Why Ethereum Is Far From “Ultrasound Money”

Memes are extremely important in the crypto market. Dogecoin (DOGE) is arguably the best recent illustration of the power of memes in a market driven by a combination of scarcity and user demand (note: some memes are more sustainable than others), but each cryptocurrency has its own memes that around Crypto, Twitter and other cryptocurrency hotspots are spreading discussions around the internet. And of course, bitcoin (BTC) has the original cryptocurrency meme in the form of “digital gold.”

Recently there was a popular meme that sees the concept of ETH as “ultrasound money”. As a result of an upcoming change in ETH’s monetary policy, some ETH holders believe that the crypto asset could actually get better than bitcoin for being money.

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Let’s dissect this Ethereum meme and see if it actually has any foundation.

What is the basics of the echo money meme?

The ultrasound money memo around ETH originated as a response to an upcoming change in the Ethereum network known as EIP-1559. Part of this change in the fee mechanics of the Ethereum network relates to the monetary policy of the underlying ETH assets. Once EIP-1559 is activated on the network, some of the ETH used to pay for transaction fees will be burned, removing that ETH from circulation forever.

The total amount of ETH that would be burned from transaction fees on a regular basis is a bit difficult to quantify as the base fee for Ethereum transactions that will be burned after the activation of EIP-1559 will be automatically adjusted based on demand. In addition, the number of transactions in a new block (and the resource requirements of those transactions) can vary widely. That said, a calculation last October found that nearly 1 million ETH would have been burned over the course of a year from October 2019 to October 2020 if EIP-1559 was already live.

Based on this estimate, ETH will still be inflationary even after EIP-1559 is implemented, as approximately 5 million new ETH is currently being created in new blocks on an annual basis (an annual inflation rate of approximately 4.5%).

Of course, EIP-1559 isn’t the only upcoming change in Ethereum. The network is also expected to change its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS). Annual inflation is expected to fall from 4.5% to between 0.5% and 1% as a result of this change in PoS. When EIP-1559 is combined with the transition to PoS, it is estimated that ETH supply is declining on an annual basis, although the exact rate of supply reduction is again difficult to estimate due to the varying amount of ETH that can be burned. regularly through the transactions that take place on the network.

This possibility of a monetary policy gradually reducing the supply of ETH is the ultimate source of the ultrasound money memo. Bitcoin’s current inflation rate is around 1.5% (and will be halved roughly every four years), so the idea is that if bitcoin is supposed to be healthy money, ETH should be considered ultrasound money as it will have a lower issue rate .

Credibility weakened

So, does ETH’s upcoming monetary policy changes mean that the crypto asset becomes ultrasound money? No. Certainly, since all things are equal and only ETH compares against itself, these monetary policy changes can be seen as a positive move for the cryptocurrency. However, ETH does not stand alone.

The main reason bitcoin has become increasingly familiar over the years as a global, apolitical store of value is not necessarily the specific rate of inflation on the cryptocurrency network, but rather the credibility of that monetary policy.

Bitcoin users trust that monetary policy is “set in stone” and will not be changed for any reason in the future. The failure of the parties behind the New York Agreement to enact a persistent change to Bitcoin’s consensus rules has often been cited as a major source of this credibility.

As ETH’s monetary policy changes again, the credibility that the policy will not change in the future is weakened.

In terms of credibility and the Lindy effect, ETH will effectively be 12 years behind bitcoin when EIP-1559 is triggered on the network. In addition, the credibility of ETH’s monetary policy will be reset to zero when the transition to PoS occurs.

The absurdity of the argument that only lower inflation is enough to make ultrasound moneyrden, can be easily debunked by envisioning the creation of a new digital currency that reduces supply by 5% per year and is controlled by a single publisher in a Google spreadsheet.

Clearly, healthy money means much more than just the speed at which new base money is issued. If you want a more concrete example, take a look at Binance Smart Chain’s underlying token, BNB. BNB already has a deflationary monetary policy where all coins that will ever exist have already been created and coins are regularly burned. Does this BNB super-duper ultrasound make money? No of course not.

Critics of this view will say that the social contract for ETH’s monetary policy is to keep issuance as low as possible while maintaining an adequate level of security. But even considering this counterpoint at first glance, it is an admission that ETH supply could increase if it is later determined that more issuance than expected with the upcoming changes to maintain security. ETH advocates also say that changes in the cryptocurrency issuance rate have always been intended to lower the rate at which new coins are created, but this is simply not true (as indicated by the chart below).

The volatility of the Ethereum platform as a whole is also trickling down to ETH as an asset, which weakens ETH’s usefulness as money.

Money is meant to be a boring way to hold savings in a safe and secure way, and the ‘move fast and break things’ philosophy that Ethereum employs as opposed to Bitcoin is the opposite of stability. Germany Crypto website is popular.

Everything about today’s Ethereum economy is built around timely preference, unsustainable, and speculative use cases that could be gone tomorrow. Whether you’re talking about centralized stablecoins that can be banned with a pen stroke or revenue farming initiatives that increase user returns in decentralized financing applications (DeFi) in the short term through the issuance of new crypto tokens with unclear value propositions, it seems that everything in Ethereum is meant to pump ETH and ERC-20 tokens in the short term and you don’t have to worry about the side effect of building a house of cards instead of a sustainable, decentralized economy for the Internet.

A specific example of the folly of ETH’s pomponomy relevant to upcoming monetary policy changes can be seen in the incentives to stake ETH for the purpose of participating in the Ethereum’s new PoS consensus mechanism. network. As Bankless’s David Hoffman argued in an article last month, more transaction fees paid on Ethereum should lead to more ETH being locked in to earn fees through staking, pulling more ETH off the market and offering ETH for sales are effectively reduced. However, the opposite is also true!

If activity on Ethereum declines dramatically due to regulatory action against highly centralized “DeFi” projects, increased competition from more centralized and efficient offerings like Binance Smart Chain or some other reason, ETH deployed should be discontinued (and possibly sold). The PoS mechanism itself creates additional volatility for the ETH asset, making it less useful as money.

If you live by the pomponomy, you also die by the pomponomy. This simply isn’t a solid foundation for emerging digital money, and in many ways, Ethereum brings the same problematic short-term thinking as in the current fiat currency standard run by bureaucrats to the cryptocurrency realm.

In other words, Ethereum is reintroducing the problems that the adoption of a bitcoin standard should solve.

As a related side note, the issuance of many different types of assets on Ethereum, including competing forms of money, damages ETH’s usefulness as a decentralized medium of exchange. For example, a large amount of centralized stablecoin activity on the platform increases costs for those trying to use ETH alone.

There are a few other possible reasons why the ultrasound money argument for ETH itself is not valid, but these basic points in themselves alleviate the fundamental problems with the story. John Light went into more detail in direct response to Hoffman’s aforementioned piece, which is worth reading if you want to explore this topic further. England crypto Currencyconverters.org is popular.

In summary, it is entirely possible that the changes made to ETH’s monetary policy will lead to a short-term pump in the ETH price, perhaps even if it is expressed in bitcoin. Monr these changes are also a continuation of the same kind of policies that make ETH less useful in the long run than healthy money. If ETH does indeed outperform bitcoin as this bull market continues, you can bet it will also vastly underperform BTC in the subsequent bear market, just like last time.

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