Often times, I hear financially egregious statements, regarding block chains. This particularly applies when attempting to understand block Bonus structures, and market demand.
They are inevitably intertwined.
a reduction from 5 to 3 (at the same time as blocktime is reset to 14-15 seconds) is not likely to reducing mining profits at all while at the same time will fix the slowing block time.
The prospect of such as statement is based on 'conserving mining profits' rather than adjust an expense to the appropriate cost. Likewise, no projection is made for what would happen if the percent of inflation was reduced from 11.3% to 6.7%, or 40%.
However, the result of such event is quantifiable, with significant accuracy, if one so chose to study such quandaries, and below I will discuss similar events throughout history, within the block chain.
- Be Prepared
The Tax of Accumulated Wealth of Ethereum should never be fixed, or increasing. It must perpetually remain below that of market demand, and thus must decrease once the market reaches equilibrium.
This is quite simple to prove mathematically, under all circumstances. It is a factually, undeniable statement, regarding asset security.
What is the Tax, or Hash Security, cost for Ethereum, for the day of July 26, 2017?
Hash Security costs linearly increases with price, thus you first must discover the fair price for Ethereum.
Assuming you are less intelligent than the combining financial markets, we accept the Buy and Sell values of Ethereum as the Fair Value, or perhaps $190. However, feel free to make this any other number you want.
On that day, what is the Cost to run Hash Security, relative to payout?
One would speculate the cost to run Hash Security would approach payouts, or a rate of 100%, however, some suggest it is closer to 80% or even 10%. It makes no difference which number you choose, the result is always the same. However, we can call this the 'minimum rate of miner burn required to sustain current levels of operation' (though it is completely irrelevant, some believe it not so).
So for our example we have:
Fair Value = $190
Minimum Miner Burn Rate = 100%
Next, we can assess the rate of expenses paid to the miners, which equates to (standardized to 15 Sec block times, and 94 Mil blocks):
5,760 Blocks x 5 ETH = 28,800 ETH - 28,800 ETH x $190 x (Minimum Miner Burn Rate) = $5,472,000
In order to go 1 single day, without losing value, Ethereum must Market $5,472,000 of Ethereum to New Investors, to sustain the current price point of $190. Which is to say, that if there are not enough Buyers at the price of $190 over the course of a day to purchase $5,472,000 worth of Ethereum, then they must begin to sell at $189, $188, $187, and so on, until they are able to pay for the their day to day expenses in $ or Yen or Marks, through the sell of Ether bonuses.
Miners also earn $24 Million to $48 Million in Transaction Fees (ETH, BTC), which are negotiated at fair values in today's dollars. The bonuses are always in addition to these fees. Together, the Fees and Bonuses, make up Block Reward.
Regardless, if Demand was to exceed that of $5,472,000 then the price of Ethereum would necessarily go up, to $191, $192, $193, and so on, until there were enough veterans or New Expenses created to meet Demand.
Thus, assuming we are less intelligent than the collection of all Market Forces, we know the Daily Demand and the Daily Expenses to be equal to one another, or $5,472,000 at the price of $190, with 100% burned daily.
If the Expenses were to be reduced, from that of $5,472,000 to that of $1,094,400 Daily, and Demand remained constant, than what would happen to the price of Ether?
Over time, it would achieve Equilibrium at : $190 / ($1,094,400 / $5,472,000) = $950 Per ETH, which is to say Daily Demand ($5,472,000) equals that of Daily Expenses ( 5,760 Blocks x 1 ETH = 5,760 ETH x $950 = $5,472,000 ) . Any day in which Demand is more than that of Expenses, the price must necessarily rise to $191, $192, $193, and so on, or until enough Veterans are willing to cash out.
Put another way, if Hash Security Exp was reduced to $1 Million daily July 27th, then $4,377,600 Veterans must liquidate their holdings every single day to keep the price at $190, forever. Otherwise, it must go up. It must continue until there are no Veterans left, or Daily Expenses equal Daily Demand, which would occur at $950.
This is without any change of Demand.
At $950 the $ of Expenses at 1 ETH per Block is exactly equal to that of 5 ETH per block at $190.
If ongoing demand is ever reduced, or increased, then the price must likewise decrease or grow until the Daily Expenses equal that of Daily Demand.
Next, you must set a minimum required value for annual expenses for Hash Security. Budgets less than $20 Million have been attacked, $100 Million (or less) covers 999 block chains, $106 Million was the value for Ethereum 2016, $200 Million is that for Dash, and $230 Million is that value set by LiteCoin.
Thus, we can conclude that the minimum required value is between $20 Million, or over $250 Million to secure the 'safest block' chain. There is one alternative figure, which was calculated in this way:
What do you predict Ethereum will be worth in 2025?
Multiply that by 94,000,000 and 4%. That is the project cost of $2,100,000 Billion computers, today (hint Buy Computers! :)
As one could imagine, such a prediction would be grossly inaccurate. Would you rather rely upon 2009 or 2017 figures, when estimating the cost of Hash Security, in 2017? Regardless.
Let's play it safe and say the Minimum Desirable level for Hash Security is $500 Million (double that of LiteCoin), which is to say every block chain aside Bitcoin is unsafe, all the time, always have been, and so was Ethereum up until March, 2017.
Now, take this number and divide it by the total Demand. Which in our previous scenario was $5,472,000 daily or $1,997,280,000 annually. $500 Million / $1,997 Million = 25%.
This is the correct allocation of Demand Required to purchase the Minimum Desirable level of Hash Security. If more than 100% of Demand is Required, then your block chain is unsafe and you must abandon your product immediately, or create substantial new demand for your unsafe products, with the hopes of achieving safety and without any possibility for growth, ever, without additional increases in demand. This could be known as a "Bail Out".
