An Economic Analysis of Ethereum
lynalden.com
lynalden.com
I have only some minor quibbles.
GPUs are very much not abundant. Gamers were complaining a lot during the last bull run that those crypto nuts were buying up all available high-end GPUs.
Also comparing the hashrates of Bitcoin and Ethereum doesn't make sense. Those are different algorithms that run on completely different hardware. Bitcoin ASICs can only be used for Bitcoin (or Bitcoin forks that haven't changed the POW algorithm) where GPUs as more general programmable devices can be repurposed for mining other cryptocoins which might be more profitably to mine at any given time. Together with the fact (as stated in the article) that Ethereum has reduced the block rewards over time, it's not surprising that the hashrate isn't bigger than during the previous bull run.
This leads to the criticised monetary policy of Ethereum. This wasn't explicitly mentioned in the article but Ethereum's monetary policy can best be summarized as "don't overpay the miners for securing the network".
Many see it as a necessary evil that Ethereum is still running on POW and they are eagerly awaiting the jump to POS. It is seen as a design flaw of Bitcoin that it has a rigid coin issuance that isn't dynamically adjusting to the actual demand.
Disclaimer: this is just my own perspective and speculation based on a bit of reading and brief convos with Ethereum foundation people.
That assumes they don't spend their ETH on fees, which doesn't make realistic assumptions about the makeup of this group.
>>Which is even more egregious when you learn that proof-of-stake rewards those with the most money (read: the decision makers).
PoS is no worse than PoW in this respect. Both PoW and PoS reward validators in proportion to their capital assets. In the case of PoW, mining ASICs, and in the case of PoS, ETH.
In any case, the fact that larger miners/stakers make more is neither surprising nor a cause for concern. It's the rate of return on capital being higher for larger investors that would be concerning, as that has the effect of concentrating wealth.
There is less of an economies of scale effect in staking than in proof-of-work generation, with smaller validators having a ROI on their capital assets that is closer to that of larger validators in PoS than in PoW.
So PoS should have a weaker tendency toward growing wealth inequality than PoW.
That's not the impression I got of Vitalik Buterin at all, nor others at the Ethereum foundation. Maybe you have a different set of decisionmakers in mind.
>I think one can boil it down pretty simply: decisionmakers at Ethereum don't care about investors
As opposed to bitcoin devs?
Lot's of folks riffing on the original implementation, but ultimately just a fork.
- It's an excellent way to make payments and transfer value without giving up on your position on more volatile assets that you'd like to hold. E.g, I am long BAT. I can deposit my BAT stash on a MakerDAO vault to make an overcollaterized loan of DAI. I go on then to use DAI to pay people and services and other investments (see next point). If BAT's value falls between a certain threshold and the loan is no longer collaterized, then the loan is liquidated.
- Provide liquidity in a volatile-stable pair (e.g, ETH/DAI) on a decentralized exchange like Uniswap and reduce what is commonly called impermanent loss or impairment loss.
- Provide liquidity on Curve Finance on the DAI/USDC pool. The fees I get to collect from that so far more than offset the interest rate from the original loan, and if you put on top of that that Curve gives their own tokens as an incentive to liquidity providers, I am getting around 2% ROI per month by holding fairly stable and low-risk crypto assets.
https://www.voice.com/post/@osaemezu/aave-lend-a-beginners-g...
https://blog.coinbase.com/a-beginners-guide-to-decentralized...
As for the actual yield on loans, there is no lower limit beyond the fact that there are fees to lend and return your coins to and from these lending contracts. Those fees are currently quite high, so it is in your best interest to plot those out when calcuating returns.
https://bitinfocharts.com/comparison/ethereum-transactionfee...
P.S. I'm long Bitcoin, so I hope I'm wrong!
[1] - https://www.coindesk.com/bitcoin-lightning-network-vulnerabi...
But whether the most used blockchain should be the highest in market cap is a totally different discussion. It's possible ETH goes mainstream, but BTC is still valued higher as "digital gold." I have no idea what will be the outcome.
Moreover, Bitcoin doesn't have the necessary opcodes for secure/trustless bridges to sidechains.
