The Ethereum beacon chain will be launched in 2020, and the annual inflation rate of the new PoS chain is a key consideration.

After about ten months, Bitcoin (BTC) and Bitcoin Cash (BCH) will halve for the first time after the adoption of self-encrypted currency.

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Image source: pixabay

Recently, the price of Litecoin (LTC) has soared from $30 to $150 before halving, which is worth looking forward to.

Bitcoin and Bitcoin cash will halve in April and May next year. However, for Ethereum, the inflation rate may rise in the weeks before the two cryptocurrencies are halved.

This is because Ethereum will launch a new Proof of Rights (PoS)-based beacon chain (Beacon) in January next year.

The chain has little to do with a workload-based (PoW) chain, and for current designs, the PoW chain is completely unrelated to the PoS chain.

The PoS block mixes the block headers of the PoW block and will therefore remain as only one block throughout the Ethereum ecosystem. However, the PoW block does not know what the PoS block is doing. Diederik Loerakker, a researcher at the Ethereum Foundation (EF), told Trustnodes:

“In Ethereum 2.0, there is a voting mechanism to track the chain of Ethereum 1.0. There is no reverse, but we are studying many different options.”

When asked if this meant that "the security of PoW is not affected by the beacon chain at all," Loerakker replied:

"There is not yet, but we are studying it. This is not a trivial matter. My personal priority is to make stage 0 a success first."

Stage 0 is an imitation chain that Vitalik Buterin calls, between the test network and the main network. It doesn't have smart contracts, and there is no Ethereum Virtual Machine (EVM), but these features will be added later in 2021.

The beacon chain is at least initially staking logic, and its design includes a fragmentation architecture that will significantly increase capacity in about two years. It is unclear what was issued before that, but the Ethereum Foundation is responsible for coordinating Ethereum 1.0 and Ethanfang 2.0's Danny Ryan:

“The current PoW issuance rate is about 4.5% per year. The beacon chain will be issued at less than 1%/year, depending on the initial level of participation, which may be close to 0.25%/year.”

In the beginning, the inflation of Ethereum 2.0 will be outside the PoW issue. At the initial start of phase 0, there is no plan to make a consensus change to the beacon chain for the PoW chain.

There is a way we can use the beacon chain to terminate the PoW chain. If/when we do this, we can reduce the PoW reward in a similar way as discussed in Eip1011. There is a working group that is doing this work, and I hope to see some prototypes in the coming months.

In the long run, the PoW chain is likely to be forked into Ethereum 2.0 as an execution environment. There will be no more PoW block rewards, and the issue rate will be firmly below 1%.

The timetable for the complete abandonment of PoW has been raised for many years. If you mortgage 30 million Eth, the extra inflation rate will reach 1%. If 3 million Eth is used for mortgages, the inflation rate is about 0.25%.

However, if the number of Eth mortgages exceeds 100 million, an additional 1% inflation rate may be added, which means that the annual circulation of 1 million is calculated at the current price and is worth about $300 million. Or it's more likely to be 0.5% inflation, so it's $150 million a year at current prices, plus about $1.2 billion to maintain PoW miners.

Since the beacon chain has no effect on the PoW chain, the latter's security is very important, because all Eths currently exist on the PoW chain, they can only be transferred to the PoS chain through the PoW deposit contract.

Parallel Ethereum

Ethereum lowered its circulation in February, and the coding algorithm was effectively increased. The block reward was automatically reduced from 3Eth/block to 2Eth/block.

Given that a large number of miners have invested a lot of money and earned $1.2 billion a year, they have naturally shown some influence in the chaotic decision-making process.

However, this issue is somewhat subjective, because unlike Bitcoin, Ethereum has no algorithmic circulation reduction. Therefore, the Ethereum community must somehow decide what is the right annual release necessary to protect the network, rather than adapting to the code.

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Ethereum's current calculations, July 2019

The chart above helps us make this decision because we see a clear correlation between price and power.

Last year's computing power fell by half, until it reached its lowest point in February this year. At that time, the circulation began to decrease, but the 33% drop in miners' incentives/subsidies did not affect the computing power at all.

The Ethereum community voted last year to reduce the block reward from three at the time to one, when the price of the Ethereum was around $300.

Eventually, after the miners and the public were invited to participate in the Ethereum developer conference call to talk to the developers, they reached a compromise of 2 eth rewards per block.

The market made its own decision, causing Eth's price to go down to $80, even now that the price is lower than two years ago. As a result, the computing power has fallen sharply, and some miners may be bankrupt.

The lesson here is obvious. As the inflation rate has dropped, or the block incentives have been reduced to 2Eth, the annual circulation has been reduced by $1.6, and the price of an Eth has risen to $300 or more.

This means that, logically, if miners are more interested in the proceeds of legal currency than they are in the case of Eth, they will not necessarily oppose the reduction in circulation.

However, even with complex models, predicting prices and all of these things can be very difficult. Therefore, perhaps because of this, Satoshi Nakamoto took out some numbers and then strongly expressed the code to determine the circulation.

Machine and people

Since the birth of the Ethereum creation block in 2015, Ethereum has been lagging behind Bitcoin in terms of inflation. Although the annual circulation of Bitcoin remains at around 4%, the ETC's share rate for the part of 2017 and the full year of 2018 is around 7%.

Until February of this year, the inflation rate of Ethereum was close to Bitcoin, and the inflation rate of Bitcoin was still slightly lower, but now both are around 4%. By May 2020, Bitcoin will reduce its inflation rate to below 2%. It is not clear what will happen to Ethereum.

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Ethereum/Bitcoin exchange rate, July 2019

The price of Ethereum for Bitcoin has remained at the same level since September and is now almost the same as it was a year ago.

In this chart, the current level seems to be in a huge support position, and the new issuance rate between Bitcoin and Ethereum is imminent, and there is still a long way to go in the future. However, if the circulation of Bitcoin is significantly reduced, and Ethereum may even increase the circulation, the stability of this ratio may change, assuming other factors remain unchanged.

Although bitcoin is 10 times that of Ethereum in terms of current market value, bitcoin is less stable than Ethereum. Ethereum just didn't keep up, because in terms of expansion, it seems to have encountered the same problems as Bitcoin.

With the development of fragmentation technology, this situation may change within two years, but Bitcoin probably will not stagnate. They all require more capacity and greater usability because developers have to deal with various data compressions.

However, the issue rate depends on the entire ecosystem, but in fact the developers have proposed it, otherwise the Ethereum community will have to ask if this is what they want because they have voted to reduce the block reward to 1 eth. This is the case.