Level up your open finance game three times a week. Subscribe to the Bankless program below.
Why ETH Will Sustain a Monetary Premium:
Read Vitalik’s rebuttal (👈you are here)
Read bull case for ETH’s monetary premium by David Hoffman
Vitalik's rebuttal of "Why ETH Won't Sustain a Monetary Premium"
A supply cap isn’t necessary to create a monetary premium
VB: I hear quite often this opinion that having a present 21M limit is really really important, and that Ethereum should adopt it if it wants to stand a chance at getting any SoV status. And yet, when I've asked people in the ethereum community how important it is (I asked this most publicly at the "Controversial Questions" panel at EDCON 2019 in Sydney), the response is typically "eh, not that big a deal". Ethereum people seem to by and large value pragmatism and assign less importance to trying to have commitments that we publicly pretend are infinitely strong (but in reality are quite malleable, as we discovered in the Binance rollback crisis when I was surprised to learn that maximalist ideology now does NOT consider even multi-day reversions of the chain to be violations of "immutability").
And there's a good reason for not publicly committing to no possibility of retreat from a fixed issuance formula, and that reason is this. There is an unavoidable tradeoff between stability of issuance level and stability of security level. This is simple to see. You need to pay miners (or in PoS validators) to secure the chain, and the security level is roughly proportional to how many of those you attract, which is roughly proportional to how well you pay them. Payment to miners/validators equals issuance + transaction fees. Hence, if issuance is zero, the security level depends on the level of transaction fees, which is quite volatile. So if you want a guarantee of security, then you have to admit the possibility that if transaction fees are low during some period of time then you will have issuance. Ethereum does not have less stability than bitcoin; rather, it chooses stability of level of security over stability of issuance, and given how tiny an impact a 0.5% change in issuance will actually have on anyone's fortunes it should be clear that this is the correct choice.
Point by Point Responses
Ultimately, this burning mechanism is of greatest benefit to current ETH holders and is to the detriment of holders and users in the future.
VB: Huh? What is the evidence for this? This was just asserted without any argument backing up the idea that there is a detriment to anyone.
One can only conclude that the monetary policy of Ethereum is relatively fluid and influenced by people rather than code. This uncertainty reflects an un-sound monetary policy (subject to human tampering) and instils a defendable perception of centralised governance.
VB: Given how central fees are to bitcoin's long-term security narrative, and how central (i) block size changes like segwit, and in the future sig compression via schnorr and (ii) layer 2 protocols like LN, are to fee levels, can't you argue that the security policy of Bitcoin is relatively fluid and influenced by people rather than code?
Narratives have shifted from world computer, to unstoppable dAPPS, to token issuance and now to open finance applications.
VB: Shifted? As far as I can tell, narratives were rarely subtracted, mostly new ones added. And that's what you should expect for a general purpose technology.
Furthermore, the ETH 2.0 beacon chain very much resembles Bitcoin by design, handling consensus and global state only with applications and bloat pushed to shards (sidechains or L2+ in Bitcoin’s case).
VB: This author needs to understand the concept of tight coupling to see why shards are not like sidechains. That claim is as incorrect as claiming that the bitcoin block is a sidechain to bitcoin headers.
Whilst the Open finance ecosystem presents impressive technological and engineering successes, there remains a lingering risk of over reliance on third party protocols for value accrual to the ETH token.
VB: Yes, general purpose technology requires at least one application to succeed. We know that. BTW ETH itself being used for payments is also a totally reasonable application, and has not been denounced.
A relatively centralised governance and an unsound monetary policy with signs this will only deteriorate in time.
VB: Once again bare assertion with no evidence. How do we know that the monetary policy and governance will only deteriorate over time when all evidence suggests (i) issuance only going down, not up, and (ii) DAO-like forks becoming more difficult, not less?
Ethereum has historically required more specialised, high performance hardware for the operation of nodes. This is generally a result of a larger scope of transactions and heavier demand on block-space from Turing Completeness.
VB: Actually it's largely because of IO issues, which will be solved by stateless clients.
The author challenges readers to consider how far advanced Bitcoin is in achieving the goals of digital, sound, immutable money whilst Ethereum has ventured down numerous dead end rabbit holes.
VB: THE ABILITY TO VENTURE DOWN A WHOLE BUNCH OF RABBIT HOLES IN PARALLEL IS THE ETHEREUM COMMUNITY'S STRENGTH!!!1! Where else do you see as many parallel tracks like sharding, PoS, Plasma, generalized state channels, optimistic rollup, ZK rollup, stablecoins, DAOs all happening at the same time?
I would even argue that the frame that there must be a single dominant application narrative is one that we should reject; instead, the Ethereum community should be proud of its own great internal diversity.
The tweets the summed up the debate
For further debate in thread see here
Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.
Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.