ETH supply versus BTC supply

On my Ethereum versus Bitcoin page I do a high-level overview of the argument over the Ethereum blockchain versus the Bitcoin blockchain in general. On this page I just want to talk about the narrower question of “how much ETH is there?” versus “how much BTC is there?”

This is kind of a weird thing to become focused on, but I do think there are good reasons for it.

Bitcoin people like to talk about

In a bit more detail:

  • Bitcoin and Ethereum both have an inflationary mechanism where they mint new tokens (BTC or ETH) to pay the block producers, but Bitcoin’s block producers are required to expend a crapton of electricity and hardware (I’ve written more about this on my Proof Of Work versus Proof Of Stake page), which means Bitcoin has to compensate them for that massive expense.
  • Ethereum also has a deflationary mechanism. On both Bitcoin and Ethereum, the users pay transaction fees (but Ethereum’s are much larger in aggregate, and on Ethereum a portion of that transaction fee is “burned” (destroyed) as a congestion tax (to discourage users from overloading the network); that is, it’s a force that decreases the total ETH supply (making all the remaining ETH more valuable). (The difference between Bitcoin and Ethereum isn’t that Ethereum has this congestion-tax mechanism and Bitcoin doesn’t; I don’t see any reason why Bitcoin couldn’t implement it too. The difference is that Ethereum has much higher revenue overall because it supports general-purpose applications.)

Ever since the switch from proof-of-work to proof-of-stake, the deflation from the congestion tax has actually been larger than the inflation from the block rewards; see https://ultrasound.money/ for graphs. That is, ETH is not-inflating overall.

Whereas Bitcoin’s strategy for not-inflating is… look, you should take what I’m saying with a huge grain of salt here, because I just can’t describe Bitcoin’s strategy with a straight face. I know I’m biased. But it just doesn’t make any sense to me. It’s something like:

  • let’s pay for security in a hideously inefficient way;
  • and have low revenue because we insist on not supporting apps;
  • and since “high expenses, low revenue” would require us to issue a lot of new BTC in order to make up the difference (if we kept maintaining the same level of economic security), but we don’t want to have high issuance because the whole Bitcoin meme is “21 million supply cap, no inflation”, let’s just cut our expenses by cutting our security in half every four years.

I don’t think that’s going to work in the long term. Either Bitcoin is going to have to change their rules to increase their block rewards (giving up on the “21 million supply cap” meme), or they’re going to see their level of economic security decline over time (making it easier to attack the chain).

“At least BTC’s supply cap is written into the code and easy to understand - new issuance halves every four years, so the supply will never exceed 21 million. Whereas I don’t really understand what determines the supply of ETH; new issuance is determined by some mysterious formula, and there’s no guaranteed cap at all.”

You’re right that “how much ETH is there going to be?” is harder to understand.