How will monetary policy be affected by the launch of Ethereum 2.0?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom)Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, by Ryan Watkins, Messari Research Analyst, translated by Lu Jiangfei, published with permission.
Ethereum has often been criticized for its "easy" monetary policy, but that could change as ETH 2.0 kicks off.
The real change will happen in "Phase 1.5" - after Ethereum 1.x is merged into Ethereum 2.0. At that time, the annual inflation rate of ETH tokens may drop significantly, and even if negative inflation cannot be achieved in a short period of time, it will fall below 1%. At this point, the Ethereum inflation rate will be much lower than that of Bitcoin.
If you are an "Ethereum skeptic", you may be thinking at this time: How can the inflation rate of Ethereum be lower than that of Bitcoin? In fact, it all has to do with the Ethereum blockchain moving from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS).
In the Ethereum Improvement Proposal EIP 1559, a proposal to reduce transaction fee consumption was put forward. If this proposal is combined with the continuously low ETH issuance, it is likely to mean that the annual issuance rate of Ethereum will become negative in the future, but at the same time the network Security is not compromised.
In theory, one of the core value propositions of proof-of-stake mechanisms is that token stakers are willing to pay a higher cost of capital when rewarded. The reason for this is that on Ethereum 2.0, the token pledger only needs to face the opportunity cost of the investment, and will not bear any depreciation risk (such as ASIC mining machine depreciation).
In fact, the slightly higher cost of capital is a good thing, because it will increase the cost of attacking Ethereum, and it also means that Ethereum only needs to provide fewer dollar rewards, that is, ETH issuance, to obtain the same level of security . In other words, the proof-of-stake consensus mechanism allows Ethereum to issue fewer ETH tokens to achieve the same level of security.
In the Ethereum Improvement Proposal EIP 1559, a proposal to reduce transaction fee consumption was put forward. If this proposal is combined with the continuously low ETH issuance, it is likely to mean that the annual issuance rate of Ethereum will become negative in the future, but at the same time the network Security is not compromised.
"Minimum Necessary Issuance"
However, we expect to wait another 12-24 months to complete Phase 1.5. During this time period, the annual issuance of ETH tokens will actually continue to increase, because token issuance will still take place on the Ethereum 1.x blockchain until the merger of Ethereum 1.0 and Ethereum 2.0.
It should be noted that this trend of incremental releases is only temporary.
The above picture shows the trend of ETH token issuance from Ethereum 1.0 to Ethereum 2.0. Some people may be skeptical: "Ethereum's monetary policy seems to be too liquid and unstable."
Indeed, since Ethereum's monetary policy is not strict, it is normal to have such doubts to some extent, but at the same time, they ignore the real Ethereum monetary policy.
In fact, Ethereum's monetary policy can be defined as the "minimum necessary issuance", that is, the minimum amount of issuance necessary to ensure that Ethereum can maintain its security. While the concept may seem somewhat subjective, like any other protocol deployment parameter, Ethereum’s monetary policy is implemented through community consensus.
Not only that, but Ethereum’s monetary policy is specifically optimized for security. This is obviously different from Bitcoin's monetary policy, which follows a "perfect monetary policy" that not only has a fixed money supply, but also has a clear timetable for currency issuance. Of course, the benefit of a monetary policy like Bitcoin is that it is easier to understand.
Safety vs. Perfect Monetary Policy
However, the two monetary policy approaches of Ethereum and Bitcoin have trade-offs, and there are also some problems, such as:
Ethereum’s monetary policy can be difficult to quantify and communicate;
Bitcoin's monetary policy can make it difficult to determine a cybersecurity budget.
