🔒 What a hard cap means for ETH
|Spencer Noon||Apr 10, 2018|
This development deserves a lot more attention—it now seems more likely than not that Ethereum will instate a hard cap of 120m coins.
At least that’s my take after watching the replay of the Ethereum Core Devs Meeting that took place last Friday and listening to Vitalik Buterin talk about the subject.
I’ve transcribed some of Vitalik’s comments below that really stood out for me. These comments are a fascinating window into the mind of Ethereum leadership as it contemplates a massive change to its monetary policy.
📌 Here’s Vitalik
On the departure from ETH’s expected ~2% inflation
2% a year inflation is a lot. In the long run, people expect to earn 4% returns reliably from the stock market. If you take 2% off of that, then what you’re basically saying is that the amount of money someone needs to retire goes up by a factor of 2…in the context of financial market returns, 2% is a huge deal.
On why an inflation-based monetary policy will not work for ETH long-term
The problem is…if you do that, then basically every ERC20 token becomes a better store of value of ETH. If ETH becomes this unique token inside of Ethereum that has the anti-privilege of being inflated to play for security expenditure, and you have the ability to just print out ERC20s on top of Ethereum and market them, and these tokens don’t have this disadvantage, then it may well be the case that eventually there is going to be this tragedy of the commons that even though ETH is necessary for network security no one wants to support ETH.
On whether a hard cap, which would reduce staking rewards, would impact network security
If we have a smaller reward, then instead of 20 million ETH staking we might end up instead having 10 million ETH staking. On the other hand though, there is a risk that if we have a cryptocurrency which is inflationary then that could lead to its value dropping, which by itself leads to less capital securing the network.
💠 ETH, A True Store of Value?
This is all happening very fast—a hard cap went from April Fool’s joke to serious proposal in the span of 6 days—but it’s clear that Ethereum leadership wants to convert ETH into a pure Store of Value (SoV) cryptocurrency, similar to Bitcoin. Put simply:
Ethereum leadership is quite literally trying to push the price of ETH higher.
Why though? It all boils down to the network’s change to Proof of Stake. Vitalik and company believe that in order for Proof of Stake to be secure, the system itself needs to be valuable. Otherwise it is prone to attacks—just as one example, if the price was low, a state-level actor could purchase a large quantity of ETH and perform a 51% attack rather easily.
The Ethereum community has been broadly receptive so far and is going to debate the proposal more in the coming weeks. You can follow the discussion here.
This has some fascinating implications for the cryptocurrency landscape as a whole. If Ethereum implements a hard cap, they are firmly competing with Bitcoin’s narrative as Digital Gold 2.0 (i.e. a better store of value) and even using many of the same arguments that Bitcoin Maximalists use in the meantime (which is both genius and ironic if you think about it). It would be reasonable to expect the price of Ethereum to violently appreciate if this goes through, especially when you consider the fact that institutional investors are very much drawn to Bitcoin’s fixed supply. We have an interesting few months ahead of us…
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