Ethereum will become a lot more rare by the end of summer/autumn as the just published specifications for the much anticipated Hybrid Casper upgrade now sets in motion the final touches.
After months of testing, concrete numbers are now set in stone, allowing the two big eth clients, Parity and Geth, to start implementing Casper, the Friendly Finality Gadget (FFG), better known as the hybrid Proof of Stake (PoS) and Proof of Work (PoW) Casper.
Once it is implemented, which should be in a few months, the block reward for Proof of Work miners will be reduced to 0.6 eth, from the current 3 eth, because the specification says:
“The security of the chain is greatly shifted from PoW difficulty to PoS finality and because rewards are now issued to both validators and miners.”
On top of that 0.6 eth for miners, holders will pay stakers a dynamic amount dependent on how much is staked:
As can be seen, stakers rewards do not half if stakers numbers double, with some leeway given. Vitalik Buterin, ethereum’s inventor, estimates an initial ten million, previously stating:
“Currently, an expected value is 10 million ETH staking at 5% interest, which is 500,000 ETH per year (~0.22 ETH per block).”
That makes it a combined 0.82 eth per block for both PoS stakers and PoW miners. Significantly lower than the current 3 eth. So bringing eth’s inflation down to an overall 2% per year.
That’s a new yearly supply of around 2 million eth, but as the overall supply increases while the new supply remains somewhat static, then the inflation rate should gradually drop.
However, the current design accounts for only two years, with a smart contract of sorts holding around 1 million eth for the staking reward. That’s because the plan is to go full PoS. A limitation, thus, has been implemented as a sort of PoS difficulty bomb to incentive the full Casper transition.
That will make ethereum in the very near term a lot less inflationary than bitcoin, which is currently at around 4% yearly inflation with some 650,000 bitcoins produced a year on a total supply of circa 17 million.
Bitcoin will then halve in 2020, with its inflation rate dropping to 2%, but ethereum will seemingly have a head-start as it significantly slashes its inflation rate in a few months.
With the plan then being to get rid of PoW miners all together, and to have only the 0.22 eth block reward for stakers, translating to an initial inflation rate of 0.5% a year, which gradually falls to effectively zero.
Some 1,500 eth will be needed per staking node, with around 900 stakers expected. Their role is to create a new genesis block of sorts, called a checkpoint. Every 50 blocks, one such check point is created by stakers. That ensures one can not reverse prior to that checkpoint, called finality.
In PoW mining, if you have 51%+, you can go back all the way to the genesis block, but other factors of course make that pretty much impossible save for as an academic exercise.
In Hybrid eth, however, miners – or anyone else – won’t be able to go back beyond the finalized checkpoint, so arguably making the system a bit more secure/certain.
There will, of course, probably be staking pools and probably a whole industry will rise out of it, so you won’t necessarily need nearly a million dollars worth of eth to participate, with the return presumably being the same 5% regardless of the amount staked in a pool or otherwise.
That means ethereum, and nodes, will basically get a decentralized savings account. Like the penny dividends in stocks, or the near 0% interest rate on your savings, ethereum will also automatically increase the amount of eth you have at a very competitive rate of 5%.
That should be discounted for the 2% initial inflation rate, making it a 3% real return of actual eth. On top, then of course, there is the potential value increase of ethereum’s price against fiat.
So rather than this being similar to a return on investment in stocks, which averages around 10%, this is similar to a return on investment that stocks give in dividends, plus then the stock’s price action.
These are frontiers, however, and it is very much a pioneering space. So while it might be tempting to compare it to bonds, hybrid casper will be a very new thing.
That means one should expect really that something might go wrong, while crossing fingers and hoping it doesn’t, as this has never really been done before for a platform like eth.
Making it thus riskier than bonds, riskier than saving accounts, but we do think it is a bit competitive with stock dividends, and even with stock returns in combination, despite our default position in something new that hiccups should be expected.
Such hiccups, however, are not guaranteed. This has been in testing for months now, and there will be 3-4 months more of testing. There are audits and so on, so it is no where near the case that a hiccup is certain because everything has been done to ensure they won’t happen, but if there is one in the early days, then no one should really be surprised.
Because these are new frontiers. This generation’s exploration of the unknown. Just as our forefathers discovered the seas, and those that follow us will discover the space waters, an America might be there, just as might be the accidental slashing of your staked eth.