Ethereum Might Be Left Out of the 2020 Halvenings



Bitcoin and Bitcoin Cash are looking forward to the first halvening since crypto went mainstream in about ten months from now.

The recent jump of Litecoin, from $30 to $150 ahead of its own halvening, gives them plenty to look forward to.

For ethereum, however, there might be an increase in inflation weeks ahead of the bitcoin halvening in May and BCH’s in April.

That’s because ethereum is to launch a completely new Proof of Stake (PoS) Beacon Chain in January.

This chain has almost nothing to do with the Proof of Work (PoW) chain, and the PoW chain has completely nothing to do with the PoS chain as far as the current design is concerned.

PoS blocks incorporate the headers of PoW blocks, so keeping it still to one block in the entire eth ecosystem. PoW blocks, however, do not know what PoS blocks are doing. Diederik Loerakker, a researcher at the Ethereum Foundation (EF), told Trustnodes:

“In ETH2 there is a voting mechanism to keep track of the ETH1 chain. There is no such thing as the reverse yet, but we are looking into the many different options.”

Asked whether that means “PoW’s security is not affected at all by the Beacon?” – Loerakker says:

“Not yet, but definitely being researched. It’s just not something trivial, and I personally prioritize making phase 0 a success first.”

Phase 0 is what Vitalik Buterin has called a dummy chain. A sort of halfway between a testnet and a mainnet. There are no smart contracts, no Ethereum Virtual Machine (EVM), with these to be added later in perhaps 2021.

The Beacon is, at least initially, just the staking logic, with its design containing the architecture for sharding which is to increase capacity considerably in some two years.

What happens in regards to issuance until then, is not clear, but Danny Ryan of EF, who is in charge of coordinating between ETH1 and ETH2, says:

“The current pow issuance is around 4.5%/year. The beacon chain issuance will be less than 1%/year and likely closer to 0.25%/year depending on initial participation levels.

At the start, the eth2 inflation will be in addition to the pow issuance. There are no planned consensus changes to the pow chain with regard to the beacon chain at the initial launch of phase 0.

There is a path in which we can use the beacon chain to finalize the pow chain. If/when we do that, pow rewards can be reduced in a similar manner discussed in eip 1011. There is a working group for this effort and I hope to see some prototyping in the coming months.

In the long term, the pow chain will likely be forked into eth2 as an execution environment at which point there will no longer be the pow block reward at all and issuance will be firmly below 1%.”

The stated timeline for disregarding PoW completely is many, many years. 1% extra inflation applies if 30 million eth are staked. Circa 0.25% is if around 3 million eth are staked.

That’s potentially 1 extra percent of more than 100 million eth, so about 1 million additional issuance a year, or circa $300 million at current prices, with 0.50% perhaps more likely, so $150 million at current prices per year in addition to about $1.2 billion for PoW miners as it stands.

As the beacon has no effect on the PoW chain, the latter’s security matters quite a lot because that’s where all the eth are currently residing with their move to PoS doable only through the PoW deposit contract.

Parallel Ethereum Worlds

Ethereum had an issuance reduction in February precisely at the point when the coded algorithmic difficulty increase effectively automatically reduced block rewards from 3eth per block to 2eth.

Considering mainly concentrated industrial miners make $1.2 billion a year with much investment on the line, they have naturally already shown some influence in the chaotic decision making process.

The matter however is a bit subjective because unlike bitcoin, ethereum doesn’t have an algorithmic issuance reduction.

So instead of humans adapting to the code, ethereans have to somehow decide just what is the right issuance level necessary to secure the network.

Ethereum's current hashrate, July 2019
Ethereum’s current hashrate, July 2019

The above chart can assist in such decision because we see a clear correlation between price and hashrate.

Hashrate halved last year, reaching a low only this February. That’s when the issuance reduction kicked in, but the hashrate was not affected at all by a 33% drop in miners’ reward/subsidy.

Ethereans voted last year to reduce block rewards to 1 eth from the then 3 when eth’s price was around $300.

The eventual decision was some sort of compromise to 2 eth after miners were invited to talk to devs and the public through the eth dev calls.

The market made its own decision, sending eth’s price as low as $80 and even now it is lower than two years ago. Hence we have the significant fall in hashrate and thus presumably the bankruptcy of some miners.

The lesson here is clear. One eth at $300 and perhaps higher due to the fall of inflation, or 2 eth at a combined $160 with maybe less upside.

Meaning logically miners shouldn’t necessarily be against an issuance reduction when looked holistically provided they’re more interested in fiat revenue than the eth ownership percentage.

Yet predicting price and predicting all these things even with complex models would probably be very difficult. Hence perhaps why Satoshi Nakamoto took some numbers and then effectively said let the code determine issuance.

The Machine and Man

Ethereum has been lagging behind bitcoin as far as the inflationary rate is concerned since eth’s genesis block in 2015.

While bitcoin was running at around 4% a year in new issuance, ethereum stood at circa 7% for some of 2017 and all of 2018.

Only in February this year did eth’s inflationary rate get near bitcoin’s, which is still a bit lower but they’re now both at circa 4%.

That will reduce for bitcoin in May 2020 to less than 2%. What will happen for eth is now unclear.

Ethereum bitcoin ratio, July 2019
Ethereum bitcoin ratio, July 2019

Ethereum’s price against bitcoin has remained at around the same level since September, now almost a year ago.

That current level appears to be huge support, with a lot more going on in this chart than a simple new issuance ratio between bitcoin and eth.

Yet if bitcoin dramatically reduces new supply, while eth perhaps even increases it, then presuming other factors are constant, this stability in the ratio might change.

While as far as market caps are concerned, there has been less stability with bitcoin now worth some 10x more than eth.

The latter is simply not keeping up because it appears to be running into the same issues as bitcoin in as far as hitting capacity limits.

That may change in two years with sharding, but bitcoin presumably won’t stand still. They too want more capacity and utility, with devs there working on all sorts of compressions.

Issuance, however, is up to the entire ecosystem, but realistically devs propose it or ethereans will have to ask it if that’s what they want as they have already expressed by voting for 1 eth.



Notify of