WHY DEFLATIONARY TOKENS ARE BAD FOR UTILITY PROTOCOLS?
Deflationary tokens are those whose supply decreases over time. Now let’s understand Gresham law to understand why they are bad for utility protocols.
It is a monetary principle which states that “bad money drives out good money.”If there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.
Good money is something that can’t be debased like Gold, silver and Bitcoin. Bad money can be easily debased or can be created very easily. E.g. – Nickel, Fiat.
This is the reason people spend their fiat currency while they save their gold and Bitcoin. In the long run gold and Bitcoin will grow in value because they have lower inflation and it’s impossible to create new ones out of thin air like fiat currency.
Why people start advertising Bitcoin as hard money or Store of value from a peer to peer transaction token?
Bitcoin was created to become a peer to peer payment network. But the tokenomics of Btc makes it a bad substitute for payments. No one will spend Bitcoin for buying goods and services when they know that the stuff they will buy will go down in value whereas the value of Btc will go up (10000 Btc for 2 pizzas). As we know that the only way for the miners to make money is through block rewards and transaction fees. In the next 9 years 99% of the Btc will be mined and the only way for the miners to make money will be through transaction fees. Miners help secure the network. If there will be less incentive for miners they will unplug from the network and thus making it less secure. That’s the reason why early Bitcoin adopters like Andreas Antonopoulos preaches about using Bitcoin for payment so that there will be enough incentives for miners through network transaction fees to continue operating. Now the aim of the Btc is to become the most censorship resistant hard money that ever existed and its tokenomics and decentralization favors that thesis. In the future the coin which is the most decentralized and have predictable monetary principle will become the next global reserve currency and we know that Bitcoin is by far the most decentralized.
WHY BITCOIN IS BETTER MONEY THAN ETHEREUM?
Money should have few characteristics. It should be durable(can’t get decayed and that’s why fruits are bad as a money),portable(easily transferrable and that’s why oil or cows are bad money), fungible(every unit should be equal to the other one like 1BTC=1BTC),unit of account(One should measure the price of goods and services in that money like in ELSALVADOR you can get prices of goods denominated in BTC) and it should be a store of value(in the long run one can’t inflate it’s supply like fiat currency). Bitcoin is the most decentralized because of its consensus which is proof of work. Proof of stake is inherently more centralized than POW because in POS one who stakes the most gets the voting power to push any changes in the network which is the same like what happens in fiat world. In POW, miners can’t push the changes( for reference read the block size war which happened in 2016 where miners wanted to increase the block size but Bitcoin community was against it and thus it didn’t happen). From the start Btc has a fixed monetary policy called halving while Eth has changed its monetary policy numerous times over the years. No country or central banks will hold anything on their balance sheet which can be controlled by few entities (Look what happened with Russia where it’s assets in Dollar and euro was seized by the US and Europe).
Does usability makes something better money? People argue that Eth has more real use cases than Btc and thus it’s a better form of money. This is true that Eth has more real use cases but only this doesn’t make something better money. Let’s compare gold and silver to understand what makes gold better money.
-USABILITY – Silver has a lot of use cases than gold. Around 90% of the silver mined annually is used for industrial use while only 10% of the gold is used for industrial use. So usability doesn’t make better money.
-COST OF PRODUCTION – It takes around $10 to mine 1 ounce of silver while it takes somewhere between $800-$1000 to mine 1 ounce of gold. So clearly the cost to produce something is what makes it more valuable. That’s the reason fiat is worthless because it cost nothing to create it. The only reason fiat has value is because of people trust. The labor people do to earn fiat is what gives it value. Now let’s compare Eth and Btc. Eth has more use cases and it takes less cost to produce it. So clearly Btc is better money.
WHY DEFLATIONARY ETH IS BAD?
Eth wants to be the global settlement layer where everything will be built. Eth is used as a unit of account in its ecosystem and by far it’s the best layer 1 protocol. But no one likes to spend anything which they know will go up in value over the long run. A lot of people bought Nfts using their Eth and now their Nfts are down 95% while Eth is down only 70%. If they would have simply hold on to their Eth they would have performed much better. All these things will lead to less usability of Eth as a unit of account because people will know that their Eth will be more valuable over the long run and there Gresham law will work which we discussed earlier. After some time Eth will only be used as a store of value but people will also realize that there is better money than Eth and they will flock to Btc. This will start the demise of Eth and they will be left with only two solutions. Either to have some inflation of about (3-4) % or to be obsolete and I assume they will choose the earlier one. It’s better late than never.
Eth was created in the first place to be a global settlement layer but to attract more people to invest in Eth they made changes to their tokenomics to become better money. Now it will be better for them to become the oil or silver of crypto than to become gold of crypto. If they will choose the path on which they are going they will might end up becoming the nickel or copper of crypto. Eth has contributed a lot to this crypto ecosystem than any other crypto but they will have to clear their path if they want to be the leader in smart contracts.