The Issuance Model in Ethereum

Ether (ETH), the crypto fuel that powers decentralized applications on the Ethereum platform, is minted at a constant annual linear rate through a block mining process. This rate is 0.3x the total amount of ETH purchased during the presale.

Although the best analogy for ETH is “the fuel that runs the contract processing engine,” this article treats ETH purely as a currency.

There are two common definitions of “inflation.” The first concerns prices, and the second concerns the total amount of currency in the system, or the monetary base or supply. The term “deflation” is similar. In this article, we distinguish between “price inflation”, which is an increase in the general price level of goods and services in an economy, and “money inflation”, which is an increase in the supply of money in an economy due to some issuing mechanism. . Currency inflation often, but not always, causes price inflation.

Although the amount of ETH issued is constant every year, the rate of increase in the monetary base (monetary inflation) is not constant.This monetary inflation rate decreases year by year, and ETH disinflationary Currency (in terms of the monetary base). Disinflation is a special case of inflation in which the amount of inflation decreases over time.

The amount of ETH lost each year due to sending to inaccessible addresses is estimated to be around 1% of the monetary base. ETH can be lost due to loss of the private key, death of the owner without transmission of the private key, or intentional destruction by sending to an address for which the associated private key was not generated.

Assuming Ethereum sells 40,000 BTC worth of ETH in the presale, and assuming an average price of 1,500 ETH/BTC, 60,000,000 ETH will be created in the Genesis block and allocated to buyers. Every year, 18,000,000 ETH will be minted through the mining process in perpetuity. Considering both the creation of new ETH and the loss of existing ETH, the first year corresponds to a monetary inflation rate of 22.4%. In the second year, the rate drops to 18.1%. By the 10th year, the rate is 7.0%. It will reach 1.9% in 2038. In 1964, it reached a level of 1.0%.

Figure 1. Amount of ETH present on the left axis (dark green curve). The right axis is the monetary base inflation rate (light green curve). The horizontal axis is the year. (Reprinted with gratitude from Arun Mittal)

By approximately 2140, BTC issuance will cease, and Bitcoin’s monetary base is expected to begin shrinking at that point, as it is likely that some BTC will be lost each year.

At about the same time, the expected rate of annual loss and destruction of ETH will balance the issuance rate. Under this dynamic, a quasi-steady state is reached and the amount of ETH in existence will no longer increase. If the demand for ETH is still increasing at that point due to economic expansion, the price will be deflationary. This is not an existential issue for the system, as ETH is theoretically infinitely divisible. As long as the rate of price deflation is not too fast, the pricing mechanism will adjust and the system will function smoothly. Wage fixation, the traditional main objection to a deflationary economy, is unlikely to matter as all payment systems become fluid. Another frequent objection is that the borrower is forced to repay the loan in a currency that increases in purchasing power over time, but if the system were permanent, the loan terms would take this into account. is defined, so this should not be a problem.

Money inflation has remained above zero for many years, but since the price level (tracked as price inflation and deflation) depends on supply and demand, it is related to the rate of issuance (supply) but not completely controlled. Please note that it is not. Over time, the growth of the Ethereum economy is expected to significantly outpace the increase in ETH supply, which could increase the value of ETH relative to traditional currencies and BTC.

One of Bitcoin’s big value propositions was the total mintage of the currency, which was algorithmically fixed so that only 21 million BTC would be created. At a time when legacy currencies are being overused in an attempt exponentially doomed to fail in an attempt to offset the fact that there is too much debt in the global economic system (more debt) The prospect of a widely accepted cryptocurrency serving as a stable currency. Store of value is attractive. Ethereum recognizes this and seeks to emulate this core value proposition.

Ethereum also recognizes that a system intended to serve as a decentralized, consensus-based application platform for a global economic and social system must place a strong emphasis on inclusivity. One of the many ways we try to foster inclusivity is by maintaining a publishing system with some degree of churn. A new participant in the system can buy new ETH or mine new ETH, regardless of whether he lives in 2015 or 2115. We believe he has achieved a good balance between his two goals of promoting inclusivity and maintaining stable storage of her ETH. value. And, especially with initial and continuous issuance, using ETH to build a business in the Ethereum economy is likely to be more profitable than speculatively hoarding it.

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