In the first week of August, Ethereum (ETH, Tech/Adoption Grade “A”) released its London hard fork, which ushered in three weeks of consecutive green candles. While ETH — along with the broad market — has taken a small breather after an exhilarating run, Juan Villaverde, crypto analyst and editor of the Weiss Crypto Portfolio, believes there’s still plenty more upside.
Part of that is due to the new process of “burning” ETH with each transaction, destroying the ETH used in transactions to prevent the soaring transaction fees we saw earlier this year.
In this week’s Weiss Crypto Sunday Special, Juan reveals his belief that while “the user experience on Ethereum has definitely improved,” this upgrade isn’t all roses and sunshine.
You can watch the interview with Juan and Chris here. Or read on for the full transcript ...
Chris:
Hi there, guys, and welcome to this week's edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. My guest analyst today is Juan. Juan, welcome back to the Sunday Special, mate.
Juan:
Thanks for having me, Chris. Pleasure to be here.
Chris:
Glad to have you, mate. Today's topic is “The Increasing Scarcity of Ethereum Could Lead to Higher Prices.” So let me set the scene here: Ethereum just went through an upgrade called the London upgrade. I think they call it that because the developer's meeting where all this was hashed out was in London.
Among the other upgrades, the major one that everyone's been talking about is Ethereum Improvement Proposal (EIP) 1559. So that's probably what you've heard in the headlines, EIP-1559. And why this has been talked about quite a lot is because it introduced a new fee mechanism into Ethereum.
Quick backstory: Every time a new block was added to the Ethereum blockchain — every 15 seconds — the block reward was given to miners. So, the miners would get that, and they would also get all the transaction fees in the last batch, or in the last block of transactions.
So those were two revenue streams — the newly created Ethereum and all the transaction fees in that block. That's now changed. There are now three numbers to keep track of. One is the block reward for the newly created Ethereum, one is this new thing called the base fee and then the third one is called the miner tip, right? Not minor as in small, but as in Ethereum miner.
Under the new mechanism, the block reward is two ETH per block. So, if an Ethereum block is made approximately every 15 seconds, that means every 15 seconds, two new Ethereum are created and rewarded to miners and whatever Ethereum is worth at the time is what it's worth. So that's the block reward.
The second one is the flat rate base fee. It's like a bare minimum transaction fee that everyone pays, right? That's why they call it the base fee. And it goes up or down depending on how full the previous block was. So, this is an algorithm that tries to keep the blocks half full. So, if the last block was more than half full, the base fee goes up, almost to discourage transactions. And if the last block was less than half full, it lowers the base fee to encourage transactions. So that's pretty straightforward.
The key thing that's got everyone excited about this feature, though, is all the base fees paid in Ethereum don't go to the miners. They get burned; that Ethereum gets destroyed and removed from circulation. So when the network’s really busy, you're burning all this Ethereum, right? And the reason the title of this episode says “potentially increasing Ethereum prices” is that now you've got this Ethereum destruction going on. If that outweighs the amount being mined, you've actually got deflation, which Juan and I will talk about in just a second.
So, the miner tip then, which is the third revenue stream, is an extra fee that you can include optionally with your transaction to ensure your transaction fits into a block. Say, in Scenario A, 200 transactions need confirming in the block. All pay the base fee because they have to, but no one includes a miner tip, right? If all those transactions fit into a block, that's fine. All those transactions get confirmed. If they don't fit into the block, then the miners decide how to handle that.
In Scenario B, say there's the same 200 transactions need confirming in the next block, but only 100 of them will fit into the next block. And let's say, 50 out of those 200 transactions include a miner tip as well as the base fee. So that means when the miners look at the 200 transactions waiting to confirm, they have to pick 100 of them to actually put into the next block. Well, they'll definitely choose those 50 that have the tip because they make more money. And then they'll just have to figure out which of the remaining 150 to include as well.
So then, Scenario C is more extreme: 200 transactions need confirming in the next block, but all those transactions include the base fee and a miner tip. Well, what if all those won't fit into the block? How does the miner decide now because they've all got a base fee and a miner tip? Well, they'll probably do what they did in the old system, which is they'll pick the transactions with the biggest tips because it's within the miner's interest to do so, right? So, they'll look at the transactions with the greatest tips and put those into the next block.
