Against Vitalik’s fixed supply EIP (EIP 960), part 2

Hi again! I thought I would address some of the discussion/feedback

One of my favorites is what Vitalik wrote in response:

Here are the first two paragraphs:

To be clear I’m not necessarily wedded to a finite supply cap. That said, I do think that you are missing one of the big arguments in favor of finite supply: mistrust of future governance.
The fact is that we have not solved blockchain governance, and I worry that there is a large chance that we never will come up with a blockchain governance process that is sufficiently robust that it will be capable of regularly doing things like adjusting fundamental economic parameters.

On mistrust of future governance

I also worry that blockchain governance will fail or be corrupted in the future, but I don’t regard it as “a large chance” as much as “an outcome that we should be completely determined to avoid.”

If blockchain governance fails it will because the blockchain’s community has failed to govern the blockchain.

I don’t mean that we shouldn't use norms and shared expectations to restrict the power of future participants in blockchain governance. But it needs to be done carefully, because it’s possible that they will have lasting consequences.

And I don’t trust current governance to establish these norms and expectations inasfar as it is driven by the interests of coin holders, or by norms that exist to protect coin holders. I do trust it inasfar as it is driven by legitimacy gained through critical and open public discourse.

I worry that this whole conversation is driven by norms in the cryptocurrency space as opposed to by careful economic reasoning.

Issuance and the security of consensus

Is it really the case that a high inflation rate would reduce the economic security of the consensus protocol? I used to think so, and I used to repeat this to argue against issuance. But I don’t anymore!

One standard way to think about the security of a consensus protocol is in terms of the dollar cost of conducting an attack, for a given particular dollar amount of fees (and issuance) paid to the miners/validators.

Enough issuance will eventually drive down the price of every individual unit of cryptocurrency, it does not necessarily end up driving down the total “market cap” of the cryptocurrency.

In fact, as long as the currency has a positive market capitalization, it does not matter how low the price of an individual currency unit goes, it will be possible for there to be positive dollar-valued payments of fees (and issuance), and therefore possible to have economic security for the consensus protocol.

The security of the consensus protocol can be completely independent of the supply model of the cryptocurrency/cryptocurrencies used for fees (and bonding). I say “can be” because it may take some design for consensus protocols that rely on issuance for security, whereas fee-only protocols can achieve independence of the supply model with something like Ethereum’s gasprice parameter. And indeed, Vitalik and I mostly agree that issuance is not going to be required for security:

For consensus, I do at present believe that long-run consensus security expenditure should be equal to or less than zero (less than if transaction fees are burned); the reason is that the Ethereum blockchain contributes to the security of both ETH and every ERC20, and so I don’t think it’s reasonable to uniquely burden ETH holders specifically with the task of paying for the security, and I do now believe that it will be possible in the long run to pay for sufficient security with txfees alone. That said, it may be wise to delay setting a limit until a proof of stake algorithm has been launched and has worked for some time.

And I don’t actually see why we would need to issue 22M ETH as subsidies beyond transaction fees for the security of the protocol. But that does not at all mean that I think we should have certainty that the supply of ETH will be fixed. I especially don’t think we should be creating the perception of scarcity in order to encourage buying.

Exploiting people’s psychological biases to get them to buy your cryptocurrency is wrong

I got a lot of negative feedback from people who thought I was being a bit harsh on coin holders (who believe in the project and contribute, btw). I thought about it for a while, and decided that I wasn’t being too harsh afterall.

Even if the truth was that we were certain that there wouldn’t ever be more than some number of ETH, it would be wrong to use that fact to create a sense of scarcity in order to encourage buying.

And I am certain that many of you will do just that. Sometimes it’s better to not have common knowledge of information that will be abused.

This isn’t just me saying “fuck speculators” because I’m bitter with coin holders. I really think that the “what’s the supply model?!” norm in the cryptocurrency is toxic, and have been annoyed with it for a long time.

On future governance, again

Lets suppose that we do want to secure the governance of the blockchain against future participants in blockchain governance.

Do we want to do this by making as many decisions as possible now? What if the best decisions aren’t possible because of the incentives and norms of current participants?

What if the decisions made now could be interpreted as specifically designed to increase the price of ETH? What kind of precedent does that set, for future participants in blockchain governance?

I would much prefer that we make no decision and insist that no decision will ever be made (if we really are that paranoid about the failure of future governance) than to make a decision that certainly will facilitate the psychological manipulation of potential cryptocurrency buyers.


The security of future governance is critically important, and we shouldn’t just give up on it. We also shouldn’t trust current governance to make all the decisions that we are afraid that future governance won’t be able to make, because today’s governance is not perfect either.

It isn’t at all clear that the best way to secure future governance is making decisions today to pre-empt future decisions that may potentially be made by corrupt governance.

Making decisions that can be interpreted as being driven by the immediate financial best interest of coin holders is a bad precedent for future governance, especially if ETH holders will use a decision to manipulate other people into buying ETH.

Finally, the main technical argument given for capped supply (that issuance undermines the security of consensus) is simply not correct.

Looking forward to more conversation :)