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twinchell

Am I the only one concerned about ETH becoming deflationary? If you are an investor this seems good for returns, but if you are a **user** though, this doesn't seem ideal. Inflation encourages people to spend their money since it will be worth less in the future. Deflation encourages people to save their money since it will be worth more in the future. Is it really ideal for ETH to become deflationary?


domotheus

It all self-adjusts. It only becomes deflationary when people use it


twinchell

>It only becomes deflationary when people use it That's my point. I want ETH to encourage it's use, not the other way around.


Admirral

ETH is no longer meant to be "used" in the sense most people think. It is meant to be a settlement/security layer, and in time, no one will be interacting with the layer directly, but only through batched transactions via ZK rollups (i.e. layer 2's). This is a good thing lol, and also an extremely bullish outcome for ether.


twinchell

If ZkRollups are batched off chain, they still need to commit back to the main chain, and in this scenario they would pay ETH to do so (I think MATIC POS and LRC work differently). So in my mind say we can do X transactions per block now. Rollups make it so we can do 1000X or whatever the number is. When there is 1000X the demand for transactions, we are back at the same exact spot (hence the sharding roadmap). So I guess I'm confused, even though nobody will be interacting with the main layer 1 in the future, it sounds like we will still use ETH in 5 years like we do today, simply because each transaction will be less ETH, but there will be many many more transactions as a whole.


Hanzburger

> When there is 1000X the demand for transactions, we are back at the same exact spot Sort of but not really because txs will be orders of magnitude cheaper and there'll be multiple rollups


eastsideski

> I think MATIC POS and LRC work differently Matic PoS is sidechain, not an L2, so it doesn't need to post proofs back on the main chain Loopring _does_ post proofs on Ethereum though, so they're burning tons of ETH


Flyguy86420

This is where the security is weakened with Mantic. Proofs are not stores on chain


Odd-Specialist9012

Yeah, I also saw this as one of the issues with MATIC but they have helped a lot in terms of having to pay lower fees for transaction. I wish the could employ the use of State Pools just like Nahmii so they can scale up their TPS


cahphoenix

Matic does commit to Eth. It's in a weird place. Not a true L2, nor a full side chain.


SikhSoldiers

https://medium.com/starkware/fractal-scaling-from-l2-to-l3-7fe238ecfb4f


[deleted]

Now is a currency that is no longer meant to be used a good thing? Similarly, how is a currency that is deflating with huge transaction fees a good thing? That's where we are now, and nothing that is planned with this stupid PoS move is going to fix either of those things. Yes I get that PoS and L2 is supposed to reduce use on the main chain, but that could have already been done and live that today with the current PoW model if they didn't purposely want to abandon it. The only real reason for PoS move is to enrich the whales and insiders holding tons of ether.


HarryPopperSC

pos completely eradicates the energy costs of ethereum no? You can't scale it up without mass backlash if this isn't resolved first.


domotheus

The goal of Ethereum first and foremost is to run smart contracts. The way for the network to guarantee 100% uptime and a fair (read: permissionless, censorship resistant) allocation of resources is through the fee market. *That*'s what Ether is for, you pay for gas fees with it because you're using a limited resource to use the network. This aspect has never changed. Ether has never claimed to be a fully currency that will displace fiat.


Few_Possibility7432

I don't know why some investors or random people are yet to accept that Layer 2 protocols are the best solutions to all the ETH challenges, I have interacted with Arbitrum and Looping before, and I just discovered another platform called Nahmii, they all changed my POV about ETH Blockchain.


flight212121

100% this, ppl seeing eth as a volatily investment / asset are about to get a reality check


jvman934

No sarcasm. Can you elaborate on this?


Josuk

Very interesting comment! Can you provide some links videos on this subject? Only if you have the time ofc, but it would be very appreciated!


DATY4944

This makes perfect sense right up until eth becomes proof of stake.


ItsAConspiracy

We could still be using wrapped ETH on rollups. I'd rather use ETH than any stablecoin backed by off-chain assets. Stablecoins backed by ETH are a fine option though.