Ultimately, this creates what I call an algorithmic monetary policy. And it boils down to that ratio between how much new Ethereum is coming in terms of existence — according to Ethereum per block — and how much of it is being destroyed or removed from circulation with these base fees.
So, that’s once around the Monopoly board in terms of how that system works. The big question everyone's been debating is how on Earth does this alter the tokenomics of Ethereum, it's value, how it's going to be priced in the future, whether it's going to be inflationary or deflationary and so on.
I'm going to bring Juan back now that I've given that initial setup and see what his views are on this. So Juan, how do you feel overall about EIP-1559 in general?
Juan:
So to be perfectly honest, I am a very active Ethereum user, so let me start by this: I have mixed feelings on this. As an Ethereum user, I can say that, "Yeah, the user experience you're trying to transact on Ethereum has definitely improved." The fact that there is this base fee, the fact that blocks are actually bigger now, it means that you have a very reasonable chance of fitting your transaction in the next block whenever you submit it. In the past, I've had to wait in the past for hours, sometimes even a day to have a transaction confirmed on an Ethereum blockchain.
Chris:
Is that because you propose your transaction, and the wallet figures out how busy the network is currently, and then right after that loads of other people propose transactions? So what you think is going to take 15 seconds ends up being outbid by everyone else and it takes hours?
Juan:
Yeah, you can get a bid and usually the big problem with Ethereum was bidding wars.
Chris:
On the old system that was the case, right?
Juan:
In the old system, yes. These bidding wars were ridiculous because blocks would sometimes get full with the same transaction. Not full with the same transaction, but transaction fees would go up because I would post a transaction typically to trade on something like Uniswap, but somebody would look at that transaction and go, "Hey, I can front run this if I pay the miner a little bit more." So they would just increase their fee by a little bit and then that transaction gets included. And sometimes what would happen is a lot of people would look at the memepool, where unconfirmed transactions are sitting, and start these bidding wars before they're even mined. Before these transactions even make to the blockchain.
Chris:
So, you've made your intention clear and you want your transaction confirmed quickly before the price moves or before it's confirmed everyone else can see your intention.
Juan:
Yeah, exactly. So miners are basically extracting rent in this sense and pushing transaction fees higher than they would be otherwise. If this incentive of collecting a transaction fee was removed — and I believe that what the developer's reasons, and rightly so — then they're probably just going to include transactions now on a first come, first serve basis. It's going to at least reduce these bidding wars. I think this is the theory. The theory is that it also makes fees more predictable, right?
In Ethereum, it's important to know how much you should be paying. Before EIP-1559, sometimes wouldn't know. When you have the base fee now, you know how much it is. If you pay the base fee, you have a very reasonable expectation of having that transaction included in the block. And the blockchain itself will tell you, "Hey, this transaction should be 100 gwei — gwei being the unit of account when you're paying transaction fees.
Chris:
A transaction fee, almost.
Juan:
Yeah. A gwei is a very small amount of Ethereum, really. So the fact that this upgrade makes fees more predictable and less subject to these bidding wars goes a long way towards alleviating these issues. I don't think they solve them completely, because like you said, if everybody includes a tip, then you're back to bidding wars again.
I, by the way, have skipped over a lot of details on these bidding wars and how they work. I mean, if you want to look into this, just google “miner extractable value” and “dark pools.” There are whole debates on this issue. It's a huge problem on Ethereum.
Chris:
I was going to say, in my Scenario C, where all the transactions that fit into the block have a miner tip, you're back to the old system.
Juan:
Yeah. During high network congestion, during peak levels — for example, when all asset prices are surging — it's going to resemble the old system. This is just not going to work for those circumstances.
However, when there's a reasonable amount of load on the Ethereum network, yes, this goes a long way. This makes things easier because, like I said, now you'll have the blockchain telling you how much you should be paying if you want to be included in the next block before wallets have to figure this out.
Wallets do not have a good way; they use these algorithms to estimate what fees should be paying, but they don’t do a good job.
Chris:
What did they do? Look backwards at previous blocks on transaction fees.
Juan:
Yes, they would basically look back at previous blocks and give you a number and say, "Well, if you use this number, you're probably going to get your transaction included." Sometimes it would work and sometimes it wouldn't. Sometimes you would have to wait an hour and the network load was not even that high. So you're left thinking, "Why? You just told me that 50 was good enough, but I can see now that it's 90. So how come? Now I have to overpay." So it created all matter of problems.
