The dolphins are out for the first time in five years to enjoy this great summer sun after beating the sharks in eth.
An eth that, for the first time in five years can finally reasonably argue a flippening might be coming after Peter Todd introduced some significant uncertainty in bitcoin.
He proposed semi-officially on the mailing list what he has argued on Twitter, that bitcoin’s fixed limit has to be replaced with infinite inflation because network fees on their own are insufficient to pay for Proof of Work.
It is easy to ignore or dismiss this proposal, but Todd is not alone. Bram Cohen supports him and it appears the bitcoin maxis do as well.
The change nonetheless is so fundamental that we’d still give it only a 20% chance of success, but depending on just how serious Todd et al are, and considering they will have the support of miners as it is in their self-interest – if they’re not the actual movers behind all this – it may be that Todd does actually succeed.
Even on the conservative end of 20% chances of success, something has changed because something has gone from 0% to 20%. And so we may be at the beginning of a snowball towards the flippening.
ETH, The New Dinar?
The timing of all this couldn’t be better. Eth has gone through an effectively seven years period since it launched, during which we witnessed ‘committees’ setting ‘inflation’ rates in generally reducing new supply, though deciding timing with some public debate, while bitcoin had it all algorithmically through halvings.
Awful, while it was unfolding, and a key reason why eth failed when it almost flipped bitcoin in 2017. It just didn’t have that key quality of certain supply.
With the merger due in about two months and in our view unlikely to be delayed any further because arguably they have been ready since June to go live, ethereum will finally gain what bitcoin always had: certainty in its monetary supply.
The Merge is the last committee. The ‘Fed’ in eth is being fired as the protocol finally freezes where monetary qualities are concerned with it unlikely it will ever change again, at least within reasonable foreseeability, because there is no reason why it should.
Soon, an algorithmic quadrant will set the rate at which stakers are rewarded depending on the amount that stake. We estimate it to usually be at around 0.2% of total supply a year, but it may go up to as much as 1% if the vast majority of eth is staked.
We don’t see that happening. 20 million eth maybe, and perhaps even 30 million, but the reward given to each validator reduces the more validators join, and so better yield elsewhere with lower risk in regards to price locking should keep a lid at around 0.2% inflation and at most – though based on little data, but logically – 0.5%.
On the other side network fees are being burned, about 2,500 eth on the lower end, like right now. That’s still more than the stakers are receiving at about 2,000 eth a day.
So we have an inflationary deflationary network with inbuilt yield in the network fees being a dividend for holders, active yield in staking, and one where network demand translates into direct value for the unit of account, eth.
And so while eth as an asset is just two months away from gaining certainty, Todd has opened months and perhaps even years of uncertainty in bitcoin, though for now at under the surface bubbling up.
The Win of Turing
Issuance has been a key differentiator and a change in that is a decisive matter, but ethereum also has a couple of other potential advantages.
The L2 wars are about to begin, although rather than wars it’s more a fashion parade in the town center after car traffic is stopped in sunny Italy.
Each has their own fans. Arguably neither is quite at the complete package, but there may be one or two that are good enough.
The jury is out on whether second layers will quite be the solution to a reasonable extent, but they may well be part of the solution and certainly more than in bitcoin where the lack of smart contracts inhibits even a half-way towards a good enough serious execution.
The new Beacon chain that will soon be the new ethereum network, also has the skeleton of sharding.
Vitalik Buterin, ethereum’s co-founder, could not quite crack sharding. It is a tough problem, and it isn’t quite clear just how much background in databases he has.
It may well be that sharding or parallelization, where some nodes validate some transactions holistically rather than all nodes all transactions, can only be solved by tapping into more traditional fields.
We’re thinking Oracle, and maybe Microsoft as well as the MySQL team and academics, gathering a leet unit with deep expertise in databases, to form the Great Scaling Marathon where they can hash out what clearly is a most difficult problem.
We haven’t quite heard much from Oracle, and in some ways they may well see the blockchain as a competitor to their own solutions, but there’s glory in solving hard problems and at a $10 trillion market cap, which cryptos might reach in the next cycle, there may also be plenty of resources to pour towards it too.
Sharding was first proposed for bitcoin, but bitcoin developers never found an incentive-aligned solution to the problem of funding development, and so nothing substantial where end users are concerned ever got done there.
In eth there are significant pressures on all sides to improve the network, and now with fee burning there are direct incentives to increase utility, with eth’s development model still functioning.
Bringing us to another strength, beyond better potential at solving scaling, and that is the eth ‘community.’