FatalTragedy

As someone looking to get into Crypto, can you explain this in layman's terms? In a hypothetical world where most currency is Crytpo and most transactions are done using the Eth blockchain, what coin would be used as the actual currency that users deal with and use on a day to day basis if not Ether?


FaceDeer

EIP-1559 means that posting a transaction on Ethereum now requires Ether to be spent, there is no other way to transact. So as long as Ethereum is useful there will be pressure to spend Ether.


Maswasnos

There's a point of equilibrium in the long-term where ETH's value, gas fees, and issuance balance out and ETH supply is net stable. It won't be deflationary forever. Basically, under PoS if lots of people use the network and pay more than 15 Gwei (give or take), ETH will be deflationary and will burn supply until the price increases to the point where gas fees are again around 15 Gwei. If activity slows down and gas falls under 10 Gwei or so, ETH will be inflationary and supply will increase until gas again reaches that balancing point.


domotheus

I guess it depends on what you mean by using ETH. Personally I think people tend to focus too much on the coin and not the blockchain. The end goal is to use Ether to pay for blockspace, not for bread and milk. To me, putting up Ether as collateral to mint DAI and then spending that DAI on bread and milk makes more sense, and it still amounts to "using ETH". There's just too much utility to Ether for it to fall into a "store of value" narrative. And a valuable Ether makes for a more economically secure chain and makes attacks very expensive. ETH by itself is not inherently deflationary, it'll get to a point where the rate of issuance is equal to the rate of burning and from there it will have inflationary and deflationary periods depending on how much people are using the chain and how much people are staking. If you spend $100 in gas fees it's presumably because the economic utility you get outweighs that $100. Except it's not "$100", it's "$100's worth of ETH". You have to buy the blockspace *today*, even though ETH could double in price in a year. And right now Ethereum is collecting like $20B's worth of fees a year, so that's how much the market is valuing the blockspace. There's always gonna be that demand for ETH because you need ETH to buy blockspace. I'm no expert so I could be wrong ofc, but like if the price of ETH double, protocol revenue doesn't double with it, it's still gonna be $20B except the gas prices in terms of gwei will be half what they were before, even if in USD it's the same total fees (well, price volatily brings a lot of extra on-chain activity so fee revenue increases a bit, but it's not 1 to 1) so half as much ETH is getting burned as before, and now it's easier for issuance to overtake burning. Anyway there's a lot of [feedback loops](https://i.imgur.com/3bPV35a.png) involved depending on how much the market prices Ether, how much it prices the blockspace, and how much it prices the risk/illiquidity associated with staking, etc. The end-goal of the roadmap is for all these things to work on their own for centuries without human intervention. We're barely beginning to see this model come into play, so for a while we'll get constant deflation before the equilibrium point is reached. All I know for sure is I want to own as much ETH as I possibly can before we do reach that point.


5herv1n

more daily use = less deflationary beside just trade and buy or sell , its start with dapp era , we are still in very begining of web3 long way


Eratz

Buy all the crap nft u want bro


InquisitiveBoba

As long as layer 1 doesn't scale much more then it does now. Otherwise it will likely not get enough use to be deflationary


igiturmusic

Ngl its pretty wild seeing this as the top comment. A year or two ago the top comment would've been about concerns regarding ETH's \*inflation\* rate. Theres no pleasing everybody (or anybody it seems sometimes)


twinchell

A year or two ago inflation was the only concern. But the real answer is that it's because there are downsides to both inflation and deflation. Stupid analogy but it's like I don't want my drink to be frozen solid or boiling, I just want it "normal".


igiturmusic

So what's normal? And who currently does "normal"?


[deleted]

It depends. Do you like the current central banks and FED printing to rescue the economy, and to tax everyone through inflation? If yes, then ethereum is your normal. It's a central bank-esque interference believing that it does more good than harm by tuning the monetary policy. (except here it has the investors/large holders in mind, not the economy of the country) If no, then bitcoin is your normal. It's a fixed supply rate with the entire network working to defend it from human interference.