I think the root cause of the issue is that Ethereum's fee system, fee structure was imported from Bitcoin. And it works on Bitcoin, who cares? This is not an issue for Bitcoin because Bitcoin's a simple system.
The idea that you need to rush your transaction and send it immediately on the Bitcoin network is somewhat less true. You can afford to wait if you're moving Bitcoin around because it's just a payment. Whatever it is, it's just paying. But on Ethereum you're using smart contracts, and sometimes you really need your transaction confirmed. And you cannot afford to wait. So the fact that this new system has predictable fees, or at least more predictable fees, I think that's a huge plus. I think it's a huge win. I was looking forward to this update. I've had a chance to use it for a few days, it works.
I actually had some doubts. I thought, "Well, maybe it doesn't work, what does the paper for this say?" I don't have the name of who wrote the paper, but he wrote about it years ago, saying, "Well, you know, transaction fees on Ethereum are usually five gwei, but sometimes they go up to 50. During those times when it goes to 50, then you should probably have this new system that's going to smooth things over.”
Basically, I think the concept for him was block sizes are going to be more variable now. So we're going to create this system where this is the fee, and if there are too many transactions, instead of resorting to a bidding war, we're just going to increase the block sizes as part of the update. Like you said, the network targets a certain block size.
Chris:
Right. Well, actually the block size is the same, but it's targeting 50% capacity. So they call it the gas target, right?
Juan:
Exactly.
Chris:
So you can still fill a block up, but that would jack up the base fee for the next one quite a bit.
Juan:
Exactly. But practically speaking, what they're trying to go for is since the Ethereum network targets a certain block size, what they're trying to go for here is, "Look, if there are more transactions than we anticipated, maybe the block gets a little bigger, but the fees don't change." That's what they were going for. And I think it's beautiful, I think it makes sense. So that's what I like; I like the fact that the keys are predictable. I like the fact that they addressed these bidding wars and, for now, it seems to be working. I do believe, like you said in Scenario C, during extremely high congestion, network congestion, I think it's going to be pretty much the same as it used to be, that's fine—
Chris:
We're going to get that tested. That's going to be tested soon, I'm sure.
Juan:
That's going to be tested soon, and we'll see. Maybe, again, if the blocks are filled, fees continuously go up. I think, maybe, we may have reached some sort of equilibrium where, hey, the fees shoot up, but the base fee goes to like 150. And if you pay 150, boom, your transaction is confirmed. We'll see. Like I said, I have a pretty good experience doing this and I've had to wait hours and hours and hours to have transactions confirmed on Ethereum. It's gone. It got to the point where I moved to sidechains and Layer-2 solutions because I had to. Could not afford to use Ethereum anymore and the same thing was true for a lot of people.
So that's good. I like the fact that they're going for more predictability with fees. And that they're reducing the incentive for miners to participate or be complicit in these bidding wars because they have been at times.
What I don't like is that, to me, there's a contradiction. When you say, "Well, we want to make Ethereum more affordable, we want to make Ethereum easier to use and more predictable. We want to make sure that these transaction prices don't just suddenly surge and there's nothing you can do. We want to make sure that this resource is more efficient in terms of how it's used. But, hey, we're going to start destroying it. We're going to make it scarcer." For me, that helps speculators only.
Now, I realize why they did this. I realize they need to disincentivize miners. So what did they do with this money? Well, no one gets this money, they’re going to destroy it. I don't know if there's a better solution.
What I do know, however, is that as the price of Ethereum goes up in fiat terms, we still continue to live in a fiat world where things are priced in dollars. And when people say that transaction fees in Ethereum are high, they don't say, "Well, I just had to pay 0.15 ETH for this transaction." They just say, "I had to pay $400 for this transaction."
So, what if you introduce an upgrade that doesn't necessarily make the price of Ethereum go up, but it certainly goes in that direction, right? If you're making this asset scarcer, you're helping its price go up. And I think we need to get into this discussion of, is a good thing for the price of Ethereum to be as high as Bitcoin's, for example. I argue, "No, it's not." You don't want this on Ethereum.
