How infinite are cryptocurrencies?
AnalysisBit News Today3 min read
New milestone: value of all cryptocurrencies exceeds $126bn.
Why is the total number of bitcoins limited to 21 million, while the total supply of ether has no theoretical limit?
Ancient Asians used records to regulate money supply. The idea was that keeping the amount of cash in circulation constant would prevent hyperinflation. In this system, the 'emission' or 'mining' of Bitcoin is controlled by embedded protocol rules.
Let's say the lemonade is so delicious that child entrepreneurs spring up overnight. Entrepreneurs with a higher standard of cup-washing than normal become the central bank, since they will consistently monetize more lemonade than the market dictates. That is, the value of a cup of lemonade rises, making it worth more money as a unit. As baking soda is burned, so too is the value creation mechanism's ability to produce new value.
But why is scarcity in the algorithm that dictates the technical properties of the ledger itself?
Scarcity is hard-coded into the number of units that can be issued to keep the supply of bitcoins constant. As designed, every 210,000 blocks or roughly four years, the Bitcoin network undergoes a halving event in which bitcoin’s issuance is automatically halved. Over time, miners will stop receiving any of the 21 million total bitcoins, a substantial proportion of which have already been mined.
It would be one thing to say that this was the protocol of Bitcoin, and Factor X's protocol was different - but that is not what we are dealing with. Ethereum is a network and community engaged in an ongoing decision-making process that may redefine its protocol any time.
Not only are there no technical restrictions on how much ether (ETH) will be mined, but the Ethereum protocol enables the ecosystem stakeholders to change these properties any time.
In the Bitcoin whitepaper, there is a hard-coded, finite number of units: 21 million.
This is why halving creates both scarcity and value. Value is determined by the current utility of a cryptocurrency as a medium of exchange. If the amount of bitcoin per trade remains the same, but supply is drastically reduced, those bitcoins go up in price. They become scarce.
Limits like these are why many view Bitcoin as digital gold: a valuable reserve asset you can hold when you want to ensure that price will not fall as digital tokens proliferate. You can create any number of coins with a block reward, but not a whole lot of scarcity there.
Ether, in contrast, started with the postulate that maintaining a permanent and stable project is more important to stakeholders who are prepared to keep it going as well as to induce network participants (dapp developers, token curators, companies building on the Ethereum platform, and others), so that developers may easily transfer ether (ETH) and send transactions - without relying on pure fees. This dilutes or increases the supply, depending on whether the price of the unit of work pays enough to keep the current reward rate - transactional, in this case - fast, but not too fast.
It does not appear that Scarcity was baked into Ethereum's design because Ethereum is evolving into a more back-end, execution-focused blockchain, rather than a cryptocurrency like Bitcoin. With the London Upgrade, the fee mechanism was implemented on the Ethereum Network. It incentivises you to include a certain amount of fees with every transaction.
The result is that the emission rate has decreased significantly, from around 5 ETH per hour in the post-London and pre-Merge era.