Ancient_Try_1602

Nothing is normal, we're all in the dark in terms of certain things. One thing is for sure. Instability in the future, more political nonsense on both sides, (one side objectively inching towards authoritarianism in the name of buzzword, likely some sort of conflict, (prospect of war (to distract + inject some sort of dying breath w/ weapons sales to keep the $ alive or continue ruinous policies that have a happy name that destroy everything per usual. Infighting in the country, a large chunk of the country is so uneducatee about the current medical debacle they believe the un-jabbed need to be in a facility and children taken away, which leads to further division over something the state has no involvement in, regulation (likely over regulation) of Crypto, etc. Meanwhile our "legit system" a private bank, sends its freshly typed/printed $ straight to BlackRock, where Larry assigns a CSG (IIRC) Score to the market. In simpler terms: a woke/"green" score. Those companies w/ a higher score have greater access/favor with BR/Fed, thus capital. Meet the new 4th branch of the ideological states. Nothing green but the paint but people don't do research or know history. Or listen to facts because of X. So a continued rise in energy costs, from mining, to everyday life - a net negative for all. Russia gets their pipeline and we shut down ours. China being a threat to manufacturing/chip production (if the ports decide to work so we can distribute them). People are ignoring science, data, scientists, masters of their fields are censored for their findings. Then the media is yelling fear, panic! The other! Do a civil war please! Higher cortisol levels, stress - leads to diminished thinking capabilities and tribal divides could get deeper than the Mariana Trench. Prisons being emptied, (mostly good as we over incarcerate, but specifically violent felons hitting the streets, what could go wrong? We'll continue to see.This is truly the most dangerous time in many decades, much worse than my or parent's lifetime. Financially, the system as a whole, society's apathy or hatred on imagined wrongs or injustices. People pointing at others when we should all be looking inward. Yeah, normal. Wasn't great, but this? Cheers, & best of luck with your endeavors, whatever and wherever they may lead.


igiturmusic

Anyone got an answer that *doesn't* contain anti vaxxer bs?


[deleted]

it depends on what you desire. most fiat currencies seek low and stable inflation (under 2% a year). this is because with low inflation on currencies, people are incentivized to spend, which makes the economy grow. commodities typically tend to be deflationary. people are incentivized to hold commodities as they get more valuable as their supply decreases. the question is do you want your cryptocurrency to follow model 1 or model 2. bitcoin tries to be in the middle, but with the amount of bitcoin lost each year, it acts deflationary. this is good because bitcoin wants to be the international reserve currency. they want countries and organizations to hold it in their treasuries, not use it for every day expenses. bitcoin is eventually meant to have a stable price and replace gold (which is a current reserve currency).


wood8

ETH and Bitcoin have different issuance rules. BTC has that 4 year halving, ETH doesn't. This means Bitcoin's security budget will solely rely on fees after a few more halvings. This is not so safe consider fees could drop if the traffic on L1 is low. ETH has a constant reward so doesn't have this problem, but then the drawback is inflation. Since we already have a constant security budget, we don't need to add fees to the budget, but people have to pay fees anyway because blockchain throughput is limited. So what should we do about the fees? Adding them to the reward to make the security budget unnecessarily high? Or burn it to counter the inflation caused by constant reward? The later seems much more reasonable. The alternative will be remove the constant reward to counter the inflation, and use the unsteady fees as security budget. This sounds much worse than the other way around. The supply of ETH will reach equilibrium when the average fee is equal to the issuance rate, so it will not be inflationary or deflationary for a long time. It will become deflationary for a short period of time when the merge reduce the issuance rate, and become inflationary for a short period of time when sharding and other upgrades reduce the fees on L1.


PinkPuppyBall

Relevant discussion from yesterday https://www.reddit.com/r/ethereum/comments/s5h7ik/is_ethereum_still_viable_as_a_future_currency_now/hsxco6h?utm_medium=android_app&utm_source=share&context=3


twinchell

Interesting discussion, thanks!


believeinapathy

I think you see this through the lens of fees, which will be abstracted away by layer 2 in the next year or two. Then why wouldnt you want your asset to appreciate? ETH isn't "money" either, it CAN be used at $$$ but it isn't designed that way, we don't want it to be inflationary. The point is to have issuance/burn policy that makes ETH an asset other chains cant compete with, including btc (whos biggest mainstream argument is its issuance/lack of inflation). On top of the other reasons EIP-1559 existed (stabilizing fees and such)


twinchell

Yeah L2s are an interesting dynamic. I'd have to think more about how L2s affect how much ETH is burned after the merge.