Note : Regarding 51% Attack situations, prior investors can always temporarily readjust the % of inflation during a hard fork, to "Reverse Bail Out" a weakened block chain.
However, in all other situations, the Minimum Desirable level for Hash Security is less than 100% of Current Demand. In the above scenario, it was 25%.
Thus we can, and responsibly should, adjust the expense to meet the desire. This could either be obtained through Selling stored Ethereum until the price of $950 reduces to $190, or through reducing the rate of inflation to 25% of current value.
Today that value is 11.3% , times 25% = 2.8%. This would equate to $500 Million of Expenses at $190, or 2.8% x 25% = 0.7% at $950.
Thus, so long as demand remained constant, either $1,997 Million - $500 Million = $1,497 Million of Veteran funds must get released, or the price must go up. This matters not if the current price is $950 or $190. So long as demand exceeds costs, price must rise.
Historically, when Bitcoin has cut its expenses sharply, the price has doubled, or tripled, within 6 months. Which is to suggest a 6 month lag, within relatively inattentive markets with largely uninformed buyers.
Keeping within the Example, to require a Bail Out, Investor Demand would need to fall by over 75%, following a 75% reduction in expenses, as a percent of Demand. Which in this case would be a reduction of the Block Reward from 5 Eth to 1.25 ETH, so long as demand fell by less than 75%, the Minimum Desirable level for Hash Security would be maintained, while the Price would forcibly move up after Veteran funds become exhausted.
Assuming no change in demand, as it has little to no impact on demand, and a reduction of expenses and increased projected worth could only stimulate demand, realistically, however... assuming no change in demand $1.5 Billion annually must be released by Veterans to prevent a price escalation, increasing expense, until equilibrium, which would be around $760 in the prior scenario.
However, in between $190 and $760, it would once again approach a value in which the % of inflation could get halved again, which is logically $380.
Thus, we have a Demand in excess of Minimum Desired Hash Security Expenses, at a rate of 4 to 1. Without adjustment, Expenses will necessarily increase until a 1 to 1 ratio presents itself. Knowing this, we desire to reduce the % inflation spent on Hash Security between the Spot Prices of $190 and $760.
If we follow the standard of 'halves' , then it is most desirous to cut the % inflation in half at $380, exactly.
With Bitcoin it took approximately 6 Months for the Market to adjust by more than doubling the value of the Coin for each 50%, or similar, reduction.
If Ethereum reduced the rate of Issuance from 5 ETH to 1 ETH, I believe the markets would adjust amply in less than 5 months, or say 20% Monthly. Thus, after 3 months, the value could get once again reduced in half, while maintain the same Minimum Desired Hash Security Expenses.
For any miners which sell less than 100% of ETH daily, their profits actually increase, as they are able to sell less ETH, while awaiting for a proper market readjustment, and sell more while the expense is over valued, which naturally occurs between times of adjustment.
Given the expectation that reducing the rate of Inflation from 11.3% to 2.25% would naturally challenge Bitcoin in both cost Structure, and Market Cap, as well as Gold and US Dollars, I would recommend making a new 50% inflation reduction, assuming 1 ETH August 1st, 50% reduction November 1st, 50% reduction February 1st, and 50% reduction July 1st.
At this point you'd achieve a rate of inflation of 0.3%, and a significantly escalated price. Assuming demand reduces to that of half the current demand, then cutting the rate inflation in half every 6 months thereafter would seem reasonable, to allow for full market appreciation between 50% reductions.
Obviously one could use a lower % monthly, like 15%, however that creates less forced market volatility. Forced Market Volatility prevents someone from acquiring excessive ETH at a low price, and holding for years at highly profitable rates. With a consistently reduced monthly expense, one could create a time frame in which they could escalate the price, and temporarily corner the market (perhaps).
Alternatively, one could leave the rate of Inflation at 0.3% forever, which would essentially force a competing coin, or Casper, to enter the market, once the rate of Hash Security Expense exceeded the acceptable value by some $ figure, which we can assess to be around $2 Billion of annual tolerable waste, or perhaps $10 Billion to support something of such magnificence as 0.3% inflation.
However, with any block chain, they essentially lose their Investment Grade status once the rate inflation goes unchanged for longer than 6 months, after securing some consistent level of minimal demand. Regardless of the amount, if the Market Reacts to the change faster than Management, then Management becomes slacking, and the price falls and fluctuates in value, without any predictable future rise, until the next adjustment.
If Demand is in excess of Expenses by 20%, then one might reduce bonus expenses by 20%, and then 10% every 3 months thereafter or 20% every 6 months, to counter any attempt from a single actor to sell massive amounts of Coin, driving the Price to levels of temporary insecurity. The larger, and less frequent the reductions, the more difficult this becomes.
I personally recommend reductions no less frequently than once every 6 months, of 50%, for Metropolis, assuming demand is half that of today, 1 year from now, and 1 Eth per block upon the first hard fork. An extremely cautious person could start with 2 ETH, and move to 1 ETH a month after.
However, keep in mind that the smaller the decrease, the greater the potential market tanking by hostile actors. Such an action could, unintentionally, provoke hostility, however at 1 ETH one would necessarily need to sell $4 Million daily to prevent the price from appreciating, or creating a noticeable effect. At 3 ETH one needs to sell $2 Million daily to prevent price appreciation, and so on.
Equaling the inflation rate of Bitcoin is very admirable. Cutting it in half is highly newsworthy, and would predictably create excess demand, creating substantial protection vs a hostile actor. However, regular reduction to suitable levels is the only way to maintain an assets investment grade status, and predictably higher future worth.