Rootstock, for its part, is controlled by trusted third parties, so doesn't come close to providing the trustless-ness and permissionless-ness guarantees of Ethereum.
Unsurprisingly, Rootstock has insignificant adoption, with Ethereum having on the order of one thousand times more capital/users utilizing it.
Bitcoin - speculation on digital store of value and solutions to hedge against fiat currency risks. The valuation model is to try to determine what X% of the global demand for store of value assets might shift towards Bitcoin in the long run. Probably nowhere close to the level of a fiat currency market or the gold market, but perhaps much higher % than it is today.
Litecoin, Bitcoin Cash - attempting to make crypto transactions common. Higher capacity, faster transaction processing. The valuation model is X% of casual transactions. X is probably never going to be an appreciable percentage compared to big transaction platforms like Visa or Mastercard, but it may grow steadily and find niche areas where the ability to quickly transact in a cryptocurrency is highly valued. This is likely to remain correlated to cryptocurrencies that act as a store of value because one main area for demand of casual cryptocurrency transactions will be hedging risk of fiat currencies. Eg if I live in a region with government currency instability, I’ll want to decouple my cash asset values from that government risk, and look to a platform where I can still buy toilet paper or bread without hyperinflation.
Ethereum, Polkadot, Cosmos - network effects and ecosystems of smart contracts. The valuation model is like an app store mixed with a cloud vendor. Much harder to state a clear valuation model, likely very volatile due to perceptions of “killer apps” and how much staying power they would really have, as well as the interplay with regulators.
More tokenized Bitcoin is transacted on the Ethereum network every day than on the Lightning network, by orders of magnitude.
People like to ask Bitcoin investors if they really think it will be the last and optimal digital currency. And no, that's not likely. But that reasoning must be applied to each and every other coin as well, including Ethereum, and that is doubly likely for them. One could easily imagine a future coin that does what they do, only better.
- The claim that BTC chose a non-scalable solution for ease of running a node isn't true. The claim at the time was that Segwit and LN were sufficient to solve all the scaling issues, the hardforks were going to solve anyways with their block size increase. It also falsely states that the hard forks take up more hard disk space, when in fact BTC still takes more...
- The hashrate comparison, the way it is charted is completely nonsensical, between BTC & ETH... it is quite literally comparing apples to oranges, their POW algorithms are completely different from one another and cannot be compared in hash/s terms. They are each respectively at the top of their hash domains. I'm doubtful this is due to ignorance, but moreso malice. Would love to see BTC miners do a 50% attack on ETH, which the author is essentially trying to instill into the minds of readers.
You did mention yourself, under however, that it can help scale in the short-term. Many of the 'tech gurus' were essentially saying that Segwit was the short-term fix, and LN wich would take 18 months(seemingly a perpetual timeframe), would be the medium-term fix. The BTC maxi thought leader morons, like Tone Vays, who are technically ignorant, were selling noobs that both were a complete fix. I didn't choose the thought leaders for BTC.
Showing the node count for BTC and making it seem huge, while trying to sell the fact of how terrible it is to run a ETH node instead, and not mentioning the fact that there are actually more active ETH nodes online than BTC, is highly disengenious, and unfortunately just makes this seem like a bagholder trying to discredit competition.
Except that it is true. There were few reasons for not increasing the block size limit, one of those was the cost of running a node. If the costs became too much for normal people to afford, it would centralize the system in a small number of big miners.
The article states that claim, as though it was the sole one, when it was just one small reason pushed by Raspberry Pi hobbyists... while the average person doesn't even know wtf a Pi or ARM SBC is.
There were several perspectives on this, including that no one found a way to deploy that protocol change to a live network in an acceptable way. It is much easier to build consensus around "soft" forks.
Non-mining nodes have no power or influence over the networks state. It is the mining nodes who decide which chain lives and which chain dies.
Having more non mining nodes to store and relay blocks is beneficial to decentralization, but they have no influence over which chain becomes the longest chain.
