Why Is Ethereum Co-founder Proposing a Hard Cap?

On April 1, ethereum co-founder Vitalik Buterin played a “meta-joke” on the cryptocurrency’s community by proposing a hard cap of 120 million on the number of coins issued for ether. As it turns out, the meta-joke wasn’t a joke at all. Buterin is now suggesting that the community consider the pros and cons of his Ethereum Improvement Proposal (EIP). He has also proposed a revised issuance number of 144 million, in case it is too late to impose the 120 million liit. 

Ethereum currently doesn’t have an issuance limit or a defined monetary policy for ether. Per its initial presale in 2014, ether capped its limit to 18 million per year. Ether follows the same principles as bitcoin in that its rewards and distribution are regulated on a yearly basis. “This means that while the absolute issuance is fixed, relative inflation will be decreased every year,” the cryptocurrency’s developers wrote in 2014.  

But the looming Casper update, which involves a shift from Proof of Work (PoW) to Proof of Stake (PoS), has triggered introspection about governance and issuance limits for ethereum. 

Arguments for a Fixed Supply 

There are two main arguments for establishing a hard cap to ethereum. The first one is centralization. The Proof of Work algorithm, which is currently in use by ethereum, could end up consolidating mining operations for the cryptocurrency among select outfits. Bitcoin is already witnessing a similar situation. This is because solving problems to earn ether requires expensive systems with powerful CPUs that may be out of reach for average miners. As ethereum moves to PoS, establishing a fixed supply will help prevent such a situation by calibrating issuance at a variable rate and, thereby, preventing concentration of mining revenue with powerful machines. (See also: Are Large Mining Pools Bad for Cryptocurrencies?)

The second factor—related to the first one—is inflation. Introducing a fixed supply to ether’s issuance limit will boost its inflation rate. This will make ether a lucrative source of revenue for miners. Other governance proposals made recently, such as charging rent for user data on ethereum’s blockchain, will further diversify sources of revenue. For investors, placing a hard cap on ether’s limit could bump up its price and translate to significant gains for ether in crypto markets.  

To be sure, Buterin also pointed to a counter-essay he wrote earlier in which he argued against development of inflationary tokens because the practice encourages the holding of coins as opposed to their being used in daily transactions. Ethereum has positioned itself as a smart contract platform that has applications across multiple industries and in daily use. (See also: Is It Possible That Ethereum Is Not a Bubble?)

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.01 bitcoin.

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