Recently, the similarities and differences between Bitcoin and Ethereum regarding the issue of price self-limitation have also been discussed. Some further thoughts and analysis are recorded below for readers’ discussion and criticism.
The issue of self-limitation is actually somewhat subtle. Ethereum also draws on Bitcoin’s method of dynamically adjusting transaction fees (miner fees) in its calculations. For Bitcoin, the miner fee = vBytes (transaction size in bytes) * fee/vBytes (fee rate denominated in BTC); for Ethereum, the gas fee = gas (amount of computational resources consumed by instructions) * gas price (denominated in ETH). Therefore, on the surface, there doesn’t seem to be a problem with whether the fee rate or gas price is denominated in BTC, ETH, or USD. From the perspective of supply and demand economics, if the pricing currency relative to fiat currency is such that the expected fee income for miners (converted to fiat currency value) is just their cost (denominated in fiat currency) plus a reasonable profit, they can lower the fee rate (fee/vBytes or gas price) to maintain stability of the product of vBytes * fee/vBytes or gas * gas price relative to fiat currency.
The problem here lies in the intrinsic differences in the sources of value between the two systems. Bitcoin, as a value transmission system, derives its overall value (manifested as market capitalization multiplied by a certain amplification factor) from the total value it can securely transmit. The “security” here depends on computational power, and the total value that can be transmitted = sum(vBytes) * BTC price. Therefore, as the price of Bitcoin increases, assuming a constant byte throughput, the total value that the system can transmit will be higher (with a higher multiple relative to the price), resulting in a higher value for this value transmission system.
Ethereum, on the other hand, is different. Ethereum is a runtime platform for an application ecosystem. Its overall value comes from the prosperity of the aforementioned application ecosystem, directly reflected in the activity level of applications used (number of transactions, N). Assuming there are no security issues, meaning that computational power is not important here and PoS and PoW are equivalent, and can maintain the same level of security needs, the total gas fee = N * (average gas * gas price) = (N * average gas) * gas price. With a constant overall processing capacity of the system, (N * average gas) remains constant, and average gas is a constant value, so N remains constant. If the goal is to further increase the value of the system (thus increasing the price of ETH), it would require increasing N to a level beyond the system’s total processing capacity, denoted as N’ (N’ > N). However, the actual processing capacity of the system remains at N, and the result of the free market bidding is an increase in gas price to maintain N, thereby increasing the total gas fee (i.e., the system’s total revenue). The increase in gas price restricts the usage of low-paying participants, limiting the overall activity level of the ecosystem and consequently limiting the overall value of the system.
Even more “sinister” (“clever”) is that after Ethereum EIP-1559, the direct channel of total gas fee revenue to miners has been cut off, and it is all “burned,” while the system issues a predetermined amount of new ETH to miners. When the burning exceeds the issuance, entering the so-called “deflation” phase, it means that the system’s revenue is large A, but only a small a is given to miners. A > a, resulting in a surplus value delta = A - a. Furthermore, according to free market competition, the equilibrium income of miners is actually just their cost plus a reasonable profit. When miners transition from PoW to PoS, costs will decrease significantly, allowing a to decrease substantially. However, A is determined by market competition on the consumption side and will not decrease. Therefore, the surplus value delta reaches its maximum.
This resembles the maximization of surplus value by lowering worker wages in capitalist production. However, a problem with capitalist production is that as competition and product improvement continue, monopolistic positions are broken, and the overall industry profitability perpetually declines, resulting in the industry gradually becoming a sunset industry, with lower price-to-earnings ratios (returning to the cost of PoS hardware and software infrastructure).
Do not misinterpret this inference. The transition of an industry from emerging to sunset may take hundreds of years. Long-term trends cannot serve as the basis for short-term speculation. In this regard, I can’t help but recall one of the most successful financial capitalists in the world today, Mr. Warren Buffett. His company, Berkshire Hathaway, acquired a textile mill in 1962. Unfortunately, the textile industry was already in decline, and despite efforts to navigate and reposition, it eventually had to be abandoned, leading to Berkshire Hathaway’s transformation.
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