Buterin, to his credit, has kept the ship solidly steering all these years and he can only mature. But more than the man, it may well be that eth has learned significantly from bitcoin, and so ‘hot’ actors are not quite tolerated.
Eth also lacks a cartel so to speak, at least of the same scale as bitcoin. There are mini-cartels, but they can be dismissed. In bitcoin if Todd is serious, and Blockstream is backing him, no one might quite bother to stand up to him because those that would have done so, have left.
The only reason they would stand up to him is if they consider it bad for all of crypto, rather than just bitcoin, but logically the only way it would be bad for all of crypto is due to people being uninformed or misinformed, which provides an asymmetrical information bet, the best of bets.
Because one can’t reasonably say this can happen to eth as it did happen in as far as there were plenty (3 or 4) monetary ‘committees’ in eth leading to the solution contained in the Merge.
So one can still argue with the ‘coulds’ and ‘ifs,’ but where reason is concerned, and that’s what we have to operate with, eth has solved the matter while bitcoin only now potentially is starting to get ‘committees,’ and they may well be endless ‘committees.’
The Great Hedge
Maxis have seemingly accepted that the fixed limit has to change, but no one outside of them quite knows that this is seriously being considered, and so it may come as a shock perhaps even to the likes of Barry Silbert.
They have some investment in Blockstream, but that’s crumbs compared to the movements we may see in bitcoin and eth if this matter starts becoming a bit more real as arguably it has to because bitcoin doesn’t have the capacity to accommodate sufficient usage for fees to cover more than 10% of the current costs of Proof of Work mining.
Arguably that 10% can still be enough, but eth would then clearly be far more secure, and so big money would be more confident transacting in eth.
In theory. In practice, the bitcoin fixed limit is unique due to the circumstances in which it arose, and so even though eth miners get paid more, bitcoin is still far more valuable than eth.
But the difference isn’t so great and regardless of our view, bitcoin maxis appear to take it for granted that the fixed limit will go.
That’s anecdotally. So far, the block reward or subsidy has been sufficient to not require a debate on the matter, something that will change after the next halving when we may see better who stands where.
Not that it matters. The fact this is even up for debate suggests there is something that has not been priced in. Suggests that bitcoin’s biggest strength is vulnerable and if the fixed limit is changed, we take it self evident that eth will flip.
Because eth almost flipped with the fixed limit, which is the only thing eth can’t replicate. Without it, the only strength bitcoin will have is in being accessible directly through mining, while you’ll need to get eth to participate in eth.
That’s an ‘esoteric’ aspect however, certainly compared to the fixed limit, and the eth Proof of Work network might be kept running anyway in the biggest fork airdrop, maybe in history.
So the flippening is back on the table and this time rather than in animosity, we might not need to diss bitcoin at all.
And though it is tempting to completely blow this matter out of proportions, it may be better to keep it as ancillary and contain it within the argument that it is eth now which has a certain fixed limit.
Though it isn’t quite fixed, but it is fixed in as far as economically the parameter doesn’t matter as long as it is predictable and doesn’t change.
The halving is predictable, though whether they will continue is not. The staking reward is predictable, and now whether it will continue in the same design is also very predictable at least for a generation or if sharding has some requirements which would be irrelevant anyway to the great prize of sharding.
Finally, eth has just gone through a significant test, and maybe even one of its biggest yet as just a few weeks ago there were plenty of sharks circling to potentially give a decisive blow.
As it happens, we were right to suggest those sharks would find only dolphins in eth, with stETH holding out fine.
And some criticize stETH, but here we see it as a significant innovation that addresses many of our fundamental criticisms of Proof of Stake, namely that exchanges would take control of the network.
The tokenized staking design instead makes staking itself into some sort of a protocol, and thus eth staking has taken in practice a far better form than we thought, perhaps because actors listened and so provided solutions.
All this combined creates a current eth network that attracts both confidence and trust in ‘properness.’ That too, arguably, has not quite been priced in either because the current ethereum ecosystem has not gone through a calamity in effect as it did in May.
No one sang praise to just how well the two year old defi ecosystem, mostly born during the last bear while seeing a bull crash towards bear for the first time, held.
Yet it is somewhat impressive that all this new stuff worked, and without a hitch, both on the way up, as well as on the way down.
All this has effectively just happened, and so its effects won’t be felt for months or years, but it should lead to an increase in confidence in smart contract networks and automated finance in defi.
All of this combined may thus lead to an increase in hedging with eth, because the network is building towards a decent shape, with a fine roadmap to succeed regardless of what bitcoin does.