Also, block validity includes more than just proof-of-work. Each node ultimately decides which block it accepts or rejects. The protocol defines the minimum criteria for a block to be valid, but each node may independently apply additional criteria that must be met. If all nodes decide to reject a protocol-valid block that a miner produces, then the block will be orphaned -- it won't matter how many descendant blocks get built on it, because the rest of the network will ignore them all. In fact, this is the mechanism by which a user-activated soft fork works [1].
For example, consider what would happen if a miner produced a block that tried to spend a Segwit output without consideration of the witness. Under the Bitcoin protocol, this is technically allowed -- a Segwit output looks like an anyone-can-spend output. But due to the extra Segwit rules, only pre-Segwit nodes would accept and relay this block. Considering that nearly all exchanges, wallets, custodians, etc. apply the Segwit rules, this would mean that this block would be treated as invalid and its coinbase rendered effectively unspendable. Even if 100% of the Bitcoin miners tried to build on top of this Bitcoin-valid but Segwit-invalid block, all their blocks would be similarly rejected. Only pre-Segwit Bitcoin nodes would accept these blocks, but hardly anyone runs them [1] (note that Segwit support first appeared in version 0.16; there are indeed still some people running pre-Segwit nodes).
[1] https://luke.dashjr.org/programs/bitcoin/files/charts/softwa...
Also you are linking to a person who thinks the sun revolves around the earth and that there is nothing wrong with slavery because the bible says so.
I never said that they can't. I said that other nodes can choose to ignore them.
> Also you are linking to a person who thinks the sun revolves around the earth and that there is nothing wrong with slavery because the bible says so.
No disagreement there. The only reason I linked to his site is because it's the only Bitcoin network status page I'm aware of that has a fine-grained breakdown of Bitcoin user-agent strings. Do you have a better link?
Who cares? That doesn't matter at all. Other miners will pick up the found block and any node that ignores what they are doing will just unsync themselves and become useless.
> Do you have a better link?
For the thing that's irrelevant to anything we are talking about? I'll get right on that.
What good is a block if no exchange or wallet will accept it (and its coins) as valid? Miners aren't all-powerful entities in a blockchain. In order to have any say at all in the blockchain's behavior (let alone cash out their coins), they (1) need other nodes to recognize their blocks as valid, and (2) need a reliable underlying network to propagate their blocks. If no one accepts a miner's block, or if the block cannot be propagated, then it's the _miner_ that's useless.
Like, this is distributed systems 101 stuff. If your node broadcasts a message, and no one accepts it, then your node is dead for all intents and purposes. If 100% of miners are producing blocks that the rest of the network isn't accepting, then 100% of the miners are effectively dead.
To think of this concretely, what do you think would happen if 100% of Bitcoin miners suddenly stopped honoring Segwit witness data, and started mining blocks that claimed Segwit transaction outputs as their own (which is technically allowed, since they are marked as anyone-can-spend)? Pre-Segwit nodes would accept these blocks (my aforementioned link shows that such nodes exist on the network today), but do you think Segwit-aware nodes would accept them?
> For the thing that's irrelevant to anything we are talking about? I'll get right on that.
You sound like a very pleasant person.
It only matters what the other miners accept. If all the miners accept a block but "exchanges and nodes don't", then they have stopped updating their chain. What are they updating to if it isn't what the miners agree on?
> (1) need other nodes to recognize their blocks as valid,
No, they need other miners to accept their blocks and build on top of them.
> (2) need a reliable underlying network to propagate their blocks.
They have that, it's called the internet. Do you think broadcasting 1 MB blocks is difficult?
> If 100% of miners are producing blocks that the rest of the network isn't accepting, then 100% of the miners are effectively dead.
The miners are the network. If they all agree the other can either relay their chain or do nothing. There is only the chain the miners agree on. What exactly do you think relay nodes will do if they don't relay what the miners create?
> You sound like a very pleasant person.
This is the cry of someone who can't explain what they claim. I don't know where you formed a solidified but completely wrong idea in your head, but someone mislead you.
To recap: There is what the miners agree on or there is nothing. Relay nodes have no say in what a valid block is. They can relay valid blocks or not.
> This is the cry of someone who can't explain what they claim. I don't know where you formed a solidified but completely wrong idea in your head, but someone mislead you.