You do not want Ethereum to be an unaffordable experience because what that means is smart contracts on Ethereum are unaffordable and people cannot use them. You see this contradiction where people look at Ethereum, they look at network statistics, and they go, "Well, a lot of people are using this thing. All these applications are running on thing, so that's bullish. That's good. I'm going to buy Ether." However, if the price of Ether is too high, this usage is destroyed. These applications—
Chris:
[Usage is] discouraged.
Juan:
... are no longer running on Ethereum. Yes, it's discouraged.
So, the speculative act of buying Ether because you like the Ethereum economy does not help the Ethereum economy.
Chris:
It's like buying millions of barrels of oil and sitting on them.
Juan:
Because you're bullish on oil. It's like, "Well, I like the fact that this world economy, these humans and this planet, they all like oil. I'm bullish on oil. I'm going to corner the market. I'm going to buy all the oil that there is available."
Chris:
To push the price.
Juan:
Well, if you do that, people will not be able to use oil anymore and will move away from it.
Chris:
I'm going to ban some of it as well for nothing.
Juan:
Yeah, now you're sitting on this useless resource, right? Now you're sitting on a useless resource because you corned the market, you bought up the entire oil supply because you're so bullish on oil.
This is an extreme example, right? But if you take this supply away from the market because you're bullish on the fact that other people are using it, you hurt yourself.
Why?
Because people will probably look for alternatives and stop using it. And it kills your case. It kills your investment thesis. Now it makes no sense for you to own this oil because no one uses it anymore.
I'm not saying this is going to happen with Ethereum, but what I'm saying is that's what you're contributing to. If the price of Ethereum is up, you're contributing to people migrating away from it. And this has already happened. Look at Binance's (BNB, Tech/Adoption Grade “C-”) chain. Why did Binance's chain go from nothing to, I think, it's like the fourth largest or the third largest?
Chris:
Because Ethereum was jammed.
Juan:
Exactly, because it was a cheap version of Ethereum. It could do anything that Ethereum could, but it was cheap and affordable. Why was Polygon (MATIC, Tech/Adoption Grade “C-“) so successful? Because it's an Ethereum clone where fees are cheap. I mean, you don't even know how much you're paying; it's so low you don't care.
So being cheap and affordable is a thing. I mean, it is something to strive towards if you're a smart-contract platform. And this burning of Ethereum is detrimental to that end goal of Ethereum being the fuel for the decentralized economy. If this fuel becomes too expensive, well, we're going to search for alternative fuel sources. That's what's going to happen.
This is what we're doing with oil right now. Actually, that's not why, it's global warming. But it's also the fact that we're going to run out of oil, so we better look for an alternative.
Chris:
That's valid.
Juan:
This is the same thing. It's a scarcity issue.
Chris:
It's like being bullish on commodities and wanting oil to hit $500 a barrel to make you money. If oil went to $500 a barrel, you bet your boots, by necessity, you'd have to look for alternative fuel sources. Just by economic necessity because everything would just skyrocket in price otherwise. It's just not economically viable. People wouldn't stand the price of goods at $500 a barrel of oil. So I'm with you on that one. And I suppose you have to use an extreme case to demonstrate the principle.
Juan:
Exactly, exactly. And by the way, this point of view that I have, I didn't just concoct it out of thin air. I went through this.
I started trading very actively on decentralized finance (DeFi) with the price of Ethereum around $300. I was using DeFi back in 2019. Back then, Ethereum was so cheap that many of these DeFi applications had no fee. You could just use them for free essentially. Eventually, they had to start charging a fee; this was in 2020. But in 2020, fees were still low enough that you're paying between 50 cents and $1 usually. An expensive fee in early 2020 would be around $5. So you would pay $5 for a transaction, you would go, "I don't care."
By late 2020, transaction fees were in the $500 range, forcing users to think, "Hm, should I do this transaction or not? Can I afford to do this? Can I afford to do this?"
And by the way, I don't have a small account. I think probably 99.9% of people have smaller accounts than I do. So if I'm having these issues, the overwhelming majority of users are having these issues. This is a fact.
So suddenly, there's a problem that you never even thought about before which is, how do I make sure [I can do] all these things that I need to do on Ethereum ... while using Ethereum the least? How can I minimize my transaction load on Ethereum? Because this is going to kill my entire strategy.
