Chainfeeds Summary:
The current supply of ETH is growing by 0.5% per year. This is the 1% issuance rate minus the 0.5% burn rate. To restore it to a very healthy state, either the issuance rate must be reduced or the burn rate must be increased. Ethereum researcher Justin Drake wrote an article expressing his belief that both will happen and explained his reasoning.
Source:
https://x.com/drakefjustin/status/1887108667675124174
Author:
Justin Drake
Viewpoint:
Justin Drake: If the BTC price grows 10x, surpassing gold, will Bitcoin be secure? Assuming this all happens within the next 11 years, BTC will become a $20 trillion asset, but due to three halvings, the issuance will decrease 8-fold. At that point, the security ratio will exceed 1000:1. I don't think this is sustainable, especially as Bitcoin becomes more institutionalized, more liquid, and ultimately more susceptible to large-scale shorting. Imagine a $1 trillion perpetual contract open interest, but only $100 billion in economic security. Can Bitcoin self-correct before it's too late? Bitcoin is the epitome of blockchain rigidity. Can it have a 1% tail issuance? Abolish the 21 million cap! Perhaps Bitcoin can switch to PoS, relying on minimal fees? PoS is blasphemy. Perhaps Bitcoin can switch to another PoW algorithm? No, that nuclear option won't work. Perhaps Bitcoin can use large blocks and massively sell data availability? The holy war was once fought over small blocks. Back to ETH. The current issuance curve is a trap. Unfortunately, like Bitcoin's issuance, Ethereum's issuance design is also flawed. It guarantees a 2% tail annualized yield, even if 100% of ETH is staked. Every rational ETH holder will be incentivized to stake, as the staking cost is far below 2%. When most ETH is staked, we'll all lose. Liquid staking derivatives like stETH and cbETH have replaced the native ETH as the collateral unit. This will inject systemic risks - custodial risk, halving risk, governance risk, smart contract risk - into the DeFi core. This substitution will also erode ETH's function as a unit of account, further impacting the monetary premium. The actual yield (i.e., considering supply growth) will decrease as more ETH is staked. When 100% of ETH is staked, all ETH holders will be equally diluted. Worse, income tax will be levied on the nominal yield. This will lead to a tragedy of the commons, where no staker can enjoy a positive real yield, and all ETH holders will face tens of billions in annual tax sell pressure. In my view, the sustainable way to burn large amounts of ETH is to scale data availability (DA). Having 10 million TPS with a $0.001 DA fee per transaction is more profitable than having 100 TPS with a $100 fee per transaction. Yes, EIP-4844's introduction of blobs has somewhat reduced the total burn, which is a natural supply-demand phenomenon. As DA demand catches up with supply, these blobs can be expected to be rapidly burned. The Pectra hard fork will double the blob count in a few months. The short-term goal is growth, and I expect to see a lot of it. Over the next few years, the supply and demand will keep playing cat and mouse until the full Danksharding deployment. I wouldn't be surprised if we see hundreds of ETH in blobs being burned per day this year, and then this burn rate may suddenly plummet again due to the companion data availability (DAS) in the Fusaka fork.
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