Ethereum’s Transition to Ultrasound Money
November 28, 2022
4 min read
We’ve seen significant changes to Ethereum after its move from Proof of Work to Proof of Stake. Not only has energy usage diminished significantly, but issuance and burn rates of the Ethereum supply have also changed fundamentally. So let's dive into how ultrasound money's ability to become increasingly robust over time makes it the next generation of sound money.
Sound Money & The Gold Standard
The origins of sound money date back to the Gold Standard. It was called 'Sound Money' because of the ringing sound that gold would make when it clanked against other metals, but more aptly, sound money represented money that doesn’t devalue.
Understandably so, since the supply of gold stays the same.
The Tokenomics of Minting and Burning
With the crypto-economic era already in motion, let's return to Economics 101 to help us better understand Ultrasound money.
The basics of supply and demand tell us that when supply decreases, value increases, and vice versa. Simply put, the more rare an asset is, the more it will cost. Furthermore, since the supply of gold is steady and demand for it increases over time it’s value should always increase.
Fast forward to the wild west of tokenomics, and we’re willy-nilly manipulation of supply and demand. We're minting tokens out of thin air, and the value of each token is volatile as a result.
How Bitcoin Created Sound Money
One of the reasons that Bitcoin was so revolutionary was that it created the possibility of sound money in the digital currency age. Since the overall supply of Bitcoin stays the same, it's considered sound money. As long as Bitcoin maintains its Proof of Work consensus mechanism, the currency will never devalue due to increased supply.
What is Ultrasound Money?
Ethereum’s switch from PoW to PoS has enabled the chain to embrace Ultrasound Money as a tokenomic architecture. The term Ultrasound pokes fun at the mass agreement that sound money is the most reliable form of currency. The Ethereum Researcher Justin Drake, who coined the term (no pun intended), says, "Not only will the money not be debased, but the supply will be decreasing."
Issuance, Burn Rate, and a Supply Economics
In order to fully understand Ultrasound Money we need to touch on issuance and burn rates. Issuance and burning are quite simple concepts. Issuance refers to the amount of a token that are minted, while burn refers to the amount that is taken out of the total supply. Based on supply and demand logic, it’s better for a token to have a higher burn rate than issuance rate so that the value of the token increases with time.
Now you may be asking what the point of minting Ether out of thin air may be. Why is it something that blockchains do in the first place? Wouldn't this dilute the supply and decrease the price of Ethereum? The answer is pretty simple. Validating transactions is at the core of blockchain's innovation. With Proof of Work, miners are rewarded with Ethereum every time they complete a complex algorithm to secure the block. This reward comes from Issuance. In short, the supply is diluted to a minuscule level to ensure the security of the blockchain.
Post merge Ethereum’s burn rate will surpass its issuance rate. This decreasing supply of Ethereum over time is made possible because staking validator rewards aren’t as expensive for the network as PoW mining rewards. Thus, the amount issued (think issuance) to validators is lower than the amount Ethereum is burning.
As it currently stands with Ethereum's Proof of Work consensus mechanism, the issuance rate is roughly 13,500ETH/day. In other words, Ethereum's security mechanism rewarded validators with a fraction of the 13,500ETH minted out of thin air daily in exchange for their contribution to the network.
Since the merge, the Issuance rate has decreased to 1,600ETH/day, which is an 8x reduction in Issuance. Triple Halvening refers to this 8x reduction because if you cut 13,500 in half three times, you get the new PoS Issuance rate.
On top of that, the burn rate for PoS will be ~5,000ETH/day, meaning that the total supply of Ether in the market will decrease by roughly 3,500 ETH/day.
In short, Ultrasound Money is the next innovation in the crypto ecosystem. It represents a movement towards more and more stability, security, and robustness in how crypto users utilize Ethereum. If you're interested in blockchain technology and wondering what the future will look like, you should explore the Ethereum ecosystem further. By diving deeper into the mechanics of Ethereum, you'll position yourself as a valuable knowledge worker in the future of the internet economy.
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