The hidden uncertainty of Ethereum as a currency

Monday 31 August 2015

Ethereum promises the moon as a platform - but its currency could be playing by different rules.

If you accept bitcoin as a currency you are implicitly accepting a broader definition of money than has ever existed before. This is because bitcoin is not just a digital store of value, it’s a simultaneous digital payment system. If you accept Ethereum as money, you are accepting an even broader definition than bitcoin and all of its altcoin forks combined. That’s because Ethereum is the functionality of bitcoin, plus the additional capability to write and execute contracts in the protocol.

Read also: Ethereum - the first Frontier

Secret

Are the streets of Ethereum paved with gold, or something else?

It is widely regarded as the final frontier in cryptocurrency. And it is this sentiment that has become the central point of nearly all of Ethereum’s coverage since its inception as a proof of concept. Developers and enthusiasts alike are so entranced by the possibilities of Cryptocurrency API, some have completely forgotten the essential qualities of a currency.

Unlike bitcoin, Ethereum is not scarce. The primary developer of Ethereum, Vitalik Buterin, has stated that the reasoning behind this is a technical one. Once bitcoin reaches its 21 million maximum coins mined, the miners maintaining the public ledger have a lesser incentive to do so if their reward is only a small fee from each transaction. Therefore the Ethereum supply was designed to be inflationary and unlimited, to keep the block rewards for the miners constant. In this state, the Ethereum programmed system of value is more accurately described as a system of devalue. Ethereum’s genesis block alone creates 72 million coins, over five times the current supply of bitcoin. New coins are mined at a rate of 300,000 Ethers a day. At a 20% inflation rate for the year and decreasing slowly, Ethereum’s inflation rate still doesn’t meet the U.S. targeted 2% inflation rate until the year 2055.

Ethereum is not primarily intended to be a store of value. It’s meant to be used and exchanged frequently as ‘cryptofuel’. As is true for most software, the developers of the Ethereum team are at liberty to change the protocol at any given time. On the team’s blog Buterin states that there is a potential for Ethereum to eventually switch to an alternative mining system. This alternative ‘proof-of-stake’ model would dramatically reduce the costs for maintaining the blockchain, and makes the possibility of a strict coin cap (similar to bitcoin’s) more technically feasible. Still, it is unknown whether switching to a proof-of-stake model would also come with a change in the inflation rate.

Cryptocurrency has functionally replaced central bankers with developers. The hope is that the ability to write contracts into the currency will displace lawyers, and contract writers with developers too. There are plenty of bitcoin forks out there, with no relative demand, and no scarcity. The inherent value of the currency has to be recognised by the demand of early adopters. The value added to the Ethereum economy can only come at the hands of the people working to build applications on top of the protocol and proving its use cases.

Many users have expressed high expectations for the Ethereum market cap. Early on, new adopters buying coins will curb some level of inflation. A much better long-term investment than buying and holding is to grow the Ethereum economy yourself, and participate in making smart contracts on the Ethereum blockchain. If you are eager to use Ethereum as cryptofuel, make sure to tie the contract with some other cryptocurrency to function as an exchange of value for now. Today Ethereum is many things, but an increasingly scarce asset is not one of them.

Written by Kiara Robles | @anarchoass


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