by Jamie Holmes
A recent proposal by Matthew Mazur for the Ethereum Classic network, ECIP 1017, looks to adjust the monetary policy to make it more like Bitcoin’s, introducing a finite supply and a reduction in the block reward over time.
On December 13, the ECIP 1017 proposal was presented, along with a discussion on Monetary Policy in the cryptocurrency space at the Ethereum Classic meetup in the City of London.
While the rate of Bitcoin money supply growth is decreasing and there will never be more than 21 million bitcoin, Ethereum and Ethereum Classic do not have fixed long-term money supplies. Any modifications will most likely affect prices.
Driving Speculative Demand
At present, the ETC network hash rate is around 700 GH/s where for Ethereum this figure is around five to seven TH/s, so the Ethereum Classic has a relatively lower security. To increase the security and price of the token, ECIP 1017 proposes to adjust current Monetary Policy to reward speculators in some way.
Mazur stated that the price of any cryptographic token, such as ETC, is made up of two elements; speculative demand and utility demand.
Further, he states there is a reason to believe that there are use cases for Ethereum Classic, there are things that it can do that Bitcoin cannot. But first, the network needs to achieve a higher hash rate, which translates into higher security. Speculative demand will drive the price of ETC until utility demand exceeds speculative demand, so the ECIP 1017 proposal is a way to do this.
Speculative demand will drive the price of ETC until utility demand exceeds speculative demand, so the ECIP 1017 proposal is a way to do this. By rewarding high-value, early investors, the plan is to shift the speculative demand for ETC, in turn raising the price. This then attracts more miners and builds a significantly larger hash rate for the network to make it more secure.
When coming up with the proposal to modify Ethereum Classic’s Monetary Policy, Mazur looked at the Bitcoin model, reasoning:
“The only successful crypto monetary policy is Bitcoin, it is the only one that holds any significant value…”
The chart below is from Mazur’s ETC Monetary Policy analysis, presented at the event, illustrating the ECIP 1017 proposal in terms of annual inflation and the total supply of ETC.
While multiple models were examined, the aim was to create a close resemblance to the Bitcoin Monetary Policy model. While a close resemblance can be achieved, the pre-mine of Ethereum Classic, amounting to 72 million tokens, means there are some slight differences. For example, while Bitcoin’s block reward experiences a 50 percent reduction every four years, Mazur’s analogous mechanism for Ethereum Classic is a 20 percent reduction every 5 million blocks. This means that the entire supply of ETC will be available earlier than bitcoin, by 2086.
This means that the entire supply of ETC will be available earlier than bitcoin, by 2086.
Lively Discussion on Cryptocurrency & Monetary Policy
For the discussion of Monetary Policy and cryptocurrency, panel members included; Jon Matonis, Founding Director of the Bitcoin Foundation, Edan Yago, Founder and CEO of Epiphyte, Matt Herbert, Director at the British Bankers Association along with cryptocurrency fund manager and Angel Investor, Alistair Milne. An interesting point of the discussion focused on whether cryptocurrencies or digital assets can be a store of value, medium of exchange and a unit of account.
Yago strongly stated that he is skeptical of Bitcoin or any digital asset becoming a unit of account and that digital commodities have got some value but they do not act as a store of value; this is down to their nature as a speculative asset.
However, Matonis disagreed stated that a regime of compulsory legal tender restricts the free market function of money. While Bitcoin is appreciating in value it will act as a store of value, eventually moving on to a medium of exchange and finally a unit of account. He does acknowledge though that the unit of account function will be the most difficult stage for Bitcoin to enter and could take a very long time.
Providing a different perspective, Milne stated that unit of account does not really matter, you can cater to all units of account, by putting these on top of Ethereum Classic.
Speaking on the Ethereum Classic Monetary Policy proposal, Matonis stated:
“Modelling ETC Monetary Policy on the Bitcoin model is the way to go, a decreasing rate and finite supply is important…”
While Mazur's change in direction for Ethereum Classic is encouraging, the community reiterated at the meetup anyone is free to contribute to the development and suggest other ideas or constructive criticism on the ECIP 1017 proposal.
With a move to a finite and decreasing rate of supply, could Ethereum Classic merge the best attributes of both Bitcoin and Ethereum?
The Outlook for ETC-USD
As stated in our most recent cryptocurrency report, we anticipated the announcement of the monetary policy proposal will boost the value of Ethereum Classic's token, as well as Ether's climbing value.
As the chart below shows, ETC-USD is on the verge of breaking the $1.00 psychological level, moving towards our initial target of $1.20. A further resistance level lies at $1.4149. A close higher than $0.9617 this week for ETC-USD, the resistance provided by the conversion line (blue), will confirm a long-term bullish outlook.