Financial Knowledge

Why is the inflation rate of Ethereum lower than that of bitcoin?

December 6, 2020

If you are an Ethereum skeptic, you may think: how can the inflation rate of Ethereum be lower than that of bitcoin? In fact, all this is related to the transition of Ethereum blockchain from proof of work (POW) consensus mechanism to proof of rights (POS).

Theoretically speaking, one of the core values of the proof of rights and interests mechanism is that the token pledgor is willing to pay a higher capital cost when getting the reward. The reason for this is that on Ethereum 2.0, the token pledgor only has to face the opportunity cost of investment and will not bear any depreciation risk (such as the depreciation of ASIC mining machinery).

In fact, it is a good thing that the capital cost is slightly higher, because it will increase the attack cost of Ethereum. It also means that Ethereum can obtain the same level of security by providing less dollar reward, that is, ETH issuance. In other words, the proof of rights consensus mechanism allows Ethereum to issue fewer eth tokens, which can achieve the same security.

In the improvement proposal EIP 1559 of Ethereum, the proposal of reducing transaction cost consumption is proposed. If the proposal is combined with the continued low circulation of eth, it is likely that the annual circulation rate of Ethereum will become negative in the future, but at the same time, the network security will not be affected.

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