their relentless and somewhat concentrated sell pressure. A pressure that would apply regardless of how they are given the coins, whether through fees or small increases in supply.
With the only answer to that volatility perhaps being the wide use and adoption of cryptos for payments, especially by miners/stakers.
Something which would depend on how convenient and competitive it is to use, especially compared to more established alternatives. That in turn would depend on the level of on-chain fees or general total fees for its use. Which itself would probably depend on how exactly security is paid.
Therefore while we’re in favor of reducing the miners’ reward as FFG Casper will do, we think a lot more information, facts and model analysis is needed, taking into account all the nuances, before an informed decision can be made on whether to have a fixed supply, a fixed increase in supply, or something else.
Which is why we’re undecided at this point, but what do you think, what should ethereum’s long term monetary supply be?