Can Ethereum survive without monetary policy support?

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s, Odaily translator | Moni

April Fool's Day, April 1, 2018.

That day, Ethereum co-founder Vitalik Buterin made a joke, claiming to set a hard cap on the supply of Ethereum tokens like Bitcoin.

Although it was a joke, Vitalik Buterin later stated that this "joke" is actually worth considering, and he also put forward three points to support this idea. He said at the time:

“I now do believe that setting a fixed supply for Ethereum is worth considering for three main reasons: 1. In the presence of ASIC mining machines, the proof-of-work algorithm cannot make the distribution of tokens more even; Under the proof-of-stake algorithm, the proof-of-work algorithm cannot obtain sufficient security; third, because rewards can be generated through rent and other destruction costs, Ethereum can provide rewards to users without issuing coins in this case.”

At least on a theoretical level, it is feasible to set a fixed upper limit on the number of tokens in Ethereum. But whether, or how much, the idea has been put into practice is unknown, and Vitalik Buterin's own estimates of ethereum's total token supply are inaccurate.

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ETH's Inflation Problem

According to Vitalik Buterin's estimates, as of August 2018, $1.5 billion worth of Ethereum tokens had been issued in the market, and since then Ethereum has issued about 7 million ETH tokens, worth about $1 billion at current market prices . Now, with the supply of Ethereum approaching 110 million, there are rumors that miners will be mining about 5 million more ETH tokens next year, and possibly more... who knows.

In fact, Ethereum has been talking about implementing a proof-of-stake algorithm since 2018, and will upgrade to "ETH 2.0" sometime next year. If all goes well, when Ethereum migrates from a proof-of-work blockchain to a proof-of-stake blockchain, the new chain can provide reliable security, which in turn reduces the need for miners. In this case, the Ethereum blockchain can reduce about 1.5 million ETH tokens per year, but so far, we don't know what cross-chain technology Ethereum will use to ensure that two different blockchains To "communicate" with each other (i.e. achieve cross-chain interoperability).

If the idea of ​​decentralized side chains is feasible, it will undoubtedly be a huge breakthrough. But to do that, you need another chain to write the "proof-of-work blockchain", and you need the "proof-of-work blockchain" to be able to read the other chain. More specifically, Ethereum needs to send ETH tokens to the proof-of-stake blockchain by "destroying", and then the proof-of-stake blockchain will "see" whether those tokens have been destroyed, and if confirmed Destroyed, the proof-of-stake blockchain will issue ETH2 tokens accordingly. Next, Ethereum will run proof-of-stake nodes and proof-of-work nodes to "verify" that the entire process operation has completed.

Taking worst-case scenarios and overcommitting into consideration, we might see inflation of at least 5 million ETH per year for three years.

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Why three years?

Well, this time point is close enough to the Bitcoin block reward halving in 2024, and far enough away from the Bitcoin block reward halving time in 2020, so subjectively speaking, it is a relatively reasonable time point.

Let's look at an example: In 2016, Ethereum was generating 30,000 ETH per day and about 11 million ETH per year. Since the Ethereum network token supply was much lower at the time, Ethereum inflation was around 12% at the time of the Bitcoin block reward halving in 2016.

However, the inflation rate of Bitcoin has been decreasing, from about 8% to about 4% at present, while Ethereum has maintained an inflation rate of 12% until October 2017, after which the community decided to reduce 7 million ETH generation per year. Coin production, that is, reducing "production" by 7%-8%.

After many discussions in the community, in February 2019, Ethereum decided to reduce the output to the current 5%, while Bitcoin reduced it to 1.80% through an algorithm.

It can be seen that ETH actually follows the inflation trajectory of Bitcoin, but lags a little each time. To sum up, we optimistically estimate that the issuance of ETH tokens will continue to decrease in 2021 and will continue until 2022.

Since Bitcoin developers cannot come up with a decentralized peg, and assuming Ethereum developers can't come up with a more secure solution, sharding may be the way to go to reduce inflation. But Ethereum will still keep the proof-of-work chain when upgrading, so ETH 1 security may need to take higher risks.

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A fork between ETH 1 and ETH 2?

It is worth mentioning that a fork between ETH 1 and ETH 2 was recently suggested, rather than a migration, which would mean that all ETH token holders would receive the new ETH, just like Bitcoin hard coins in the past. Someone gets BCH when forking, so that Ethereum does not need to destroy ETH.

This idea is very interesting and certainly worth considering, but no matter what, there will still be 2 ETH in the end. Maybe not a technical issue, but there is a big difference between sharding ETH and actual ETH.

A fork between ETH 1 and ETH 2 may make the proof-of-work ETH token more valuable, because the ETH on the proof-of-work chain will eventually be transferred to the proof-of-stake chain, becoming proof-of-stake ETH. However, things might be different if a real fork is performed.

If the split is actually completed, Proof-of-Stake ETH will basically have no inflation problem (0.2%? It may even be low enough to be ignored). However, if the two blockchains are really split and finally become a design of 2 ETHs, since the two ETH tokens will be tied to each other, there may be confusion in the end.

On the other hand, performing a clean split allows one of the ETHs to gain a clear value, and this ETH can become "true Ethereum". Assuming that the design scheme of forking and launching two ETHs is really adopted, then we may need to consider an "inertia problem", that is: under the action of "inertia", the ETH on the proof-of-work chain may continue to act as the "real ether". Workshop" role until finally packaged and migrated to the proof-of-stake blockchain in some way.

In fact, all of these issues have been discussed in the community. When discussing why not do a fork between ETH 1 and ETH 2, the community also raised another question: why not adopt Hybrid Casper as a new chain, and this new chain is fully capable of working with Quantity proves that the chain is independent.

However, in the field of digital currency, ETH does have its own value proposition.