Proof of stake and spiralling demand

[semaforo]

I just read an article about the plan to convert the ethereum blockchain to 1% proof of stake. This means 1 out of 100 blocks will be awarded according to proof of stake, which is (as my basic understanding can so far grasp) money that someone puts up to operate a node, which they will lose if they don't play by the rules.

  So basically this means that mining, rather than happening with computing power, will happen with ETH tokens.

    Since ETH also has a limited supply, this means that the boom that happened with bitcoin mining equipment would happen with ETH price, since those who have it can use it to get more without having to do any hardware manufacturing, shipping, pre orders, electricity, and and and.

   I am really not well versed in the technical aspects of it so maybe someone will be able to shed some light on it. But it seems that this would drive demand for the tokens through the roof, and therefore price as well. If this could actually work it seems that I will be telling my kids in 15 years about the early days of bitcoin mining when whole rooms were filled with ASICs and people's houses were catching on fire in the same way my dad used to tell me about computers that filled whole rooms while having a fraction the computing power of a modern phone.

[megashira1]

From my understanding ETH is moving to complete POS system via "difficulty bomb" and the have no cap to their inflation. The hybrid POS+POW is a temporary transitional phase.

[semaforo]

No cap to inflation?

[york780]

ETC has a limited supply, ETH hasnt.

I also heard that ETH has an ammount of 900 000 000 tokens.

Only 10% mined rightnow.
Prepare for inflation.

[jofus]

...

    Since ETH also has a limited supply, ...

As far as I know there is not a limit on the supply currently. 

[megashira1]

No cap to inflation?

Yes, unlike BTC and ETC - ETH has no set hard cap for monetary supply. Ethereum inflation could go on forever.

[semaforo]

It says on the website they have a cap on how many token can be mined per year, but no ultimate cap. Theoretically this could be changed but would require another fork, right? It is still an improvement over a central bank type scenario.

[megashira1]

It says on the website they have a cap on how many token can be mined per year, but no ultimate cap.

"per year". Correct.

Many countries have inflation rates set per year and how has that turned out for the historical value of fiat currency's worldwide?

[semaforo]

Still the original question was could proof of stake could cause demand and therefore price increases by combining mining and speculative bubbles.

[U2]

No cap to inflation?

Yes, unlike BTC and ETC - ETH has no set hard cap for monetary supply. Ethereum inflation could go on forever.

Which is why it's useless! Oh, the dev just created 400billion more ethereum. Umm... hard fork it 5x and we'll be fine. Consensus? No need for that crap. The captain at the wheel knows all.

[york780]

No cap to inflation?

Yes, unlike BTC and ETC - ETH has no set hard cap for monetary supply. Ethereum inflation could go on forever.

Which is why it's useless! Oh, the dev just created 400billion more ethereum. Umm... hard fork it 5x and we'll be fine. Consensus? No need for that crap. The captain at the wheel knows all.

True. Eth isnt a long term investment. Would you buy stocks when they are infinite? What is the value of infinite stocks? 0

[semaforo]

So you're suggesting it is basically a pump and dump of unprecedented proportions with major financing from conventional mutual funds? Plausible, but this still doesn't address two issues

1) proof of stake seems to be a really good idea and could drive value up considerably, as well as demand resulting from the utility of the platform

2) there seems to be some pretty brilliant minds with hefty financial backing behind it.

[d5000]

I was somewhat active in the Peercoin forum and there we have discussed that topic.

The crucial number to know would be the block reward for the Proof of Stake block. In the case you describe that we have 1 PoS block per 99 PoW blocks, the typical block reward a "PoS miner" could mine per timeframe (day, month, year) must also be divided by 100.

In Peercoin's model the PoS reward is so low (1% of your staking holdings per year) that the incentive to buy in is relatively low because you can't call this 1%/year a real "profit". Volatility in this case is comparable to a PoW coin like Bitcoin.

If the PoS reward is very high, then - according to my limited economic and game theory knowledge - the incentive to buy in is higher, but the incentive to sell early to take profits is high too, because of the higher coin supply inflation that would drive down the price in the long term. That would lead to a high volatility and a high probability of "pump and dump" games. That's why I never was interested in "high-PoS-reward" altcoins.