Chris:
Okay. You could take Ethereum out of that though, and say it like this, "How do I do as least activity on the expensive platform?"
Juan:
Yeah.
Chris:
That's your point, though: Just like in traditional investing, fees and taxes are the two things that put a drag on your returns. Because that's money you can't then compound. So it is similar concept; the more fees you pay, the more money that could have been invested.
Juan:
Yeah. Not only that. Sometimes, let's say, you're making ... I don't know, this hypothetical example, let's say you're making $1,000 a month on arbitrage. Now let's say every transaction is suddenly $200. Let's say you need to do 10 of these transactions per month. Oops, you're no longer profitable.
Chris:
I was going to say. Yes.
Juan:
I have to stop doing arbitrage.
Chris:
Well, or you move to a Layer-2 or something like that, like you said.
Juan:
Correct, yes.
Chris:
In your opinion, if destroying the Ethereum doesn't help Ethereum, would that be the same as staking Ethereum in a DeFi application? Because that's still removing it from supply, but it's not destroying it.
Is there a difference there between burning it for transaction fees or temporarily moving it from supply by all the people staking Ethereum in DeFi applications?
Juan:
I think there is a difference, and the difference is — like you said — this Ethereum is not destroyed. It's locked but not destroyed. It's still here, so it could be released if the price was high enough.
Chris:
That's a good point.
Juan:
Let's say, for example, you could see free markets doing the same thing. You know, when the price of an asset tends to go up, supply tends to increase. Now in the crypto economy—
Chris:
Which gives incentive to sell.
Juan:
Right. In crypto economies we do not have this, but if there are stockpiles of Ethereum sitting there somewhere — like we see with oil — and the price of Ethereum goes up, guess what? A lot of this locked Ethereum is going to be released and sold into the market. And that's going to help prices go down.
But if you're destroying it, if you're permanently removing this from circulation, there's no offsetting that. This thing is gone. So does it make sense to take the fuel of the decentralized economy and just burn it? Does it make sense to do that? I argue that no, it doesn't make sense. You should not do this.
I don't know what I would do. I think I would, however, distribute it maybe to stakers. If you're staking Ethereum, these transaction fees go to you, the staker, rather than the miner. I think that Ethereum has become such a scarce resource already that you do not want to add fuel to that fire, and yet this upgrade does exactly that.
So this is my biggest issue with this Ethereum. By the way, I'm going to say something controversial here: I think that the reason you do not hear this argument more often is the overwhelming majority of Ethereum participants are speculating on the price of Ethereum. So you always get the speculator's point of view, which is something that's irritating to me. You always get the speculator's point of view. "Oh, number go up? Good." No, not really.
Arthur Hayes, founder of BitMEX, one of my favorite guys in crypto in the entire world—
Chris:
He's a good writer.
Juan:
He's an excellent writer and he's thought provoking. He wrote a very good essay on Bitcoin and Ethereum. He was trying to poke holes into both of these cryptos. He said, "The issue for Bitcoin is, well, we have the halving. We're cutting issuance every four years. What if transaction fees cannot make up for that? Well, the network would freeze. It would cease to make sense. So, conclusion, Bitcoin needs people to use it because eventually the block subsidy is going to go away, the miner's subsidy is going to go away, and we're going to need transaction fees to replace that subsidy." Good, that's an excellent point.
And yes, it's true. I argue that the biggest weak spot in Bitcoin is this, that's the only point of speculation. You're speculating that, yes, a lot of people will be using it, and he points this contradiction of being gold and a store of value, which is something you do not use very often. And at the same time, requiring that people use it. So it's like on the one hand telling people to buy this asset and never use it again, and on the other hand, you have a network that is structured in such a way you need people to use it.
Chris:
To sustain itself.
Juan:
So, that is Bitcoin's biggest weak spot.
And for Ethereum, I think he correctly identified that you cannot be this uber deflationary à la Bitcoin store of value, because that's going to completely destroy your fundamental use case to be fuel.
We hear often that energy is going to be cheap and abundant. Cheap and abundant, that's energy because everybody should be able to afford to use it. But what if it's extremely expensive? What if it goes up 10 times? What if the cost of doing business goes up 10 times in a year, year after year?
