Cryptocurrencies Review

Bitcoin vs. Ethereum; Which has a better monetary policy?


Bitcoin and Ethereum, the top two digital currencies, have each been created with unique goals and features and are pursuing a different future. Ashwath Balakrishnan, economist and digital currency analyst, at an essay On the cryptocurrency website, he compared bitcoin to Ethereum and compared the decentralization of bitcoin to Ethereum’s economic logic.

The constant debate between the Bitcoin and Ethereum communities revolves around which network has a better monetary policy. Is Bitcoin’s strict decentralization better or Ethereum’s economic logic? The answer to this question is not so simple and several aspects must be considered.

Minimum essential Ethereum supply

There is a huge difference between inflation and monetary inflation. Monetary inflation is the increase in the total money supply in a country or in the network of a digital currency. But inflation is the increase in the price of goods and services in an economy. The issue of supply in digital currency networks is the issue of monetary inflation.

Indigenous coins of both Bitcoin and Ethereum networks are offered to extractors as a reward for verifying transactions and generating new blocks.

Unlike Bitcoin, which counters monetary inflation with Hawing, which is halving the block reward, Ethereum has chosen an easier method. Ethereum is pursuing a “minimum supply” policy instead of a sudden reduction in block rewards.

This policy allows the Ethereum blockchain to supply only the amount of ether needed to keep the network secure. This reduces supply over time.

This approach is a more stable monetary policy; Because instead of a sudden drop in miners’ incomes, their rewards are gradually declining. In the table below, you can see the estimated supply rate of ether for the amount of ethers deposited in the stock proof.

Validation ethers The highest annual supply of ether Annual supply ratio to existing coins Maximum annual profit of creditors
1,000,000 181,019 0.17. 18.10.
3,000,000 313.534 0.30. 10.45.
10,000,000 572,433 0.54. 5.72.
30,000,000 991,483 0.94. 3.30.
100,000,000 1,810,193 1.71. 1.81.

Although this way of offering helps with better planning for the release of new coins; But this mechanism is at risk of being attacked by profiteers.

Ethereum monetary policy is rational and adapts to the current situation; But it is not immutable. As a result, bad actors can infiltrate the network and make changes that are detrimental to the long-term growth of the network. This has never happened due to the admirable supervision of the Ethereum community, as well as the ability to create forks if a malicious map is discovered. However, there is a possibility of danger.

Strict bitcoin hawings

On the other hand, we are dealing with bitcoin. As mentioned earlier, in a process called hawing, bitcoin supply is halved every four years. Due to the Hawing phenomenon, the total number of bitcoins that can exist is a definite and predictable amount.

But this is predictably costly. Every four years, the revenue of bitcoin miners is halved; But from the extractors’ income, only the block reward is affected and reduced. The portion of the extraction income that is derived from the transaction fee remains constant. Historically, transaction fee collection has increased over time.

This phenomenon makes Bitcoin a high-fee market. As a result, blockchain transactions become more expensive over time. According to this theory, the day will come when the transaction fee will be the main income of the extractors.

Bitcoin vs. Ethereum;  Which has a better monetary policy?
Expected release of bitcoin over time. Source: Bitcoin It

The problem with this theory is that as transaction fees become more expensive, users may abandon bitcoin and switch to other transaction tools. Bitcoin will still be an anti-censorship network with non-stop payments; But if each transaction costs $ 20, will it still matter?

On the plus side, Bitcoin monetary policy is more decentralized than Ethereum monetary policy and more resilient to the dominance of certain individuals over the network.

Although an immutable monetary framework is not ideal for a network, it can give users a sense of relief by eliminating human intervention; Because they know exactly what is happening.

Which one will be the winner at the end of the game?

With this data, the conclusion is clear. Ethereum’s economic framework is more stable. However, Bitcoin has a more decentralized supply policy and is safer against abuse.

In addition, bitcoin hawing events reduce the number of bitcoins received by miners; But this has not been a problem in the past. The rising price of Bitcoin always makes up for this decline in revenue and many other things. This will give extractors more incentive to raise prices and create market cycles.

Bitcoin vs.  Ethereum: Who Has the Better Monetary Policy
Bitcoin price history. Source: TradingView

Ethereum, on the other hand, is set to undergo a period of change. As the release of the second version of Ethereum approaches, the Proof of Stake algorithm will gradually enter the scene. This will increase Ethereum’s monetary inflation in the short term; Because the Proof of Work and the Beacon chain are stocks running together. With the phasing out of proof of work, the supply of Ethereum also decreases dramatically.

In fact, after the implementation of the “EIP 1559” plan, and if the transaction fee exceeds the supply of Ethereum, the probability that the supply of Ethereum will be negative is very high. This makes the Ethereum an anti-inflammatory asset, a result that will be pleasant for some and unpleasant for others.

EIP 1559 is a proposal that, if implemented in 2021, would drastically reduce congestion at the Ethereum network.

Bitcoin vs.  Ethereum: Who Has the Better Monetary Policy
Predicted Ethereum supply. Source: Anthony Sassano’s Twitter account, co-founder of EthHub

Conclusion

In general, which monetary policy is better depends on the individual. Fanatic cyberpunks may prefer that financial stability fall victim to more decentralized policies. This gradually leads them to bitcoin. Cypriots are a group that seeks to increase privacy and counter great economic and political powers through cryptography.

However, for people with a more economical mind, it would probably not be important to reduce the degree of decentralization in exchange for an improved supply framework. Because improving the supply mechanism ensures the dynamism and long-term durability of the network.

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