Before you reply, why don't you try checking my profile? I think you will find that it is you who are mistaken.
Update: ah he provided the answer by inviting us to investigate his profile.
He is trying to build a layer on top of bitcoin, and perhaps /he/ relies on non-mining consensus for /his/ uses of tokens /on top of/ bitcoin.
So it would make sense for him to proliferate a fabricated notion that non-mining nodes are important /to bitcoin/ itself.
Miners can broadcast to anyone they want and nodes can't find or manipulate blocks, so they take the role of passive helpers.
Block sizes are under 1MB.
Anyone can rent a VPS for under $10 USD per month that would transfer that in 1/100th of a second.
The block time is 10 minutes.
Why do people repeat stuff like this? Is it because you have seen other people say it and never stopped to look at the math?
A dominating miner runs the risk of a 51% attack, which can cause denial of service or censorship, but game theory dictates that the missed opportunity cost is huge. A dominating economic actor makes the whole blockchain an obsolete backend to something like Paypal.
This doesn't matter much for ETH because its mining algorithm dissuades ASIC production. So there are some (large) number of GPUs out in the world not mining ETH that can in theory be used to attack Ethereum. The same can't really be said for Bitcoin because ASICs serve no other purpose besides mining.
That being said, it's not even true anymore that ETH is GPU-only; despite attempting ASIC-resistance, there are now ASIC miners for ETH too, although unlike with Bitcoin, Ethereum is still able to be mined with GPUs.
The complaints that ETH has little real-world utility and is mostly speculation-driven felt similarly nonsensical compared to Bitcoin. What real-world utility does Bitcoin have? The whole thing is HODL-driven speculation on an inherently-useless deflationary asset.
(Unlike the author, who claims to have no stake in the debate a breath before admitting he's long BTC and doesn't own ETH — by definition, a stake — I truly have no stake in this debate, and currently own neither BTC nor ETH.)
Last time I looked those "ASIC" miners for ETH were basically a few GPUs stacked together in one case. More of a special PC setup than truly ASICs and that's why there is still GPU mining. Those ASIC miners were not that much faster and cost effective than a regular GPU setup.
Has that changed?
>>I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock’s Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring.
> TLDR; Ethereum could indeed do very well over the next year in terms of price, but as long as it's transforming its base layer, it remains a speculation in alpha development, rather than a finished/stable product.
https://twitter.com/lynaldencontact/status/13508211296367370...
Some other cryptocurrencies could go up when that happens, but it seems like it would be bad for demand in the slightly longer run.
IMO the only way USDT dies is if the US government makes using it illegal. Nothing else will make a dent in it.
So they clearly do not get it
Funny that this upvoted article says much of what I said yesterday in a comment that was originally heavily downvoted, then went back:
The Ethereum solution to serve this demand, however, ironically has semi-centralized clusters. While it’s more decentralized than purely-centralized systems, it’s not really the level of decentralization that some were hoping for, and Buterin has admitted as such. These clusters of centralization serve as potential attack surfaces for governments to crack down on these methods of going around regulated and fully centralized and KYC-regulated firms.
One could almost say it’s a veneer of decentralization over a system that is actually quite centralized. There’s a step here towards decentralization, but it’s not actual decentralization in its current form.
I went further. Let me reproduce it here: No, blockchains are not the future, they are really the reason why one transaction can happen at a time in the whole world. Even Ethereum 2.0 will have shards which will do away with this anomaly. The only reason flash loans even work with no collateral is because you can be sure nothing else is running on the “world computer” while your transaction runs, so you can roll it back with no risk except gas fees. Vitalik himself acknowledges this, the guy is quite honest and straightforward about its limitations:
Vitalik Buterin: Using Ethereum is expensive, and its blockchain is ‘almost full’ He also said blockchain's 'problem' is that every computer verifies every transaction
Actually blockchains are a first-generation technology that do global consensus for every block, which literally means all transactions in the world must go through one computer in the world (the miner) although it’s a different one each time. And the situation is actually worse, since you don’t know who would mine the next block in advance, every transaction must be sent to every potential miner! Imagine if BitTorrent had every computer store and seed every movie instead of using DHT.