Speculators on Ethereum are going to say, "That's a good thing.” Users of Ethereum are going to pack up and leave." And if all you have left—
Chris:
Which is harmful for the price long term.
Juan:
Exactly. It makes the price collapse because now there are no users left, only speculators.
Chris:
Because the product isn't any good.
Juan:
Yeah. I think that was an excellent point, and I was like, "Yeah." Because he said, "Listen, yeah, they are doing EIP-1559 now. They're going to be burning fees now. But these guys have already changed monetary policy like three, four times in the past. There's no guarantee that they're not going to go back to the drawing board on this issue of burning fees and go, "Maybe that wasn't such a good idea. We need the price of Ethereum to go down."
I always argue that Ethereum's market cap ... Sure it can be high, but [it should be that] Ethereum's market cap can be high and yet the value of per token can be low. Each individual unit, the price of each individual unit, should probably be low. And if fees are priced in those units, then it's going to be cheap and abundant.
Now, of course, a counter argument to all of this is tech upgrades. Like the difference between oil and Ethereum is you can introduce upgrades on the Ethereum economy and make this thing 10,000 times more efficient, 100,000 times more efficient and this can never become an issue.
Chris:
Which would be akin to, say, the improving efficiency of an internal combustion engine. Instead of getting 10 miles per gallon, it'll get 100 miles per gallon.
Juan:
Yeah, only in Ethereum, you'd go from 10 miles per gallon to 10,000 miles per gallon and, all of a sudden, the price doesn't matter. This is possible in Ethereum and, in fact, this is what you would get with Ethereum 2.0 and a fully charged network. What happens between now and then, though?
Chris:
Experimentation.
Juan:
What if something better comes along? Yeah, yeah. I think this issue will be revisited at some point.
Though I'm a holder of Ethereum; I haven't sold any. I still use it. Just like I'm not worried about Bitcoin’s usage statistics right now, I'm not worried about Ethereum burning ETH tokens right now. However, I do not think it's a good idea and I certainly resent all these comments that basically reflect a lot about the current state of the crypto market, which is it's dominated by its speculators. Because the only reason you would get the consensus that burning is good, is if most people are just long ETH and they don't care. They just want the price to go up. So they don't care.
As a user, it's not good. The price of Ether going up over the past 12 months, 18 months, for me, it wasn't a positive. Yeah, I made some money on the ETH token itself, but I was actually using DeFi applications and I was killed by the rising prices. So were a lot of people.
Another issue: We want this thing to be the world's distributive computer that everyone has access to. Well, guess what? Most people don't have access to Ethereum. It's too expensive. If you have local communities, small projects, experimenting with smart contracts, they're using Binance Chain, which they think is shameful. You know, because Binance Chain is completely centralized, and this is what they're experimenting on because that's all they have. They really cannot afford to use Ethereum.
So yeah, mixed feelings on EIP-1559. I like the fact that fees are more predictable, but I absolutely do not think that Ethereum should even entertain the idea of competing with Bitcoin on being a store of value which is the narrative that some people are floating. "It's a better store of value." It should not be a store of value. It's fuel. If Bitcoin is potential energy, Ethereum is kinetic energy. It's released when it's used. Ethereum is something you use. I keep a balance of it here and I use it constantly. And I refuel Ethereum constantly. I buy and sell to use.
Chris:
So interesting. That's the model I've used in the DeFi Revolution course. I've intentionally taught it this way because I think it is an easier, more logical model to get your head around. When I'm instructing people, I say, "Right, buy a couple of hundred dollars’ worth of Ethereum and put it in your MetaMask. Then turn some of your dollars into crypto dollars like Tether (UST) and then put that in your DeFi wallet." And then, from there, I'm teaching people to invest their dollars for dollar returns. And then to just burn through the Ethereum as a utility token. I haven't explicitly said that Ethereum is an investable asset because I think that will confuse people.
Juan:
Right.
Chris:
That's the way it was designed, the irony is that the reason the ETH token is valuable is because it's useful. But it's not meant to be hoarded, it's meant to be used. And Polygon is the perfect example of that because, I keep about .2 MATIC in the wallet at any one time just to prevent bricking my wallet. But any other MATIC I've got is on loan or whatever, right? You don't even think about it, don't even look at a transaction fee, it's just ridiculous.
Juan:
Yeah, you don't even think about it.
