Ethereum is cutting its monetary inflation, but it’s not that important.
During a special meeting among the major Ethereum developers it was agreed to cut the production of new Ethers from 3 to 2 per block. The change will take place as an integral part of the next hard fork, called Constantinople.
In figures, this decision implies a reduction of the ether monetary inflation and therefore also a smaller nominal ether premium to the miners.
For miners the purchasing power of a single Ether is actually much more important, as today it is still measured in a conversion into some fiat currency.
My hope and (I think) yours as well is that one day Ether’s and other cryptocurrencies’ purchasing power will be measured as a rate of inflation within a basket of goods. For now, we have to settle for a rate of conversion into Euros, Yuan, Pounds, Yen or US Dollars.
Resorting to a bit of pop mathematics, this reduction in the production of new Ethers per block means a theoretical cut from about 6,307,200 (=3 * 4 * 60 * 24 * 365) new Ethers per year, to 4,204,800 (=2 * 4 * 60 * 24 * 365) to which we should be adding the premium in Ethers for the mining of uncle blocks, which remains constant in nominal terms.
In terms of inflation rate it is necessary to take into account the estimated monetary inflation for uncle blocks. For ease of calculation, I estimated that the current monetary inflation amounts to 2700 Ethers per day, which will lower to 1800 Ethers per day next year, that is to say from 985,500 (=2700 * 365) to 657.000 (=1800 * 365) new Ethers per year.
Therefore, applying a cut from 3 to 2 of the produced Ethers per block, the annual nominal monetary inflation would change from:
- 6,307,200 + 985,500= 7,292,700 new Ethers per year to
- 4,204,800 + 657,000 = 4,861,800 new Ethers per year
Considering that as I write the total amount of Ether in existence amounts to 101,686,041,44, the inflation rate at this precise moment would become
4,78% (2 Eth per block) from the previous 7.17% (3 Eth per block).
To get a nominal comparison, bitcoin has an inflation rate of about 3,81% as I write. Actually one should count Ethers and bitcoin that are actually circulating, excluding from calculation those that for various reasons are locked forever in the blockchain because the access keys to their relevant addresses were lost forever. My suspicion is that with a reduction from 3 to 2 Ethers per block the actual monetary inflation rate of Ethereum and bitcoin will become very similar because for reasons related to the history of these two blockchains (with bitcoin having existed, banally, for a longer time) one can reasonably think that, as a percentage of the total, the quantities of bitcoin lost forever will be much greater than those of Ether.
Well, this is what has been determined and what is making a lot of noise on social media and specialized newspapers. I think that is unnecessary noise.
The rumours about Ether inflation rates are overstated.
In other words, the effect on the value of the Ether in Euros (or even US Dollars) due to the cut in Ether production per block is marginal, certainly totally exaggerated compared to the real main and current issues on which the Ethereum value depends: scalability and resistance to asics.
As for the scalability of Ethereum itself 2018 is a year that hasonly one real good news: Raiden Network is close to going to main net, I’ve already talked about it in this article.
For the rest, research into what is termed Ethereum 2.0, the combination of Casper, Sharding and eWASM, is far from being possible. Plasma, too, is currently confined to a limited environment (loom network) which is still not well defined in terms of specs.
The technology, the only real technology ready to go into production is that related to State Channels.It looks like Raiden Network will be the first company to provide Ethereum with an environment consisting of smart contracts, dedicated nodes and a consensus system capable of exchanging value (tokens and Ether, wrapped) in a quick, instantaneous and highly confidential way. There are other companies working on State Channels, so we’ll see competition for this huge market.
As for the resistance to asics there is a proposal already discussed in several dev meetings, namely ProgPow (eip 1057). It will require months of testing and optimization of the mining algorithms on different graphics cards to adopt it, however I am confident that this or other solutions will be adopted rapidly to prevent the cancer represented by mining on dedicated chips (Asics) from spreading into the core of Ethereum as well. Bitcoin, Litecoin, Bitcoin cash and other cryptocurrencies that have been infected and are hyper-centralized in mining are enough and are progressing as a negative example not to be followed.
Finally, I do not have a definite position on the inflation rate for Ethereum, the sharp cut leaves me cold because I am aware that the value of Ether depends on the adoption and safety of Ethereum itself, and these are factors that depend solely on the scalability of the protocol and on the consensus system.
Author: Paolo Rebuffo, CTO @Deepit AG
Originally published at funnyking.io on September 1, 2018.
