A joke on April 1st 2018 on a fixed supply for eth by Vitalik Buterin, ethereum’s co-founder, turned out to be not quite a joke.
“I do now believe that fixed supply is worth considering,” Buterin said at the time, providing three 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.”
What exactly is happening with “rent” where smart contracts pay a fee – otherwise are deleted, but restorable – is not clear.
This, in combination with a fixed fee, sort of turns user network payments into kind of a fixed block reward for miners, thus removing the need to print more eth.
That’s at least the theory, thus allowing a fixed cap. However, just how much this theory has advanced into practice is not too clear, with Buterin’s own estimates of ethereum’s total supply missed by quite a bit.
As of August 2018, some $1.5 billion worth of eth had been printed above Buterin’s own estimate of eth’s supply.
Since then, another circa 7 million eth has been minted, worth nearly $1 billion at current prices.
Ethereum’s supply is now nearing 110 million. Another circa 5 million eth will be minted by miners next year, with this potentially continuing until… who knows.
The idea is to do perhaps sometime next year what they said was imminent in 2018. That being the finality gadget where stakers checkpoint the Proof of Work (PoW) chain, so providing considerable security that lowers the need for miners.
That would reduce it to about 1.5 million eth a year, but it’s not clear they can do this two way “talking” of different blockchains.
If they can, that would be a huge breakthrough because that’s decentralized sidechains. Yet to do it would require another chain to write the PoW chain, and the PoW chain to read the other chain.
More concretely, eth is sent to the Proof of Stake (PoS) chain by burning. The PoS chain “sees” this burning and so prints the eth2 coins, with the “seeing” done by running both the PoS node and the PoW node.
To do this in reverse, the PoW chain would need to print eth outside of the minting rules with it very difficult to see how miners can do so.
In Hybrid Casper, it was a smart contract within the PoW chain, so the stakers and miners could “talk.” With a new chain, well we’ll believe it they can do it when we see it.
So considering the many two weeks and 18 months, and to balance overpromises with worst case scenarios, we can perhaps suggest it is likely this ◊5 million a year inflation will continue for at least three years.
Why three? Well, thats sufficiently near the 2024 bitcoin halvening and sufficiently away from the 2020 halvening, so it would fit with past practices at a subjective level.
In 2016, for example, ethereum was running at 30,000 new eth per day, or ◊11 million a year. Supply then was far lower, so at the 2016 bitcoin halving they were running at circa 12% inflation.
Bitcoin reduced it from around 8% to the current circa 4%, but ethereum continued at that 12% until October 2017 when they reduce it to circa 7 million eth a year, or 7%-8%.
After much debate this was again reduced at the end of February this year to the current circa 5%, while bitcoin is set to lower it algorithmically to 1.80%.
So eth has kind of followed bitcoin’s inflation trajectory, but in a significantly lagging manner.
Just from the above, thus, 2021 might be an optimistic estimate for issuance reduction, but likely by 2022.
More concretely, phase 0 launch is now estimated by June at best. That increases inflation a bit, with the finality gadget at first suggested for autumn 2020, but sometime in 2021 would be optimistic.
Presuming they can’t do this finality gadget – because the bitcoin devs couldn’t come up with a decentralized peg so presuming eth devs can’t either is safer than otherwise – then you’d be looking at the sharding launch for an inflation reduction at which point being a bit more risky with the eth1 security could be worth it because there’s the PoS chain.
Some are now suggesting an actual fork between eth1 and eth2, instead of a migration. Meaning all eth holders would get new eth, like bitcoiners got bch, instead of burning eth as bitcoiners did for coloured coins which got no where.
That’s an interesting proposition, and one that certainly should be considered, because there will be two eths anyway.
Maybe not technically, but practically until sharding the staking eth is very different from actual eth in as far as it can’t even move.
That potentially makes the PoW eth more valuable because it can always turn into PoS eth, but if there’s a clean split it can be different in one crucial way.
In a clean split the PoS eth would basically have no inflation, 0.2% or something ridiculous. While in a ‘one eth, but two eths’ design, it can potentially be a bit of a mess because both eths are potentially holding each other back.
A clean split would presumably give one eth a clear value, and that can become ethereum. While in a ‘one eth, but two eths’ design, inertia is a very powerful force so the PoW eth might potentially continue as ethereum until it is packaged into the PoS chain somehow.
Obviously all of these matters should have been publicly discussed long before now, instead of having some Moses come down with the tablets to say this is what we are doing sometime in 18 months.
The question as to why not a clean chain-split should have been discussed at the same time as the question: why not Hybrid Casper instead of this new chain which in almost all ways has nothing whatever to do with the PoW chain.
But eth is where it is, and the question is: can it survive without a monetary policy? The answer is no, you’d think, but it does have a monetary policy of sorts as shown above.
Eth’s monetary policy so far has been to follow bitcoin’s protocol policy, but a year or two after bitcoin in a lagging manner.
That does raise the question of ‘then why not bitcoin’ from an investment perspective, and the ratio has so far given a very clear answer.
Eth does however have its own value proposition in more easily programmable digital money, but arguably there hasn’t been a more squandered opportunity in the crypto space.
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