Chris:
No.
Juan:
It's how you overpay on Polygon. I just overpay because I can afford to and I have my transaction confirmed within seconds if I overpay. So I'm going to go, "Okay, price for this should be 1.5 MATIC to have it confirm; I'm going to pay 10." And, bam, it's confirmed immediately.
Chris:
It's still negligible, eh? That's why we shouldn't worry too much about this, because there are ways around it. The base layer can do what it likes. You also said that EIP-1559 wasn't designed to increase the price of Ethereum, it was designed to make transaction fees more predictable. That's a good thing, right?
Juan:
Yes, yes.
Chris:
Because it's about user experience. The side benefit of burning the Ethereum has other economic impacts which you say are undesirable in the long run, right?
Juan:
They are undesirable, and I'm not too thrilled about the fact the burning of fees has taken over the narrative. What most people don't know is this is just a fee upgrade to make fees more predictable and to disincentivize a group of people who are extracting too much value from the previous system by rigging the fee game. These miners, a lot of them, were colluding with certain people to make fees go up and enrich themselves. And Ethereum developers correctly saw this and said, "You know what? You're not getting those fees anymore. We are going to destroy them."
I pose the question, is there a better way? Is there a better way to distribute these fees? I think you could just distribute them to token holders instead of destroying it. I don't know how you would go about doing that, so I'm not even going to go there. But I think there are more elegant solutions, which is why I think eventually this issue will need to be revisited. I don't think you can afford to burn all this Ether. I think you need to come up with something better. Maybe you have a treasury system. It gets locked in a contract and token holders can vote on how this Ether is spent, but destroying it seems pointless. It's like, "Why would you do something like this?"
Chris:
Well, isn't the game going to change again when we get to the launch of Ethereum 2.0? Because exactly what you just said is going to happen. The mining rewards are going to go to holders. So that's how it's going to work, isn't it? When we get to Ethereum 2.0 and we go away from proof of work. Well, then the validators, the ones that have staked Ethereum, they're going to get the bulk reward and the miner tip. And this space fee is still going to be burned.
Juan:
Like I said, if you want to have one prediction as a takeaway from all this, this issue of how the monetary policy of Ethereum works will be revisited I'm pretty sure. They're going to have to go to the drawing board and say, "Okay, this is not working." I mean, it is working, but, "Hey, I think we can do better." And I think they can do better. I think that the brute force, low-hanging-fruit solution is no one gets this ETH. But I think you can disincentivize miners by giving this away to a third party, like a treasury.
Like I said, you can create an entire governance structure out this. I mean, now you're collecting ... It’s being said that about $100 million of ETH have been burned. That's a lot of value that's just being destroyed. Why aren't you keeping them in a smart contract and then have people vote on how it's spent? That seems to make sense.
Chris:
I'm looking at it right now.
Juan:
That's a lot of money.
Chris:
I got 32,000 ETH, it's $102 million at current prices have been burned.
Juan:
That just hurts to see. Donate it to charity. Seriously, why destroy it? That's a lot of value that just being evaporated for no reason. Seriously, donate it charity. I mean, give it to someone.
Chris:
Well, it's $10,000 an hour right now.
Juan:
Ridiculous. It's wasteful.
Chris:
Oh, wait a minute, about $10,000 a minute.
Juan:
It's wasteful. You're wasting resources, literally. Quite literally wasting resources.
Chris:
But check this out: Don't you find this slightly different to critiquing, say, the monetary policy of the Fed? Because this A) is changeable by the community, and B) if we do this experiment all the data is transparently on the blockchains to review for everyone to see. It's not like a clandestine thing, right? We can try it in the real world, out in the open, in the light with real economic actors. Human action all over the place, proper economics in action based on actual experimentation. The community can go, "This is working for us ... or it's not."
Juan:
100%. Like I said, I have mixed feelings on this upgrade because I think this one area of the upgrade needs some rework, in my opinion. I think just burning fees ... Yeah, maybe it makes sense for now. It's not going to be that big of a deal in the short term, but down the road it may be. And like I said, there're probably better uses for this money.
But overall, I like the upgrade and think it was necessary. Like I said at the beginning, Ethereum's fee structure was designed from Bitcoin. They just imported it over from Bitcoin, and it just doesn't make sense for a smart-contract platform. These fees need to be more predictable. They can't be just a wild free-for-all like it is in Bitcoin.