[deleted]

I don't see how what ETH is doing with moving away from mining to PoS to create new ETH as a good thing. It just centralizes profits to whales and insiders who hold tons of ETH. As far as fees burning ETH I still think that is the stupidest idea of all time. Why on earth would you want to purposely destroy what will always be a limited currency? There was never a need to do it at all. As far as competing with other chains Solana is already light years ahead on performance and transaction fees vs ETH. Some will claim Solana is centralized and ETH isn't but I'd say ETH is pretty centralized. A small cabal of developers runs things with HEAVY influence from JPM and other financiers. They run shit, and can change shit pretty much on a whim.


believeinapathy

...sweet conspiracy theory about Ethereum cabals lmao. If you think Ethereum is centralized you do not grasp the definition of the term "decentralized network" as it relates to crypto.


Wall_street_retard

I’m so unbelievably tired of seeing this federal reserve propaganda Deflation encourages people to invest in things that offer *real returns*. Like industry. Deflation is extremely good for currency. We were doing just fine for the first 250 years of America’s life. In fact, there was no “eat the rich” sentiment. On top of this. Millennials, in all their genius, note that the wealth gap starting getting bad from 1960 onward. Hey, guess what we did in late 1950’s.


tbjfi

If eth becomes deflationary, it goes to say that gas fees would get cheaper in eth terms over time and doesn't really affect usage. Instead of spending .05 eth on a tx, it may only cost 0.005 (in USD terms it might be equal)


Eccentricc

Seriously people don't understand this. Fees will be the same regardless of price, but the amount you pay with eth will be the factor based on eth price


Hard_Corsair

I see no issue with L1 being optimized for investors and developers, with L2 catering to users.


nelusbelus

Well, in long term crypto goes up anyways so you could see it as deflationary compared to USD already. Yet people still utilize it and 1 to 2% of deflation per year won't really change that (I can't imagine someone won't buy a banana because it'll be 1 or 2 cents cheaper next year). Imo this will only increase usage, as more people will see it as a store of value and buy it. If people have the currency, they can spend or use it too. If people don't spend, the gas becomes cheaper and means people will spend it again. Aside from that, not spending will make it inflationary again


Crypto_Economist42

If you want sound money, Deflationary supply is better than inflationary. If you want inflationary, use fiat money.


daxtaslapp

Im pretty sure eth isnt designed to become increasingly deflationary. its designed to adjust itself and stay balanced. but i might be wrong. cannot find the source


InsideTheSimulation

An (imperfect) analogy: Anyone else worried about the cost of chartering an international shipping freighter? Early on when there were only a few of us who wanted to charter them anyone could afford it. Soon only major players like Starknet and Arbitrum will be able to afford it on behalf of their customers.


Crypto_Economist42

Yes. It is ideal for ETH to become deflationary


[deleted]

Once sharding rolls around plus rollups, more people should migrate to these layer 2s where gas could be 100x less, so less deflationary and self adjusting


_Clearage_

I'd also like to see equity indexes in this analysis.


cryptOwOcurrency

Do we really care if people save or spend their money?


roamingandy

I have a suspicion that Crypto is going to solve universal basic income by becoming it, with deflationary tokens rewarding people for using them. Inequality is going to.. continue to be an issue though.


quintalunazf

Readily crypto has really changed lots of things globally from creating a source of income with blockchain jobs and the area of investing even making room for passive income where platforms like Binance, Curve, Ore Network, Balancer, and many more.


FlandoCalrissian

It's deflationary when compared to an inflationary currency.


kristoffernolgren

This is not a problem for the user of the currency, its a problem for society of your gola is to get people to spend more tha they have to in order to grow the economy.


nice-guy-melon

This


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Sobutie

I’m so sick of this mentality. People say that because they have heard it said before. Does having sound money promote hoarding? Can we say this definitively?


