The Issuance Model in Ethereum

Ether (ETH), the cryptofuel that powers distributed applications on the Ethereum platform, will be issued at a constant annual linear rate via the block mining process. This rate is 0.3 times the total amount of ETH that will be purchased in the pre-sale.

While the best metaphor for ETH is “fuel for running the contract processing engine,” for the purposes of this post, we will treat ETH purely as a currency.

There are two common definitions of “inflation.”  The first relates to prices and the second relates to the total amount of money in a system – the monetary base or supply.  Similarly for the term “deflation.”  In this post we will distinguish between “price inflation,” the rise in the general price level of goods and services in an economy, and “monetary inflation,” the growth in the supply of money in an economy due to some sort of issuance mechanism.  Often, but not always, monetary inflation is a cause of price inflation.

Though the issuance of ETH is in a fixed amount each year, the rate of growth of the monetary base (monetary inflation) is not constant.  This monetary inflation rate decreases every year making ETH a disinflationary currency (in terms of monetary base).  Disinflation is a special case of inflation in which the amount of inflation shrinks over time.

It is expected that the amount of ETH that will be lost each year caused by transmissions to addresses which are no longer accessible is estimated to be on the order of 1% of the monetary base. ETH may be lost due to loss of private keys, death of owner without transmission of private keys, or purposeful destruction by sending to an address that never had an associated private key generated.

If we assume that Ethereum sells 40,000 BTC worth of ETH in the pre-sale, and if we assume that the average price is 1500 ETH/ BTC, 60,000,000 ETH will be created in the genesis block and assigned to purchasers. Every year, in perpetuity, 18,000,000 ETH will be issued though the mining process.  Taking into account both creation of new ETH and loss of existing ETH, in the first year, this represents a monetary inflation rate of 22.4%.  In the second year the rate drops to 18.1%.  By the tenth year, the rate is 7.0%.  In year 38, it hits 1.9%. And in the 64th year, the level of 1.0% is reached.

Image

Figure 1.  Amount of ETH in existence (dark green curve) on the left axis.  Monetary base inflation rate (light green curve) on the right axis.  Years on the horizontal axis.  (Adapted from Arun Mittal with thanks.)

 

By approximately the year 2140, the issuance of BTC ceases and since some BTC will likely be lost each year, the monetary base of Bitcoin is expected to start shrinking at that point.

At approximately the same time, the expected rate of annual loss and destruction of ETH will balance the rate of issuance.  Under this dynamic, a quasi-steady state is reached and the amount of extant ETH no longer grows. If the demand for ETH is still growing at that point due to an expanding economy, prices will be in a deflationary regime.  This is not an existential problem for the system since ETH is theoretically infinitely divisible. As long as the rate of price deflation is not too rapid, pricing mechanisms will adjust and the system will operate smoothly.  The traditional main objection to deflationary economies, wage stickiness, is likely not to be an issue since all payments systems will be fluid.  Another frequent objection, borrowers forced to repay loans with a currency that grows in purchasing power over time, will also not be a problem if this regime is persistent, since terms of lending will be defined to account for this.

Note that while the monetary inflation remains greater than zero for many years, price levels (tracked as price inflation and deflation) are dependent on supply and demand, so are related to, but not totally controlled by the rate of issuance (supply).  Over time it is anticipated that growth of the Ethereum economy will significantly outpace growth of the supply of ETH, which could lead to an increase in the value of ETH with respect to legacy currencies and BTC.

One of Bitcoin’s great value propositions was the algorithmically fixed total issuance of the currency which mandated that only 21,000,000 BTC will ever be created.  In a time of profligate legacy currency printing in an exponentially doomed attempt to patch over the fact that there is too much debt in the global economic system (with more debt), the prospect of a universally accepted cryptocurrency that can serve eventually as a relatively stable store of value is attractive.  Ethereum recognizes this and seeks to emulate this core value proposition.

Ethereum also recognizes that a system intended to serve as a distributed, consensus-based application platform for global economic and social systems, must strongly emphasize inclusiveness. One of the many ways we intend to foster inclusiveness is by maintaining an issuance system which possesses some churn.  New participants in the system will be able to purchase new ETH or mine for new ETH whether they are living in the year 2015 or 2115. We believe we have a achieved a good balance between the two goals of fostering inclusiveness and maintaining a stable store of value. And the constant issuance, especially in the early years, will likely make using ETH to build businesses in the Ethereum economy more lucrative than hoarding speculatively.

 


20 comments

  1. Ethereum is not subject to the same technical limitations as Bitcoin nor ideologically bound to imitate gold. You could issue money on any basis you pleased, so why copy bitcoin and try to predict demand 25 years down the line? This is just the fuel supply did it really require 3 months to decide? Its not a global reserve currency or the new petrodollar.

  2. Many, many other issues required that we take time to put our legal, taxation and security houses in order before taking on the responsibility of the ether sale. The issuance model hasn’t changed substantially for quite some time, but we are just now ramping up our communications in advance of the impending ETH sale. And no sorry, we do not have a date yet set for the sale.

  3. Thanks for the details.

    Of course, you make a completely unfair comparison. You really expect the US dollar to last 100+ years? Hell, I expect the US dollar to outlast the US as a country. 🙂

    • Yes, you are correct, X refers to the pre-sale, not to the total amount of ETH generated in the start (like I thought). sorry

      But still there is no word about the issuance of the pre-mine amount in the article. Any changes there from the original whitepaper?

