Can Ethereum survive without monetary policy?

Source: Trustnodes

Translator: Odaily Planet Daily Moni

April 1, 2018, April Fool's Day.

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

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

"I do now believe that setting a fixed supply for Ethereum is worth considering. There are three main reasons: first, in the presence of ASIC miners, the proof-of-work algorithm cannot make the distribution of tokens more even; second, in 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 users with rewards without issuing coins in this case. "

For now, it's unclear exactly how Vitalik Buterin's "rent" model of paying fees through smart contracts will be designed. However, if combined with fixed fees, then when the network fees paid by users become fixed rewards paid to miners, it is basically no longer necessary to issue more ETH tokens.

At least on a theoretical level, it is feasible to set a fixed upper limit on the number of tokens for Ethereum. But whether this idea has been put into practice, or how much has been put into practice, is still unknown, and Vitalik Buterin's own estimates of the total supply of Ethereum tokens are also not accurate.

Inflation in ETH

According to Vitalik Buterin's estimation, as of August 2018, the market has issued $ 1.5 billion worth of Ethereum tokens. Since then, Ethereum has issued about 7 million ETH tokens, which is worth about $ 1 billion at current market prices. . Now, the supply of Ethereum is close to 110 million, and there are rumors that miners will mine about 5 million ETH tokens next year, and may continue to mine … 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 demand for miners. In this case, the Ethereum blockchain can reduce about 1.5 million ETH tokens each year, but so far, it is unclear what cross-chain technology Ethereum will use to ensure that the two different blockchains will "Communicate" (that is, cross-chain interoperability).

If the idea of ​​a decentralized sidechain is feasible, it will undoubtedly be a huge breakthrough. But to do this, you need another chain to write a "proof of work blockchain", and you need a "proof of work blockchain" to be able to read another 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, if confirmed Destroyed, the blockchain will issue ETH2 tokens accordingly. Next, Ethereum will run a Proof-of-Stake node and a Proof-of-Work node to "verify" that the entire process operation has been completed.

If it is to be executed in the reverse direction, it means that the Ethereum workload proves that the blockchain needs to issue ETH tokens in addition to the additional issuance rules, and it is basically difficult for miners to do this. In order to solve this problem, Vitalik Buterin proposed the concept of Hybrid Casper, which is a hybrid consensus protocol, mainly aimed at two previous versions of Casper: one is Casper FFG proposed by Vitalik Buterin himself, and the other is Casper CBC proposed by Vlad Zamfir The working methods of the two are not the same, but it is not clear which Ethereum will ultimately adopt. It is also possible that the two protocols will influence and merge with each other. Hybrid Caspe r mixes the two protocols of proof of work and proof of equity. At present, no final version plan has been determined, but according to Vitalik Buterin's statement, the amount of ETH held is not enough. It can continue to use mining machines to mine. Join Casper as an identity. If you have enough ETH, you can play a role in Casper through proof of stake. Of course, the final guide is definitely to gradually abandon the proof of work mining method and move to a consensus agreement on proof of rights.

Given the worst-case scenario and over-promise, we may see inflation of at least 5 million ETH per year for three years.

Why is it three years?

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

Let's look at an example: In 2016, Ethereum generated 30,000 ETH every day, generating about 11 million ETH each year. Since the Ethereum network token supply was much lower at the time, when the Bitcoin block reward was halved in 2016, the Ethereum inflation rate was about 12%.

Bitcoin's inflation rate has been declining, from about 8% to about 4%, and Ethereum has maintained an inflation rate of 12% until October 2017. After that, the community decided to reduce 7 million ETH per year. The production of coins is to reduce the "output" by 7% -8%.

After many discussions in the community, in February 2019, Ethereum decided to reduce its 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 only lags a little each time. In summary, we are optimistic that the issuance of ETH tokens will continue to decrease in 2021, and will continue until 2022.

More specifically, the current "zero-phase" of Ethereum 2.0 may not start until June 2020 and be completed around the fall of 2020 (to be more conservative, it is also possible at some time in 2021), this It will be that ETH inflation issues continue to increase.

Since Bitcoin developers cannot propose a decentralized pegging solution, assuming that Ethereum developers cannot propose a more secure solution, it may be necessary to seek sharding to reduce the inflation problem. However, Ethereum will still retain the proof-of-work chain when upgrading, so ETH 1 security may need to bear higher risks.

A fork between ETH 1 and ETH 2?

It is worth mentioning that recently someone suggested a fork between ETH 1 and ETH 2 instead of implementing a migration, which means that all ETH token holders will get new ETH, just like Bitcoin hard in the past Someone got BCH like this when the fork, so Ethereum doesn't 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. It may not be a technical issue, but the collateralized ETH for shards is very different from the actual ETH.

A fork between ETH 1 and ETH 2 may make the proof-of-work ETH tokens more valuable, because ETH on the proof-of-work chain will eventually be transferred to the proof-of-stake chain and become proof-of-stake ETH. However, if a true fork is performed, the situation may be different.

If the spin-off is actually completed, the proof of equity ETH will basically be free of inflation issues (0.2%? Maybe even low enough to be ignored). However, if the two blockchains are really split up, it will eventually become a design of 2 ETH. Because the two ETH tokens will pinch each other, confusion will likely occur in the end.

On the other hand, performing a thorough split allows one of the ETHs to gain clear value, and this ETH can become a "real Ethereum". Assuming that the design scheme of two ETHs is actually adopted by forking, 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 play the "real ether "Fang" role, until finally somehow packaged and migrated to the proof of stake blockchain.

In fact, all these issues have been discussed in the community. When discussing why not forking 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 in all aspects The quantity proof chain is irrelevant.

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

Finally, we have to return to this question: Does Ethereum need a monetary policy? Can it survive without monetary policy? You might think that Ethereum's lack of monetary policy is not a big problem, but in fact, so far, Ethereum's monetary policy has been following the policy of the Bitcoin agreement, but it is only one or two years behind Bitcoin.

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