Cryptocurrencies – Ethereum
Ether is the underlying token that powers the Ethereum blockchain, but it serves a slightly different purpose than Bitcoin does for the Bitcoin blockchain. Although Ether is traded on public markets and has shown similar price appreciation to bitcoin, they are quite different by design. Ether is not intended to be a currency unit in a peer-to-peer payment network, but rather acts as the “fuel” or “gas” that powers the Ethereum network.
At the highest level, Ethereum is an open source platform that runs smart contracts. When smart contracts are executed on a blockchain, they become self-executing when certain conditions are met. Running smart contracts requires computational resources that must be paid for in some way – this is where Ether comes in.
Ether is the crypto fuel that allows the execution of smart contracts. It provides the incentive for nodes to validate blocks on the Ethereum blockchain, which contains the smart contract code. Every time a block is validated, 5 Ethers are created and awarded to the successful node. A new block propagates approximately every 15-17 seconds. Some nodes can find the correct solution for a block without having it included in the network. The Ethereum network rewards these nodes with 2-3 Ethers.
Individuals interacting with decentralized applications on the Ethereum platform will have to pay the network in Ether for use. Developers are incentivized to create these decentralized applications because they will be paid in ether for their work. Developers are also incentivized to write quality apps because wasteful apps will be more expensive and probably won’t be used as often as better alternatives.
Using this information, the narrative around Ether becomes clearer. Its end use will most likely be abstracted by clicking a basic button, but assuming Ethereum is widely used, Ether will be moving rapidly between users and miners. Its value is directly related to the use of the Ethereum blockchain.
Is Ether Inflationary?
The total supply of Ether is not limited like the total supply of Bitcoin. 60 million Ethers were created during the initial sale, 12 million of which went to early backers and the Ethereum Foundation. Most of the money raised will be used to fund future development initiatives.
Ether’s issuance model is unique in that it doesn’t stress deflation like most other popular crypto assets. Ether issuance was initially capped at $ 18 million per year, which is 25 percent of the initial offering raised at wholesaling. But more recently, Vitalik Buterin said that emission levels will depend on safety and not on a predetermined schedule. Although this rate is fixed each year, the rate of money inflation actually decreases each year, making Ether a disinflationary currency. Disinflation occurs when the inflation rate decreases over time.
Ether is expected to be lost every year because some users may forget their private keys, others may die without transmitting their private keys, and still others may send Ether to an address without the corresponding private key. As the network grows, the annual rate of Ether loss is expected to equal the annual emission rate. The hope is that Ether will be deflationary by 2140, around the same time that Bitcoin stops issuing new currencies. For an in-depth look at Ethereum’s issuance model, read Joseph Lubin’s work.
These calculations are not set in stone. Ethereum is expected to change its consensus algorithm from proof of work to proof of interest, which in theory is supposed to be more efficient and requires less mining reward. This change has produced some uncertainty within the ecosystem. The Ethereum Foundation is currently investigating the possible monetary effects and claims that all changes to the network will be handled by smart contracts, as opposed to individuals who may have ulterior motives.