  4. We will be releasing information leading up to the genesis sale on a regular basis and we will use each opportunity to present our thinking on each issue. We are looking forward to getting feedback on each issue and engaging in discussion.

  5. Well first of all thanks for the information!
    So the only limiting factor of monetary inflation is the presumption that about 1% of the monetary base is being lost or destroyed every year. Where do you take this number from and how do you want to measure the actual loss once ethereum kicks off ? Are you planing to interfere (adjust), if the amount stays significantly over or under the 1% ?

  6. “And the constant issuance, especially in the early years, will likely make using ETH to build businesses in the Ethereum economy more lucrative than hoarding speculatively.”

    I doubt this conclusion is true. I think both will be equally lucrative on the aggregate.

    Firstly the inflation rate will be less than to that of Bitcoin during its rise from $0 to $13.

    Secondly, businesses that succeed will increase the demand for ETH as they run on ETH and transact in ETH. A killer app can radically increase the demand for ETH, radically pushing up the price.

    I think in the end the reward for holding ETH and risking the potential gains will find an equilibrium point. This will probably be determined by how successful the successful businesses are and how much is lost in the unsuccessful ones, coupled with the fact that it is easier to just buy ETH and sit on it.

  7. The goldbug-ish language in this post is an alarming break from Vitalik’s balanced tone. Until now, my impression is that the Ethereum founders were uncertain as to which issuance strategy to use and that this clumsy linear inflation strategy is only a stub to be revised in the fullness of time. I strongly disagree with your choice to commit to linear inflation for the long haul.

    It’s hard to see how ETH (or any currency) could be a “stable store of value” without constantly tuning the money supply to fit the size of the economy, much as most “legacy currencies” are currently tuned. Without this tuning the value of ETH, like bitcoin, will be extremely volatile. ETH might become a medium of exchange but will never be a unit of account. People want stable prices. You only have a stable store of value if prices remain stable across the years.

    As you observe, in the long term linear inflation is almost identical to a hard cap on the currency, especially once we account for lost money. If Ethereum is successful and its economy continues to grow forever then ETH, like bitcoin, will become a deflationary currency. From what I’ve heard, that’s very bad. First, it encourages hoarding, which is a perpetual drag on the economy. You observe that loans can be designed to take deflation into account. But loans are not all that matters. Why buy something today when you can get more of that something if you wait a bit?

    Second, who in 2115 will want to buy into a currency in which almost all the money will forever remain in the hands of the descendants of early adopters, especially when they could be more prosperous under a competing Ethereum fork with a better monetary policy? (For their sake, one can only hope that they are able to overcome Ethereum’s dominant market position!)

    All this talk of the long term is probably moot anyway. Cryptocurrencies are still in their infancy and the distant future is impossible to predict. We are deluding ourselves if we think that our present choice to reach 1% inflation by 2078 will have any relevance when that time eventually comes to pass. Best to focus our energy on surviving 2015.

  8. Wouldn’t the issuance model be the prefect proof of concept when it comes to feeds and contracts. I mean, why not use feeds to regulate the issuance of new coins, and/or set an interest rate (multiplier) on ALL coins. The latter increases the monetary base, but equally for all, thus in effect is neutral. However, this can enable stable prices in terms of fiat money.

  9. > Wouldn’t the issuance model be the prefect proof of concept when it comes to feeds and contracts. I mean, why not use feeds to regulate the issuance of new coins, and/or set an interest rate (multiplier) on ALL coins. The latter increases the monetary base, but equally for all, thus in effect is neutral. However, this can enable stable prices in terms of fiat money.

    What is the utility in increasing the monetary base for all?

    The utility in issuing ETH through the mining activity is in the securing of the network through proof of work.

  10. Perhaps this is not suited for ether. But there are some merits to this, and the reasons are partially the same as to why companies do “stock splits”. Say Bitcoin “split” and gave everyone 10x coins when the price passed 10 USD. By now, everyone would have had 1000X as many coins, and the price would be 0.50 USD / BTC. (I assume no merges), but the market cap would, in theory, be the same. Primary advantage is in psychology. For instance, when I started looking into crypto currencies one year ago, I started with LTC, why? Because they were cheaper. Totally irrational, but still, that was my perception. I would rather have 10 LTC coins than 0.1 BTC coins. I know ether has thought about this with giving names to the currency units, and I think that is very wise!

    Bottom line, I believe this is a viable approach for a crypto currency, by combining a mining issuance with an continuous adjustable multiplier on the coins, in order to stabilize prices within a certain range.

  11. I am interested in why you chose to add exactly 30% of iniitial value with expected loss of exactly 1%.

    At this rate the saturation would be reached after ~500 years.
    Is this a good idea?
    Why not use some other constants, or no constants at all but a dynamic system?

    • Forgot to say that if no ETH is lost (due to whatever reasons), you actually will have never ending inflation.
      Or am I wrong?

    • After thinking about the never ending inflation issue, I came up with the following formula:

      ETH(produced each year) = (0.3 * Initial_ETH) / (year_number / 10 + 0.9)

      Of course 0.3(suggested by you), 10 and 0.9 can be tweaked. The term (year_number / 10 + 0.9) must be 1 where year_number=1;

      So following values result:
      we assume initial_ETH = 60000;

      after 1 year: 18000 ETH are produced.
      after 2 years: 16363 ETH are produced.
      after 3 years: 15000 ETH are produced.

      after 500 years: 352 ETH are produced.

      What do you think?

  12. Pingback: 以太坊的发行模式 | 巴比特


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