Ethereum: What are the advantages and disadvantages of a continuously decreasing block reward compared to the current method
The Ethereum blockchain, like Bitcoin, has a limited supply of 21 million tokens. In order to keep the number of unique addresses relatively small and manageable, the developers have implemented various mechanisms to control the block reward. One such mechanism is a 50% reduction in the block reward every 210,000 blocks, a period known as a “block reward halving”.
In this article, we will examine the advantages and disadvantages of a continuously decreasing block reward compared to the current method.
Advantages of a continuously decreasing block reward
- Reduced centralization: By reducing the block reward by 50% every 210,000 blocks, the Ethereum network becomes less centralized. This is because fewer individuals can control the block reward, making it harder for a single entity to manipulate the network.
- Increased adoption
: Lowering the block reward will incentivize more people to participate in the network, leading to better adoption and usage of the Ethereum platform.
- Reduced mining volatility: Lowering the block reward may reduce mining volatility as fewer miners are willing to take on high-risk mining commitments. This may lead to a more stable ecosystem for new market entrants.
Disadvantages of Permanent Block Reward Reduction
- Reduced transaction speed: Lowering the block reward significantly increases transaction processing time, slowing down the network and increasing fees.
- Reduced Scalability: The higher mining difficulty required to maintain a 50% shard rate may reduce the scalability of the network, making it harder to accept new users and perform transactions.
- Increased Incentive for Mining Conglomerates: The reduced block reward encourages mining conglomerates to accumulate wealth through mining rather than individual miners contributing to the network.
- Reduced EVM Capacity: Reducing the block reward reduces the capacity of the Ethereum Virtual Machine (EVM), which limits the number of smart contracts that can run on the network.
Comparison with the Current Bitcoin Method
The current Bitcoin method involves reducing the block reward by 50% every four years (currently planned for 2025), but not every 210,000 blocks. This approach has both advantages and disadvantages:
Pros:
- Reduced centralization compared to Ethereum
- Increased adoption due to reduced mining difficulty
Disadvantages:
- Increased transaction processing time and short-term fees
- Reduced scalability and increased network congestion
- Encourage mining conglomerates to accumulate wealth through Bitcoin mining rather than individual miners contributing to the network
Conclusion
A steadily decreasing block reward mechanism has both advantages and disadvantages compared to the current approach. While it reduces centralization, increases adoption, and encourages more people to participate in the network, it also slows down transaction speeds, increases scalability issues, and increases mining difficulty.
As Ethereum continues to evolve and improve its scaling solutions (such as sharding), a balanced approach may be needed that combines decentralized validation mechanisms with incentives for individual miners. This balance will help keep the number of unique addresses on the network relatively small and manageable, while ensuring greater adoption and usage.
Recommendations
- Introduce scaling solutions
: Implement solutions such as sharding, non-scale operations, or Layer 2 scaling to improve scalability and reduce congestion.
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