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Did you hear about the latest Dash halving?
You didn’t? I’m not surprised.
While no one has been able to avoid headlines about Bitcoin’s third halving, Dash‘s last halving barely made a blip in the news.
Why? Because Dash’s halving is far less dramatic than Bitcoin’s. In fact, it’s not a ‘halving’ at all.
As you know, Bitcoin cuts its block reward in half roughly every 4 years. Meanwhile, Dash cuts its block reward by only one-fourteenth about every 383 days.
You can see why it’s not breaking headlines nearly as much.
Dash is not the only project to have created its own alternatives to Bitcoin’s halving model. Today, hundreds of projects are experimenting with their own token emission models.
Some of these are closely modeled on Bitcoin’s version 1.0. Whereas others have taken completely different approaches to the issue of token supply. Each model influences the token’s potential long-term value, security and price stability differently.
Want to know which model is the best fit for your project, or how different models impact your portfolio?
Read on in today’s article as we walk you through different token emission structures to help you decide.
Bitcoin’s Token Emission Model 1.0
From its genesis, Bitcoin’s goal has been to undermine the existing financial establishment.
Instant cross-border transactions disrupted the control that financial institutions have over our transactions, and a limited supply of tokens disrupted the inflationary tendencies of fiat currencies.
Politicians frequently claim that low-level inflation is good for the economy. But the truth is that inflation reduces the wealth of its holders.
Without alternatives, most of us become desensitized to this devaluation of the currency.
But Bitcoin showed us that there is another way.
With Bitcoin, no humans or central bankers can jump in and decide on a whim that we should have more Bitcoin. Once we hit the 20 million Bitcoin mark, that’s it. The token will be “completely inflation free.”
The Bitcoin model undeniably solved the issue of inflation, but did it go too far? Is zero or negative inflation the ideal?
While Bitcoin set an incredible precedent, as with every version 1.0 there are always ways to improve.
Let’s take a look at how token emission structures 2.0 are improving on the Bitcoin model.
Emission Model 2.0: Long-Term Value vs. Utility Functionality
The way that Bitcoin is set up, once the final Bitcoin is mined, the currency will be deflationary by default. Forever.
On one hand, this guarantees long-term value. But on the other hand, this could undermine its utility for daily transactions.
If people always anticipate that the price will go up, they may stop wanting to spend their tokens.
To maintain a consistent value, supply should be as close as possible to the growth of the network.
This is a tricky task, because how can one predict in advance how much the network will grow over the next 150 years?
It’s far from an exact science, but some projects have made their guesses.
These projects have implemented limited inflationary schemes into their token emission structures. This ensures that there is some inflation, but that it can’t get out of hand.
Ethereum, for example, is programmed to issue 18,000,000 ETH through the mining process each year. And it has no total cap on the number of ETH that can be produced.
With this, the Ethereum team claims to be “disinflationary”. Meaning that it is inflationary, but that the amount of inflation shrinks over time.
And like with all tokens, lost or burned wallets have a natural deflationary effect.
Block.One has taken another approach. Instead of a fixed amount of tokens, the EOS token has a fixed rate of annual inflation.
Originally this rate was set at 5% a year, but in May 2019 the EOS community voted to reduce this inflation rate to 1%.
This is an example of a successful governance system. One that enabled the EOS Authority to adjust its inflation rate according to the community’s needs.
Like Block.One, Stellar also began with programmed inflation. The project started out with a fixed rate of 1% annual inflation, which it hoped would encourage contributions within the community.
Eventually, however, the Stellar team found that the inflationary pressures did not have the impact they had expected. So they elected to drop it in their October 2019 update.
As these newer emission models demonstrate, when currency holders control inflation, their decisions will be very different from central bankers. In fact, diminishing and voluntarily reduced inflation would be completely unheard of in the world of fiat currency.
Different incentives, different results.