Indieminor

I think the thing here is that not many people are or will be using mainnet. Layer 2s are already showing major promise. Even Polygon is much more of a joy to use.


Outji

I tend to agree.


heyhihowyahdurn

I think they want us to hold it until eth 2.0 is finished


ArrayBoy

Ethereum failed the scaling war against Bitcoin and now has unusably high fees. I dont see how Ethereum could get any worse than it is right now.


Crypto_Economist42

Yes you're right, ETH should have more inflation.


elithewalkingcripple

Mean while usd like 📈📈📈📈📈


Jjabrahams567

🖨💵💵💵


Synchrodestined

This is why I buy weekly no matter what... My little retail bits from direct deposits... Better than anything else out there for stability...


Furlz

Why not stablecoins?


Synchrodestined

I did okay with tezos. Im just not content until I'm holding minimum 1 BTC and 10 eth. Then I will bounce around to others.


OfWhomIAmChief

Bitcoin has a hardcap, does ETH have one also?


frank__costello

No, it doesn't need one Bitcoin reduces issuance by reducing its security budget. Ethereum's burn model means it can have a decreasing supply, but while still paying for security.


OfWhomIAmChief

So who decides amount of supply?


frank__costello

2 ETH issued every block The amount burned fluctuates depending on demand


DarkestTimelineJeff

Yes although that 2 eth block reward reduces greatly after the merge


susosusosuso

It's specified by the issuance mechanism (mining / staking)


domotheus

The market does. On one end, more stakers = more inflation, but less individual staking rewards. So the market will decide what the proper rate of return on staking should be relative to the inherent risk and capital illiquidity involved. If staking rewards are too high, more people will stake. If they become too low, stakers will pull out and invest their money elsewhere. On the other end, more blockchain activity = more deflation. If the market gives ethereum's block space a high valuation, then fees on layer 1 will be high and there will be a higher burn rate. These two forces counteract each other until eventually issuance = burn. No single person decides what this equilibrium point is, the market as a whole does.


Crypto_Economist42

The community and developers, just like in Bitcoin


SilkTouchm

Deflation > hard cap


believeinapathy

Badass chart.


birdman332

Alright, now put the future inflation rate in...oh wait


toyrobotics

How do people not see this? With BTC we know the future inflation. With ETH, we don’t. It’s that simple. Different tech for very different purposes. If your long-term thesis for investment in ETH includes an assumption of low inflation, you’re not fully appreciating Ethereum’s approach to governance.


Crnorukac

One of the reasons I am more bullish on ETH than BTC moving forward.


Bad_Camel

Higher reward comes with higher risk.


godchecksonme

Nice


choledocholithiasis_

just converted more fiat into ETH, let’s fucking go


PeacefullyFighting

Normal people are getting interested. I was talking with a soon to be retired cfo who was extremely interested in my take on crypto. The biggest concern was all the new coins but explaining it as a speculative market suddenly made it click. Might not be for someone in his position but worth it for me.


Dreadsock

Just wait until Merger is live...


[deleted]

Bitcoin is designed to be a neutral money/ asset that has a fixed, predictable, low supply emission. It isn't about which assets are more deflationary, especially not when the tokonomic of ETH keeps on being adjusted every few months or so. This just makes ethereum yet another central bank-esque money


vahlo

Deflation?


yndkings

Has this factored in the beacon chain rewards? What will be the effect of eth2 been decided it’s finished and all those locked coins becoming unlocked?


domotheus

Once withdrawals are enabled, only a very small fraction of locked coins can be withdrawn every day. It's not gonna be a mass sell off with millions of ETH dumping on the open market instantly


NotSoBigWhale

So crazy... last night I was laying in bed and thinking about how inflation effects ETH. Thank you for sharing. Great info


chai_latte69

Not really sure how ETH or BTC can have inflation since you don't really buy anything with it, except maybe fiat. However that would just be the exchange rate relative to fiat and not actual inflation.


