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Currently, the supply of ETH increases by 0.5% per year. This is because the 1% issuance minus the 0.5% destruction per year.
To return to the "supersonic currency" state, issuance must be reduced or destruction must be increased.
Before we delve into the issuance and destruction of ETH, let’s briefly talk about ETH and BTC.
☝🏻Internet native currencies are a massive opportunity, worth trillions of dollars. Currency premiums are rare at scale. For society to reach consensus around an asset, it must have extremely attractive properties.
Initially, the currency attribute is a zero-sum game. In the Internet era, the gold standard faces demonetization. Only two candidates can replace it and win the status of Internet currency → BTC and ETH.
The others are not on the same level. I think the decisive Schelling points are credible neutrality, security, and scarcity.
Since the Merge, ETH has become more scarce than BTC. Notably, during this time, BTC’s supply has increased by 666K coins, worth $66B, while ETH’s supply has remained the same. BTC’s supply is currently growing at 0.83% per year, 66% faster than ETH’s. And as I’ll explain below, ETH’s supply is expected to decrease again.
Scarcity is important, but it may be security that ultimately decides the battle for internet money. Ironically, BTC’s 21 million cap is the culprit. BTC issuance will eventually drop to zero — this is Bitcoin’s most powerful social contract. After a few halvings, issuance will become negligible.
📍Shocking statistics:
In the last 7 days, only 1% of miners’ revenue came from Bitcoin transaction fees. That’s right, 99% came from newly issued Bitcoins. This is despite four halvings that reduced issuance 16-fold, and despite finding transactional uses for Bitcoin over the past 15 years.
In my opinion, the Bitcoin blockchain is hopeless. To permanently 51% attack Bitcoin, you would need about $10 billion and 10GW of electricity. For a country, this cost is a piece of cake. In terms of electricity, the state of Texas alone can produce 80GW. BTC's security ratio is 200 to 1, a $2 trillion asset secured by only $10 billion of economic security.
Any shortable instrument tied to BTC mining incentivizes a 51% attack. There is currently $20 billion of Bitcoin mining stock — these would collapse instantly under an attack. There is also $40 billion of open interest in BTC perpetual contracts — direct shorting risk. Not to mention the possible shorting risk through the $100 billion ETF and the $100 billion MSTR.
🔻Can BitVM solve the cost problem?
Any BitVM bridge is an incentive to 51% attack Bitcoin. In fact, a 51% attacker could censor fraud proofs during a challenge, draining the funds of the BitVM bridge. Ironically, BitVM could be a direct threat to Bitcoin. Bitcoin also has no social penalty mechanism to recover from a 51% attack.
If BTC price grows 10x, surpassing gold, is Bitcoin safe? Assuming this happens in the next 11 years, BTC will be a $20 trillion asset, but the issuance will shrink 8x due to three halvings. The safety ratio will be over 1000 to 1. I don't think this will be sustainable, especially as BTC becomes increasingly institutionalized, more liquid, and easier to short on a large scale. Imagine $1 trillion in open interest on perpetual contracts, but only $10 billion in economic security.
Can Bitcoin fix itself before it's too late? Bitcoin is the poster child for blockchain solidification. Can it have a 1% tail issuance per year? Good luck trying to hit the 21 million cap! Can Bitcoin switch to PoS relying on minimum fees? That's heresy in the Bitcoin community. Can Bitcoin switch to another PoW algorithm? No, the nuclear option won't help. Can Bitcoin adopt large blocks and sell data availability on a large scale? The small block war has already been fought, bro.
If you have read this far and understood the above, congratulations. Even now, few people realize the long-term problems of Bitcoin PoW and the impact this will have on BTC assets. This is an opportunity to plan ahead, but patience is required. The time frame is not 1 month or 1 year, but 10 years.
Speaking of long time frames, Lummis's proposal to lock up BTC for 20 years is simply insane - by then Bitcoin will be completely suppressed. Worse, if the US holds trillions of BTC, it will directly incentivize America's enemies to launch a 51% attack. Contrary to popular belief, Bitcoin is not at all resistant to state adversaries - China and Russia can easily do it.