Programmed inflation may not be as ideologically pure as Bitcoin’s model. Nonetheless, it is clear that with blockchain, we have much better incentives in place. This opens the possibility for projects to eventually find the ‘right’ balance of inflation.
Emission Model 2.0 for Long-Term Security
Deflation is not the only issue raised by Bitcoin’s fixed total supply. Another key issue here is the long-term security of the project against malicious 51% attacks.
Bitcoin, like most cryptocurrencies, is based on a system of built-in incentives. Automatic block rewards encourage people to mine the currency and defend the blockchain against attacks.
So, what happens then when those block rewards disappear?
According to Satoshi’s vision, at that point “the incentive can transition entirely to transaction fees.”
We’re many years from this happening, so it’s still too early to say if these fees will provide sufficient incentive to support the network.
Also, because of Bitcoin’s dominance and ideological base, it has a unique advantage. Many will continue to support the project, even when it is not economically profitable to do so. As is currently the case with Bitcoin development and node operations.
However, this is not a factor that subsequent projects can rely on. So they have to come up with their own, more stable alternatives.
Most prominent among this list is Monero. Overall, Monero has worked to stay close to Bitcoin’s token emission model, with one key difference.
Like Bitcoin, Monero also has a total fixed supply of XMR. However, its use of the word “total” is not as definitive as Bitcoin’s.
Once the total emission cap is reached, Monero will continue to generate block rewards at a reduced rate. This is a system referred to as “tail emission.”
The Monero team believes that continued incentives are essential to keep the network secure.
Overall, I would agree with Monero’s thesis. Incentives are key to retaining the hashpower needed to secure a network.
With such a small block reward in the tail emission phase, it is highly unlikely that this emission rate will have an inflationary effect, while allowing Monero to maintain the necessary hashpower to protect its network.
Emission Model 2.0 for Price Stability
Last but not least, we come back to the halving itself.
As we’ve seen in the past, the abrupt halving of Bitcoin’s block reward can lead to wild volatility in the market.
That’s why it’s been the hottest topic in the space for months.
Price volatility can provide great opportunities for day traders, but for users and miners this can be highly disruptive.
Miners regularly compare the block reward against the costs of their mining activities to determine whether or not it is worth continuing operations. When the block reward is halved, the price of Bitcoin must double in order for operations to continue uninterrupted.
In a perfect market, as Rob Viglione, President of Horizen says, the impact of a halving should be minimal.
After all, the information on when and how much the block reward will be reduced is public information. So all market actors should be able to prepare for it in advance, thus minimizing its volatility.
In reality, however, things are quite different. The market is not nearly as rational as one would hope.
It is likely that the price of Bitcoin will increase due to the halving. But will it come before or after?
This may be mildly stressful for an investor, but could mean bankruptcy for a mining company. Or a company that pays its suppliers in Bitcoin for example.
Overall, price instability is not desirable. So it makes sense that in emission 2.0 models we see features to help to reduce this.
While there are many different examples that we can look to, Dash provides an excellent model. The project has taken the same ‘halving’ model as Bitcoin, but ‘smoothed’ it out. With a less dramatic block reward reduction on a more frequent basis, we see much less price volatility.
This helps to achieve the same end-result, but with a much better experience for miners and users during the process.
What does this mean for Crypto Law Insiders?
For investors, it is key to know the differences between different emission models to invest intelligently. And for founders, this issue must be explored to maximize the desired outcome of your project.
Like everything in blockchain, we still do not have any definitive answers on what is a “good” or “bad” system yet. Nonetheless, we can always learn from the activities of other projects.
With just over a decade of examples to reference, it is difficult to know how things will play out in the long run.
The same system that led to one project’s success in the first few years, could lead to its collapse 50 years down the line.
For now, as founders, your main goal is to put your best foot forward with your emissions supply plan.
But since it is impossible to predict what will happen over the next hundred years, the real key is to have a good governance system. This will make sure that you have a mechanism for users of the network to make changes if necessary.
For all projects, strong governance is essential to long-term success.