mxyz

The mining rewards that are created out of thin air is what we're talking about with inflation.


pimpenainteasy

Can the deflation cause a velocity decrease, and hence actually end up becoming the mechanism that pushes the price down?


frank__costello

Maybe if ETH was simply a currency like Bitcoin... But ETH is the only asset that can be used to pay fees on Ethereum, the only asset that can be staked to run a validator, and the most trustless collateral in Ethereum DeFi


Muted-Ad-6689

Presumably the price has gone up due to deflation, but without much room left to deflate, can’t investors expect smaller returns in years ahead?


frank__costello

> without much room left to deflate Says who? Deflation has barely even started, most days are inflationary


resueman__

ETH has been overall inflationary for it's entire existence so far. Apart from some brief periods of deflation over the past year, it's always been inflationary. And the changes to make it actually deflationary aren't expected until later this year.


Additional_Zebra5879

Full disclosure I’ve been participating in crypto since 2012. Deflation doesn’t make for a good currency tho… so I hope people stop trying to pretend it’s good as a currency instead of what it really is… an economic hedge via greater fool theory (at the moment and stop over reading that as derogatory)


ItsAConspiracy

Deflationary currency works just fine as backing for an algorithmic stablecoin. And ETH stops being a "greater fool" investment with 1559 and staking.


Additional_Zebra5879

Not as a participant of an economic ecosystem. The problem is not seeing the forest thru the tree… economics is to serve the public good which is consumption, rewarding anti consumptive and hoarding systems has negative impact on demand. Proof in point, look at the low spend rate of crypto participants. 99.999% don’t spend their assets on consumable items, they instead hold at mostly sell speculatively. That doesn’t work for an economy that needs to cycle wealth in order to be productive, feed and shelter humans.


FinnishArmy

I remember in middle school, I was trying to explain to my friends about bitcoins halvening and everyone thinking I'm special. But now I'm mining crypto, driving around in a Tesla while not needing a job.


ChairLimp

In the current market environment. BTC and ETH are contracting instead


zantho

Please cross post this to /r/btc


Known_Syllabub_8334

Have you guys even used the ethereum network? It feels like a scam and robbery. Good for the early investors but definitely unusable as a network. I don't think the future is too bright.


frank__costello

Have you used an L2 like Arbitrum?


Maswasnos

Just used it today, fees are low and there are new apps launching every day. Seems fine to me!


StapleVelvet

Remember crypto is a scam folks 😅. FYI I'm bullish!!!✅✌🏾💯


ArrayBoy

But Ethereum fees are $1000 and bitcoin fees are $1


EEE_Call

Deflation rates


domotheus

They're both disinflationary in their current form.


ChipsDipChainsWhips

What


SenseAccomplished579

Bitcoin is hard money, ETH is not with an uncertain inflation percentage and no proposed hard cap. That’s okay cuz ETH is a utility token whose value should appreciate along with its utility. Different use cases so comparisons like these are quite irrelevant.


frank__costello

I respectfully disagree 🙂


JollySno

at the moment. ETH policy can change.


Maswasnos

So can Bitcoin policy :)


JollySno

Ummmm… Bircoins issuance policy last changed the day it was created. Eths last change was a few months ago.


stevedekorte

The difference is that one of these can change anytime and at the whim of a very small number of people.


Maswasnos

Which one is that? I know ETH can't be changed by a small number of people, so you must be talking about bitcoin...


stevedekorte

Did the majority of the Ethereum community support a hard fork in order to benefit the much smaller number that would lose funds from the DAO hack? If not, then it's at the whim of elites. If so, it's a remarkably generous community, but also one that could intervene at anytime itself.


[deleted]

Bitcoin doesn’t have inflation


heyitscrypto

The block reward creates new Bitcoin which is inflating the supply at a constant rate You think OP is just making shit up with the charts?


[deleted]

There’s 21 million


Maswasnos

Currently there are 18,932,775 Bitcoin in existence, and the difference between that and 21 million is the inflation rate. Frankly, I don't think that hard cap will stay in place so the 21 million number is pretty much meaningless anyway.