A major change in the Ethereum (ETH 1.65%) blockchain to a proof-of-stake protocol may be finally taking place later this year. In this Motley Fool Live segment from "The Crypto Show," recorded on June 1, Fool.com contributors Travis Hoium, Jon Quast, and Chris MacDonald consider how this development could impact investors.
Jon Quast: I thought this was kinda interesting. Talking about the merge, they say that the tokenomics here are going to change a little bit for Ethereum. I don't know if either of you have thoughts here, but they're calling this the triple halving. It's a nod to Bitcoin. Every four years or so, the amount of new Bitcoin per block gets cut in half as a mining reward. Ethereum, they're basically saying this is like havening except there's three things that are happening here that are going to create a supply and demand imbalance. For one, fewer new tokens are going to be coming in to circulation. Something like the inflation rate right now is something in the ballpark of 4.3 percent. They're saying post proof-of-stake merge, it's going to be like 0.4 percent. Less than half of what Bitcoin's inflation is.
Chris MacDonald: Is that per year?
Jon Quast: Is that per year? That's good question. It must be. Now I'm saying it out loud and I'm not sure. [laughs].
Travis Hoium: I think this is interesting. Look, tokenomics is one of these areas that's so new that we don't really know what drivers are going to drive specific things. I'm always a little bit leery of saying, OK, this can be some burning or havening and then therefore, that will lead to some increase in value when a blockchain like Ethereum, the entire idea is that you are able to build smart contracts and utility into it. You want people to be able to make transactions. If you're making the token behind it more expensive, does that actually make it more difficult to make transactions?
I guess that's my question there in the tokenomics of it. Is I understand why people think that the idea that there being less tokens means that they will all be more valuable, but none of these things happen in a vacuum. We've seen recently, Bitcoin has gotten absolutely crushed over the last six months. Theoretically, it should only be going up in value because of halving and more demand. You have to have the demand and the supply matching. These are at the end of the day currencies. We've got to able to do something with them. I think that's the dynamic I like to think about, is I would like to see the utility built out and then the value will end where it is just like we do with the dollar, but we'll see where that ends up. I don't know if you guys, if you had different thoughts, Chris.
Chris MacDonald: Yeah, I think that's a really good way to think about it is that dichotomy between users and investors. For an investor, producing supply makes sense. This triple halving is definitely an interesting development. One thing that I don't know, I didn't see anything if this is with respect to the upcoming difficulty bomb. But I sat on top of this, Jon, do you know? Are they making it more difficult to to get new tokens via, I guess it's going to be staking eventually, the difficulty bomb, or is that with the mining aspect of it?
Jon Quast: The difficulty bomb is with the mining. Basically, the idea is that you build in the thing you have to transition the network to proof-of-stake. If anyone feels like sticking around with proof-of work, it's actually going to become impossible to do that through the code. I don't know what you would refer to it as, the code of the system is laid out, it's going to become actually impossible. It's going to be so time-consuming, energy consuming, computing power intensive that you actually won't be able to process a transaction. I think they call it ICEAGE protocol or something like that. It supposed to just freeze to a complete stop. That is the idea. You have to move it to the proof-of-stake if you want to continue to participate. Completely different dynamic.
Chris MacDonald: The interesting thing with the merge then when the beacon chain gets merge and it's proof-of-stake. If there's triple halving at that point. I guess I'm trying to wrap my head around, there's reduced tokens now, as a result of this, RAF and testnet being launched so that with the mining aspect or is that with the final?
Jon Quast: Yeah, this is after it's merged.
Chris MacDonald: That is a very significant development then because what that means is essentially sticking rewards might not be what everyone expected, and having less inflation, that's a big thing. I think that's one thing that we're all unclear on too is what the ultimate staking rate will be in terms of rewards for validators, and that's something that if Ethereum decides to go with maybe a lower inflation rate that could be beneficial for investors, but I guess we'll see.
