Towards Ethereum 2.0: Collaboration and Economics

An awful lot of the time you’re really a lot better to collaborate and grow the pie for everyone and create value.
— Bob Summerwill, Executive Director - Ethereum Classic Cooperative, at the ADI Vancouver Blockchain Summit, September 2018

I was intrigued to recently learn that Ethereum Classic core developers may be collaborating with Ethereum 2.0 researchers to advance the mutual development of their respective projects.

It remains to be seen if such a cooperative undertaking will be beneficial for both parties. And the details of any possible engagement have yet to be released. In the meantime, let’s consider what the benefits may be while assessing the price action of both digital assets:

$ETHUSD (Bitmex: Ethereum); $ETCUSD (Bitfinex: Ethereum Classic)

In mid-November 2018, Ethereum fell decisively below $200 while Ethereum Classic dropped under $9. I have highlighted these two prices as key resistance levels to watch from this point forward.

The prevailing bear market in the cryptocurrency space is behind the sell off we have seen. Nonetheless, it is evident that Ethereum Classic is struggling to find its footing to a greater degree, as it is currently not trading near its early January levels, while Ethereum is managing to do so.

The 51% attack on Ethereum Classic that occurred shortly after the start of 2019 may be the reason for this diminished sense of enthusiasm that the market has shown towards it. The less resilient price action seems to correspond to this assessment, for now.

Now let’s look ahead and consider what the future holds. Ethereum has a variable monetary policy in place that is not as set in stone as Bitcoin’s. Unlike Bitcoin, the Ethereum network has not at this time adopted a maximum supply and is experimenting with various deflationary (slashing)/inflationary models for its Proof of Stake implementation under Ethereum 2.0, also known as Serenity. On the other hand, Ethereum Classic has a proposed cap on supply of somewhere between 210M and 230M coins, per ECIP-1017. Ethereum and Ethereum Classic, like Bitcoin, are currently Proof of Work blockchains.

So how does this all translate for a possible cooperative effort between Ethereum Classic core developers and Ethereum 2.0 researchers, one might ask. After all, it appears that the economic visions of both networks are diametrically opposed. I would contend that there is in fact an opportunity for synergy to be explored for the collective advancement of both sides.

Litecoin is often characterized as a test net of value for Bitcoin upgrades. With a market capitalization of nearly $3B USD, that is indeed a valuable distinction for Litecoin to uphold. Yet Litecoin still has its own unique qualities. Similarly, it is my view that Ethereum Classic can augment Ethereum 2.0 research and development in a manner that allows it to help the latter’s progress while still preserving a level of contrast.

Accordingly, towards this prospective initiative, my proposal would be for Ethereum Classic core developers to reexamine the network’s suggested monetary policy to help answer key issues for Ethereum 2.0. Specifically, I encourage Ethereum Classic to address an early question about formulaic inflation that was posed by Sepp Hasslberger to Bitcoin’s pseudonymous founder, Satoshi Nakamato:

Is there a formula to decide on what should be the total amount of tokens, and if so, what is the formula?

If there is no formula, who gets to make that decision and based on what criteria will it be made?

Satoshi seemed to acknowledge that a “clever way” could be devised, but did not delve further. And over a decade after Hasslberger’s inquiry, Ethereum continues to wrestle with it today.

Thus, can Ethereum Classic developers help demonstrate that a hybrid deflationary/inflationary Proof of Stake system with some upper limit on supply would maintain both the network security and economic value of Ethereum 2.0? It’s one of many lingering questions that they may be able to help settle in an actionable manner, if consensus and drive is there for it be done.

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. And it is also a chance for Ethereum 2.0 advocates to consider what their counterparts may be able to bring to the table to expedite their current efforts amidst an ongoing debate about economic incentives in a future Proof of Stake rollout.