Chris:
To your point about having Ethereum be cheaper in dollar value, that is actually why you are suggesting, let's say, "I'll put all fees to stakers." Because the objection of a speculator will be like, "Well, one, that's going to create more sell pressure." And you say, "Good. It's going to push the price of Ethereum down and make it more useful," right?
Juan:
Yeah. The price of Ethereum going down is a good thing.
Chris:
Yeah, so if you reward it to stakers, they might just sell it and increase the sell pressure, and you're saying, "Good," because that makes the utility of Ethereum open to more people. So that's the outcomes argument.
Juan:
Yes. I was careful to say, however, that I do think the market cap of Ethereum overall should be high. This is because when it removes the proof of stake, market cap equals security. The larger it is, the more difficult it is to attack. So market cap as $10 trillion? I don't care, but what is the price of Ethereum? What is the price of each individual unit? I don't know, $100?
Chris:
Right, that favors inflation. Lots of tokens, very cheap, massive market cap.
Juan:
Yeah. You can also do a hard fork where you just do a split and you split each ETH 100 times. And then everybody has more, the market cap is the same and now fees are low.
Like I said, I don't pretend to have all the answers here. You do need to have a high market cap for security reasons. However, it's a careful balancing act where on the one hand, yes, you want this thing to be worth a lot of money so it's more difficult to attack. But on the other hand, you want fees to be low and, all else being equal, prices going up is a bad thing. So yeah, it's a careful balancing act.
And like you said, I mean, they're probably going to experiment on this and they're going to have to come back and tweak.
I know this is completely off topic, but this is exactly why Ethereum will never be a store of value. Because you do not have the deterministic monetary policy as you do with Bitcoin. With Bitcoin, you know exactly what monetary policy is going to be. With Ethereum you just don't know.
Chris:
That's hard money, very hard money.
Juan:
That is hard money. Predictable monetary policy. It's not deflationary vs. inflationary — by the way, deflationary is anything for which there is more demand than supply, and that's true of Ethereum. That was true of Ethereum before, at least. You do not need to destroy the token itself in order for it to be deflationary. You just need more people wanting it than there is supply of it.
And that's not what makes it a store of value, by the way. What makes it a store of value is the fact that it's immutable, nothing about it changes. And that’s Bitcoin, that's not Ethereum. That's a good thing, predictable. You know what it is. You know what it's going to be. That's why people in Bitcoin — rightly so — are very reluctant to change things because they know that's a value proposition. They know that immutability —
Chris:
That is the consensus as well.
Juan:
Yeah. So immutability is the value proposition. With Ethereum, they just pushed an upgrade, now it's slightly more deflationary. They've already changed this, I think, three times. The issuance, what they are going to do with the fees, this has already changed in the past. It already pretty much a guarantee that it's going to change in the future. In fact, we know it will. Because they're going to go for proof of stake.
Chris:
It makes me laugh every time.
Juan:
What changes will that bring?
Chris:
Right, exactly. What makes me laugh when people find out why. The first, most common thing people say is, "Well, it's true there's only 21 million of them," right? So that's like the message that never changes. It's like everyone hears about that. But with Ethereum, you might be like, "Well, it was 21 million, but then there was this thing, there was this hard fork and now it's different, and then it changed again to this thing." People are like, "What the hell?" So it's tough.
Juan:
And then you go, "Okay, so you don't know."
Chris:
Yeah. Well, it changes all the time. We're okay, fine. Okay, cool.
Juan:
And that's a good thing, because Ethereum is not Bitcoin, Bitcoin is not Ethereum, and these two should be separate, and that's okay.
Chris:
Exactly, they're not comparable.
All right, Juan, we'll wind up there. For any of the viewers that want to have a look at the data you can go to etherchain.org/burn. That will show you the real-time data of how much Ethereum is being destroyed and whether it's inflationary or deflationary, whatever, in real time.
But that's going to do it for this edition of Weiss Crypto Sunday Special. Juan, thanks for being with me this week.
Juan:
Thanks for having me, Chris.
Chris:
Check your inbox for the next edition of the Weiss Crypto Sunday Special. Until then, it's me, Chris Coney, saying bye for now.