My conclusion would be: the higher the PoS block reward, the higher the volatility. In the model you describe, because of the low number of PoS blocks, I would say that the incidence of PoS to volatility because of a "spiralling demand" is low.

[semaforo]

What are the implications for ethereum converting completely from PoW to PoS?

[Forcelite]

That is very well thought out.

A few things,  What will be the incentive for a POS worker if the return is only 1-4% a year. If there is ether volitilty you could easily lose money for the year, all while having it tied up to service ethereum. Also, you can guarantee there willl be hacks on the POS pools, so there is another risk . I would think the return would need to compete with the stock market and real estate return percentages, 6-10%.

Great analysis , just some things to review.

Force

I was somewhat active in the Peercoin forum and there we have discussed that topic.

The crucial number to know would be the block reward for the Proof of Stake block. In the case you describe that we have 1 PoS block per 99 PoW blocks, the typical block reward a "PoS miner" could mine per timeframe (day, month, year) must also be divided by 100.

In Peercoin's model the PoS reward is so low (1% of your staking holdings per year) that the incentive to buy in is relatively low because you can't call this 1%/year a real "profit". Volatility in this case is comparable to a PoW coin like Bitcoin.

If the PoS reward is very high, then - according to my limited economic and game theory knowledge - the incentive to buy in is higher, but the incentive to sell early to take profits is high too, because of the higher coin supply inflation that would drive down the price in the long term. That would lead to a high volatility and a high probability of "pump and dump" games. That's why I never was interested in "high-PoS-reward" altcoins.

My conclusion would be: the higher the PoS block reward, the higher the volatility. In the model you describe, because of the low number of PoS blocks, I would say that the incidence of PoS to volatility because of a "spiralling demand" is low.

[dennyd999]

You are too complicated.

Can somebody explain it simpler?



I have 1 ETH and Bill have 100 ETH , aslo JP have 50 ETH.

In PoS they will rule the world of Ethereum?


Why they need to make it unprofitable? Are Bill, JP and I stupid? What about China?

[d5000]

What are the implications for ethereum converting completely from PoW to PoS?

It depends entirely on the block reward structure they would adopt. Do you have any numbers? I know they have very small blocks (14 seconds target).

A few things,  What will be the incentive for a POS worker if the return is only 1-4% a year. If there is ether volitilty you could easily lose money for the year, all while having it tied up to service ethereum.

One of the main incentives to participate in PoS minting if the reward is low (or non-existent, like in NXT or NEM where you only get transaction fees) is called "altruism-prime" by Vitalitik Buterin. It refers to the fact that if you mint, you contribute to the security and so also to the value of your holdings. If there is a small reward, there is also some coin supply inflation - and that means that you, if you are a long term holder and don't mint, will lose some money (or better: your holdings will represent a smaller share of the total supply).

Also, you can guarantee there willl be hacks on the POS pools, so there is another risk . I would think the return would need to compete with the stock market and real estate return percentages, 6-10%.

6% may be still OK, but 10% in my opinion is already too much if the inflation is not limited. In this case, we could already see the "spiralling demand" problem semaforo describes, and in consequence, high volatility. Another problem with high block rewards is that high rewards increase the incentive for minting on multiple chain forks ("Nothing at Stake problem"), which is potentially dangerous for the system's stability.

[mining1]

ETH will have about ~100mil token supply with an inflation of 1-2% /year. So, in about 6 years, with an inflation of 2% at worst, there's going to be 112mil ETH. 1-2% isn't that bad at all, it's really good for hodling actually.

[ratatatat]

So eth forks again?

Can't imagine the miners being too happy about such a fork. 
How is that going to play out? Will we get another classic chain?

Is pos even viable?

[mining1]

Ofcourse ethereum is going to fork. This is how you update your protocol, by hardforking. It is going to play out like  the other forks, well.

Miners knew about POS since 2014 or so, so it is not a surprise. I am a small miner myself.

POS works. And it's just not "working" but the fundamentals beneath it will make it extremely hard to attack, compared to POW bitcoin  / ethereum which requires like 40-50mil to be attacked. In POS you ll need probably over 500mil usd at this curent eth price, assuming you don't have to buy more from the market.