The Ethereum Inflation Problem

Hey Jessiether HODL'rs

Ethereum has become wildly popular because it allows you to mint tokens and has opened up a world of so-called "DE-FI" and trying to establish a yield curve for cryptocurrency. While I appreciate Ethereum the chain and technology, I don't care much for the token Ether and its governance structure.

Sure it's a billion-dollar playground and testnet playing out in real-time, collecting data on humans behaviour and incentive structures and creating case studies we can draw lessons from in the future. Still, other than that, I don't buy into the narrative that it's some world changer.

I see Ethereum as the lesser of two evils, I would rather use a chain than a centralised service, and in that, it's one-up'd a lot of the centralised services, not that they're not trying to create faux-ecosystems that mirror Ethereum, as is the case with Binance Smart chain but that's another tangent altogether.

Blockchains can't scale

Blockchains are only good for one thing, solving the double-spend problem and creating an immutable ledger. Anything else it's pretty terrible at; adding more features to a base layer will always add layers of complexity. Bitcoin has continued to strip out more data from its base chain to keep it cleaner and move more work to layer 2.

Ethereum has tried to scale on-chain and has a range of layer 2 solutions too. Now Ethereum has several scaling solutions in the works, like sharding, ZKroll ups and side-chains, but one of its biggest changes has to be the move to the beacon chain and rolling out proof of stake.

The TLDR of it is, Ethereum currently has a proof of work chain, it's launched a new chain that runs on a proof of stake, and they are currently running in parallel until the proof of stake chain eventually takes over.

No one knows how much Ether is out there

Since no one runs a full node on Ethereum since it takes considerable resources, no one is really auditing the supply and taking into account how this affects the value locked into the network.

This, to me, was already a red flag and one that pushed me to learn more about how Ethereum's monetary policy works; while its tech is cool, its monetary policy is nothing I am too keen on investing in.

I think the tech narrative obfuscates the monetary part of the system, and people take for granted why Bitcoin has these enforced rules.

Many will think I am an ETH hater, but I've owned ETH, I've used ETH, and I've researched what I own, as I do with Bitcoin, and that's why I came to these conclusions. I am highlighting things an investor should be concerned about.

Now currently, Ethereum inflation comes from the miners, same as Bitcoin, as proof of work is submitted to secure the chain new Ether released as a block reward.

Proof of stake rewards

Now I mentioned earlier that they have a proof of stake chain running, and many investors are bullish on the change; they are securing either their 32 ETH to stake themselves or securing ETH to be part of a staking pool. This has clawed the supply of ETH off the market and locked it away until the new chain is the primary chain.

To reward users for their faith in the new chain, ETH is offering staking rewards of around 7%, I think, which is a large chunk of new supply that will come onto the market if all goes well in the next 2 years.

Now, as the POW chain continues to mint coins, so too does the POS chain. Can you see where this is leading?

An audited supply

To help offset the new supply of coins, the ETH chain plans to burn tokens when using the EVM and reduce supply over time. But remember, no one is running a full node, no one knows the exact supply of ETH it's all guesswork.

There is no guarantee that the number of transactions will be able to outpace the effects of inflation, and ETH will have to continue to tweak their monetary policy if they are to maintain value for investors.

The more changes they make to the monetary side, the more fragile the system becomes, similar to the fiat system.

Eth could be walking into an inflation time bomb, and none of us knows how it will affect the price and if their proposed solutions will work; this level of uncertainty will only grow as we get closer to the release of the POS chain.