Higher Proof-of-Stake (PoS) Rewards Proposed for Upcoming Ethereum 2.0 Upgrade

Anthony Sassano (sassal0x), the co-founder of EthHub, a “fundamentals-focused, open source, community-driven” organization dedicated to conducting Ethereum-related research, has revealed that a new proposal for Eth 2.0 has been submitted.

Eth 2.0, a system-wide upgrade to the Ethereum blockchain, will most likely include a major change in the cryptocurrency platform’s consensus algorithm - as it will be switched from the current proof-of-work (PoW)-based protocol to a proof-of-stake (PoS)-powered mechanism.

Eth 2.0 Proposal Could Set “Network Issuance At 1%”

As mentioned in Sassano’s tweet, a new proposal to “increase validator rewards for Eth 2.0 stakers was put forward [recently,] which would put overall network issuance at 1% with 30 million ETH staked.” Sassano added that Ethereum co-founder Vitalik Buterin “explained the various ways issuance can be decreased even if staking participation is high.”

According to a Reddit post by username Sfdao91, at “30 million validating ETH, inflation will be less than 1%, which will be more or less the same as Bitcoin (BTC) between 2025 and 2029. [Cryptocurrency] exchanges can become even more powerful if they start to stake with their customers' ETH.”

Responding to the initial comments, Buterin suggested (via Reddit) not using the word “inflation” to refer to the ETH supply. He noted that the term “inflation” confuses economists as they may think it’s being used to describe price movements. The process does not have much to do with the price of ETH, as it mainly involves modifying the blockchain’s staking mechanism.

Issuing Figures Are Maxima, Issuance May Be Decreased “In Practice”

Clarifying that the issuance figures suggested above are maxima, Buterin pointed out that there are a “few factors” which could potentially “decrease issuance in practice to well below those levels.” The factors, according to the Ethereum co-founder, are as follows:

  • “Validators going offline. Combining the individual and collective penalties, every 1% of validators offline cuts total issuance by around 3%, and if more than 33% ever go offline at once, many coins could get burned quickly.”
  • “Validators getting slashed. Probably will happen infrequently in practice, but still....”
  • “Transaction fees being burned due to Ethereum Improvement Proposal (EIP) 1559 (I estimate ~10k ETH/year initially while usage is still low, ramping up to hopefully hundreds of thousands of ETH/year eventually)”
  • “Transaction fees being burned to pay for state rent (this mechanism could possibly be folded into the gas mechanism and hence the EIP 1559 burn)”

Acknowledging the potential changes noted by Buterin, Reddit user InsideYourGhost mentioned that: 

Right now we are on pace for > 100k ETH in annual fees, a large percentage of which could conceivably get burned via BASEFEE once 1559 is merged/forked. Once there are 1024 shards doing this, isn't it possible the burn rate will eventually exceed issuance? A system doing 10,000 Txs per second burning 1 penny per transaction would burn $3 billion worth of ETH a year.

Bitcoin Proponents Debate a Potential Hard Fork for Inflation

  • Bitcoin Advisory founder Pierre Rochard is asking bitcoin community to consider the implementation of inflation.
  • Rochard argues that transaction fees alone may not be enough to sustain miners in the future. 

Pierre Rochard, founder of consulting firm Bitcoin Advisory, has addresed a debate in the bitcoin community over whether transaction fees will be high enough to support the network’s continued use. 

Bitcoin Inflation Debate

According to Rochard, who is also a self-proclaimed proponent of BTC’s scaling solution lightning network, the community must question whether transaction fees alone will be enough incentive for miners in the future. As outlined in the original white paper, bitcoin’s total supply is limited to 21 million coins. 

While the final BTC is not expected to be minted until after the year 2140, the block reward will continue to decline over the coming century. Miners, who facilitate transactions and secure bitcoin’s network, will have to rely more upon transaction fees as a source of income, as BTC rewards continue to fall.

Some are now arguing that bitcoin may need to introduce perpetual inflation to remedy the situation, which would mean altering the original 21 million BTC total supply.

Rochard said, 

There’s an open question of will transaction fees be high enough – or in the aggregate total – enough to provide transaction finality...will bitcoin have to hard fork in inflation?

The Bitcoin Advisory founder asked the community to consider the state of altcoins, many of which operate on an inflationary protocol. Rochard acknowledged that confirmation bias may be clouding judgment in regard to bitcoin’s managed development and that the potential for inflation should at least be considered, 

There’s confirmation bias. We’re all very bullish on bitcoin, I certainly am, and so we want to pick out arguments and facts that support our position rather than trying to see all sides of a debate and have a more balanced view. Or at least have some level of uncertainty and self awareness in how much support we actually have for our arguments.

Future of BTC

Rochard pointed to an article written in 2015 by Silicon Valley entrepreneur Ryan Selkis, under the name TwoBitIdiot, arguing that bitcoin needed inflation despite the controversy of the idea. He also pointed to the increase in block size from 1MB, which at the time was considered blasphemous to bitcoin’s protocol, as analogous to the idea of introducing inflation. 

Rochard concluded that the bitcoin community has “a good 10 to 20 years to argue about it,” before inflation becomes a pressing issue. 

 

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