Some notes on ether economics
I started writing a post on ether economics but realized it’s a complex matter with many nuances, it’d take too long, and scrapped it. So, here’s the tl;dw(rite):
- Basefee = issuance, 0% inflation. Network can continue growing with a stable equilibrium, so it doesn’t mean the price / market cap can’t expand. Basefee < issuance, +ve inflation. Basefee > issuance, -ve inflation / deflation.
- Basefee target for 0 inflation pre-Merge: ~140 gwei. Basefee target for 0 inflation post-Merge: 15 gwei. Including priority fee, 150–180 gwei; 16–20 gwei respectively. Long-term target post-Merge (i.e. with 1M validators): 26 gwei (28–30 gwei with priority fees).
- L1 gas fees will remain high for the foreseeable future. Higher the L1 gas fees, the more secure the network is long term. L2 gas fees are moderately low now, and will plummet post data shards.
- What a brilliant solution. Keep L1 fees high, let the base network be highly secure and valuable. At the same time, offer low fees and high scalability for mass adoption on L2. Eventually, only L2s and large players will settle on L1.
- All other L1s also burn some ETH through bridges. E.g. Axie Infinity’s Ronin bridge is consistently the top 2 or 3 gas burner over the last month. In short, every “eth killer” is an Ethereum sidechain.
Rollups and data shards roll out, but there’s not enough demand. It’s easy to saturate dozens of TPS, but is there enough demand for tens of thousands of TPS?
Post-1559 and the Merge, Ethereum is the first and only L1 protocol that has a watertight paradigm where it can remain sustainable purely on utility and fundamental value generation. The elephant in the room is speculative value or monetary premium.
As a comparison, consider a high-TPS chain like EOS, Solana or Polygon PoS. They collect very little revenues in transaction fees (that’s their whole gimmick) while they often pay orders of magnitude greater in inflation to validators and delegators to keep their very expensive servers running and their flawed DPoS mechanisms from bribery/collusion. Worst still, as time goes on, these networks will become more centralized and difficult to run. These networks are bolstered purely by speculation for now. Indeed, it’s not clear if BTC can generate enough transaction fees in the long term to remain sustainable and secure, as the block subsidies collapse.
Ethereum has a robust base to build monetary premium from, but it doesn’t necessarily have to rely on it.