The ability to send or loan arbitrarily large amounts for a fixed fee is a symptom of centralization. In a fully distributed network, transaction fees would have to be proportional to transaction size!
Almost every other protocol on the Internet does not have such bottlenecks in its design. No one asks how many emails or websites can be served per second. Blockchain is trying to secure every transaction using the entire network! That is why so much electricity is wasted just to do 7 transactions per second. The next generation of crypto will actually be able to power payments using embarrasingly parallel architecture. Until then, we have blockchain. Ethereum is nicknamed the “world computer” for a reason. Gas fees are super high for small transactions like paying for coffee or voting in a secure election. Just one app KryptoKitties can clog up the entire network.
As one example, we built Intercoin apps on top of Ethereum (https://intercoin.org/applications) but we are not going to wait around for Ethereum 2.0 - which is blockchain also. Kik Messenger and others have long gotten off. Ripple, MaidSAFE and Solana use different technologies.
Your argument boils down to: not enough TPS, because bad technology. It's good enough for now and can always be changed later. Changing the distribution of the mempool to miners is trivial. But the game theory consequences (MEV for flash lending) are not. So no one wants to change what is not yet broken until the implications become clear.
> The ability to send or loan arbitrarily large amounts for a fixed fee is a symptom of centralization. In a fully distributed network, transaction fees would have to be proportional to transaction size
With UTXO, there is no correlation between amount and transaction size (cf "dust")
My “argument” is just stating facts.
How is it good enough for now, when none of the tokens are actually usable for their intended purpose onchain - and no one uses decentralized crypto systems for everyday payments? Our society relies on centralized server farms run by huge states and corporations and we see the result. Suddenly people care about Big Tech because of Parler and WhatsApp but these are just two blips in a long line of consequences of living in a Feudal society.
WeChat for example is used every day in China and has replaced cash for millions of businesses, and now you have a centralized social credit system, controlled by the Party, and anyone can be blocked at any time, as can those who associate with them. And the digital dollar is coming soon to your neighborhood, which means one account at the central bank, and yes most people will sign up. Meanwhile you’re sitting around saying 10 transactions a second is good enough... this is how the centralized state and corporation wins. When cypherpunks do nothing.
Enjoy living in a world where Facebook and Amazon and your Federal government OWN your identity, data, transactions and let you live as a digital serf under strict supervision.
But yeah, it’s all about “shilling my coin” LOL
An example of something that isn't true, in case you needed one.
UTXO is just “unspent transaction outputs”. The reason Bitcoin and Ethereum can send transactions of any size for the same fee is because ALL transactions are secured by the entire network, regardless of their size. So they just charge the cost of what a consensus process would take (proof of work, nakamoto consensus in this case) for the entire network to agree on the linear order of that transaction in the sequence. It’s a brute force inefficient approach. Like transporting $1 in the same armored vehicle with a convoy as $1,000,000
I think this article is really solid, as are all of her articles. Part of what I love about Ethereum and altcoins is exactly because of the speculative, fast-money, insanely risky and exotic assets and protocols it creates. Where she sees that as a negative, I see it as a positive. ETH and its tokens have helped my crypto friends amass more wealth than we would have made working at FAANG companies, and without slogging through all of the bullshit and pain of working at huge corporations. Plus we get to work on super interesting tech rather than middleware that powers the middleware that powers the data mining pipeline that extracts money out privacy violations.
If you want the "safe" crypto play, I tell people to do 60/40 BTC/ETH on Coinbase so they can hold it safely and never look at it again. If you want to make the 10x fast money gains speculating like a crypto degen trader, then the only game in town is ETH and the alts running on its ecosystem.
And there are wrapped BTC tokens on Ethereum that utilize cryptoeconomic incentives instead of the reputation of a custodian to guarantee redeemability for BTC: renBTC and tBTC.
WBTC was just the first to launch so has the largest market cap. It's also possible that WBTC's reliance on a trusted third party is perceived as less risky than reliance on novel cryptoeconomic incentive schemes.