Comparing the monetary policies of Bitcoin and Ethereum results in fierce debates between loyalists of each respective blockchain, but it is one of the more important debates as we strive to find the best way to issue currency in the new age of truly public money. Without giving in to the biases of each chain, let’s look at what exactly the different trade-offs are between the two approaches.
Bitcoin’s monetary policy involves a periodical reduction of network inflation, called a “halving”. Every 250,000 blocks, the reward for mining a block is cut in half, reducing network inflation and causing miners to be more reliant on fees as a source of revenue. Fees do not affect inflation, and a fee market – which is the long-term goal of Bitcoin – induces a 0% inflation in the very, very long run.
What is the primary goal of Bitcoin’s monetary policy? The first is to induce a system whereby no single actor, irrespective of their degree of control over the network, can influence issuance. The mechanism to issue currency is set in stone and can only be changed with massive community consensus. The more Bitcoin grows, the more difficult it becomes to convince people to remove the supply cap.
Another vastly undermined aspect of Bitcoin’s monetary policy is the implication of a fee market. Inducing a fee market is not just about removing inflation. It’s about shifting the burden of paying miners from the network and its stakeholders (block rewards that dilute supply) to those who want to use it (transaction fees from the existing supply).
As of yet, Bitcoin has had two block reward halvings with a third imminent in May of this year. This next block reward halving, however, holds some degree of trouble. There is no sign of a fee market yet, and the reward for miners is going to be cut in half. From the last halving till today, Bitcoin has evolved into a massive network, with market cap constantly hovering above $100 billion and the Bitcoin price always looking just moments away from a massive rally.
On the contrary, Ethereum follows a policy of “minimum necessary issuance”, which means the block reward is set as per what is necessary to create incentives for miners. This form of issuance is susceptible to capture by cartels and can be manipulated by groups of powerful developers.
At the same time, the long term sustainability of the network is not in peril as the block reward will continue indefinitely – unlike Bitcoin.
Bitcoin attempts to capture value through scarcity; Ethereum aims to capture value through utility and usage. This is precisely why Bitcoin is a unique economic experiment that could challenge the way economics works, and Ethereum is implementing new-age governance with an old school twist to economics and sustainable incentives.
Minimum necessary issuance is destined to keep miners attached to Ethereum, but if a fee market doesn’t develop on Bitcoin, the network could be in trouble. Bitcoin’s success in this regard can change the face of money and finance.