“...[Bitcoin’s] greatest and most dangerous weakness is that...it is impossible to adjust the total quantity of money in the system in response to a crisis - and this makes a crisis worse...”
On August 13, 2020, Ethereum Classic stakeholders held a conference call to discuss a proposed treasury model to address the lack of funding available to developers interested in working on the protocol.
The treasury proposal, initiated by IOHK, was in response to ongoing 51% attacks that the chain has faced, which call into question its overall security and the commitment of its lead stakeholders to address critical issues in an innovative and timely manner. Consider that this problem first occurred in January 2019 and has not yet been resolved.
Taking a look at $ETC’s monthly chart, it’s clear that the market has frowned upon it in recent years:
$ETCUSD (Bitfinex: Ethereum Classic)
Unlike other crypto currencies that have made new yearly highs, $ETC has failed to even reclaim its February 2020 price level above $10, which occurred prior to the crash in markets worldwide following the COVID-19 outbreak. On a monthly basis, $ETC has only managed to close above $10 once since September 2018, in January 2020.
While $ETC has steadily climbed back from its March 2020 lows below $4 to just over $7 at the time of this writing, its future nevertheless remains in question, as several crypto currency exchanges are now on the fence about its listing status in light of the recurring 51% attacks the chain has endured.
Proposals to address the 51% attacks have been presented by $ETC stakeholders since 2019 (see ECIP 1049 and this report by ePIC Blockchain), and the discussion is ongoing, with a recently stated commitment from the community to upholding the network’s security as its top priority.
For the purpose of this blog post, I’ll focus on IOHK’s treasury proposal, and a possible compromise for all $ETC stakeholders to consider following the recent discussion on the topic.
IOHK’s CEO, Charles Hoskinson, suggested during the August 13th call that $ETC should “…hard fork to take some of the block rewards and pay a smart contract. And that smart contract will have three entities capable of withdrawing from it [IOHK, ETC Cooperative, and ETC Labs]…”
The aforementioned groups are three $ETC development teams which would be the initial benefactors of IOHK’s proposed proto treasury model; as Hoskinson noted during the call, checks and balances would be in place to “…give the community the power to shut that [smart] contract off, add members or remove members.”
This treasury proposal, from first glance, appears to be a constructive step forward for $ETC proponents to consider. However, it is problematic in that it designates three distinct developer teams to reap its benefits in the short to medium term, rather than opening up development funding to all developers from the start.
Although Hoskinson underscored that the intent of the proto treasury is to evolve to a more egalitarian and open model “by the end of 2021,” what assurance is there that this will happen? Opposition to the proposal on this basis, as well as the legal and regulatory risks that it potentially presents to $ETC at large, has already been expressed by ETC Labs and others.
In my view, if a treasury model can be made to be open to all developers early on, rather than to just a select few, and constructed with the option for miners to opt out as suggested during the call by directing a portion of block rewards intended for developer funding to a burn address instead, then that seems to be more in sync with $ETC’s foundational principles.
Even so, not once during the nearly ninety-minute community discussion did the question of $ETC’s monetary policy come up as it relates to the proposed treasury; keep in mind that the proposal itself was rejected in the past on this basis.
So, what than of $ETC’s 5M20 monetary model? If $ETC stakeholders are open to incorporating a treasury to differentiate it from other proof of work blockchains, then it behooves them to reassess the future emission schedule as well.
As I wrote in 2019, it is my view that $ETC should consider adopting a formulaic inflation mechanism that addresses early questions posed to Bitcoin’s founder by Sepp Hasslberger. The proposed modification to $ETC’s 5M20 monetary policy, in consideration of the treasury proposal, would be as follows:
Continue with the 5M20 emission schedule until an agreed upon block number in the future, thus allowing for a fixed block reward thereafter, with a proposed target inflation rate of under 0.5% in perpetuity (achievable at some point after block number 60,000,000).
In this manner, $ETC distinguishes itself from other crypto currencies that have supply caps in place, such as Bitcoin, while still preserving a constrained and principled position on inflation that is known to all stakeholders.
Including a burn mechanism for a portion of block rewards if miners opt out of supporting the treasury would also act as a check on the overall supply of $ETC. To accomadate all sides and ensure that a treasury is at least partially funded in exchange for the modification to $ETC’s 5M20 monetary policy noted above, a maximum opt out limit may be set (for example, if 20% of block rewards are to be routed to the treasury by default, miners can opt out of no more than 10%).
Consider that earlier this year, the original proponent of $ETC’s 5M20 emission schedule expressed his new found conviction that a supply cap is not suitable for incentivizing the security of the protocol. In the case of the present crisis $ETC has found itself in, the quote cited at the top of this post from Yanis Varoufakis certainly resonates.
In closing, it is my hope that if $ETC stakeholders agree on a treasury system, it is a truly decentralized one from the get go. To foster support from $ETC miners for continued developer funding decades into the future, an adjustment to the existing 5M20 monetary model that guarantees a consistent and perpetual block reward after a pre-defined block number with a target inflation rate of under 0.5% may be considered as a possible path forward.
This compromise would ensure that the contributions of both developers and miners are acknowledged, while containing $ETC’s future supply in a manner that still upholds its scarcity yet also sets it apart from other fixed supply and proof of work crypto currencies in the broader market. Alas, my concluding remarks in the above cited blog post from 2019 are even more relevant today than they were then:
“This is ultimately an opportunity for Ethereum Classic to redefine its value proposition and perhaps revitalize the market’s enthusiasm for its development moving forward.”