By now, almost all of us are aware of the hard fork that took place with Ethereum this week. It is part of the process that is converting that blockchain from proof-of-work to proof-of-stake. One of the things that was implemented was a token burn.
In this article, we will contrast what was done with what the SpkNetwork is going to do. Also, it will be laid out why this might be a mistake.
The main idea with the Ethereum shift is to burn part of the transaction fees. This will reduce the outstanding supply if the network is active enough, helping to increase the value of the token.
It is the same mindset that leads to stock buybacks. The idea is to make the distribution more scarce, thus raising the price. It also offsets the inflation rate of the token.
While this is good for ownership of an asset, it is a really bad model to follow for a currency. The elasticity should be dependent upon economic conditions, not what is the best way to raise the price of the token.
Deflationary Conditions
Ethereum arrived there in a different manner yet it could be setting itself up to mirror Bitcoin.
Since Bitcoin is capped, something that Ethereum is not, it ends up being a deflationary asset. If people were going to use only it as transactional currency, the economy would collapse. The reason is HODLers. We would see a miniscule velocity of the currency which already happened.
An economy will not flourish if people are holding onto money. This ends up creating a liquidity issue. There simply is not enough money floating around. With Bitcoin, since it is deflationary, the value keeps growing. Hence the amount of an item that is received will grow over time. This is fine since people will still purchase necessities. However, if the value of Bitcoin is appreciating at a greater rate than other asset classes, which it does, then little would flow into them.
The Ethereum economy could be facing a potentially similar situation. Since it will be regularly burning coins, this means that the amount of Ethereum available should decline especially as the network expands. That is the goal anyway.
We already see a large portion of it locked up. When we see deflationary environments of this nature, it does not lead to economic expansion. It does appear that Ethereum could release more coins if needed since there is no hard cap, so they could work around this issue.
However, when you think about it, they are burning money, something that people are celebrating.
SpkNetwork's Revolutionary Idea
Why burn money? Isn't that something that is needed especially considering we are challenging the established financial system which has trillions?
This is where what SpkNetwork is developing is so powerful. We see from the SpkNetwork light paper the introduction of the Service Infrastructure Pool (SIP).
The main premise here is to reduce the number of coins in circulation, similar to Ethereum. However, unlike that project, this is not burning the tokens.
A token burn destroys them forever. It is literally akin to burning money. Most engage in this to make the token more valuable. Yet, as stated, if the growth is there, this can quickly reverse itself.
With the SIP, the idea is to use DeFi to enhance the entire network. Instead of destroying, it actually puts the tokens to use. Any Hive that enters the SIP is effectively locked away.
Hive enters the SIP through the purchase of miners and advertising. The former is the foundation for the network since the miners trigger everything. Therefore, Hive is used to keep the system operating due to the fact that miners will need to be bought on a regular basis.
Here we see where the Hive, unlike a burn, still have value. By tying it to DeFi via liquidity pools, it not only provides utility but also generates payouts to the supporters of the network.
In other words, the Hive locked up is still providing value. The payouts could be used to fund different projects that end up adding even more to the network. Over time, this keeps feeding itself.
Of course, this is not a novel concept since it is what the wealthy have always used. The phrase the rich get richer holds because they use the money they have to create more wealth.
The SIP does the same thing for both the Speak AND Hive networks. By not burning the Hive but, rather, putting it to use, it is able to tokenize the growth of the network. This feeds both networks, producing a nice closed-loop system at this level.
Incentive For Inclusion
Since the Hive is still in operation, generating payouts, there is incentive for newer people to join. When tokens are burned, the usefulness is gone. Inflation is a way to enhance the network effect that is taking place.
If newer individuals do not get rewarded, they will not participate. This is especially true in an environment where other opportunities are offering returns.
Scarcity is a model we all know too well. It is the entire premise of our economic and financial system. This started to change with the introduction of digitization and the Internet. Suddenly, things became abundant since something digital has few limitations. It tends to be abundant.
For example, there is no limit to the supply of a digital file such as a song. A store could do 100 downloads, or 1 billion. Once the file is up, the downloads are only limited by bandwidth.
Abundance makes for inclusion. The present system fails so many because the concept of scarcity means that many are excluded. We need to be mindful of trying to replicate the same system in an effort to pad the wallets of a few of the early adopters.
Ethereum will do just fine. It is likely opening itself to follow the path of Bitcoin, at least to a degree. We will probably see it end up being taken over by Wall Street. They will use the scarcity to gobble up what they can. The fee structure is already pushing things in that direction anyway so it might not be much of a change.
In the end, the SIP is going to keep using the Hive that enters the pool for productive purposes. This will help the network to grow while also providing incentive for people to keep participating.
We will see the success of these different platforms coming down to the economic activity that is generated on them. For this reason, all will have to navigate the fine line of what is the proper amount of currency at the base layer. This is exclusive of the mooning idea so it is not concentrated upon.
That said, nothing will enhance the token value like a thriving economy on the network. The model is changing, something Amazon and Facebook showed us. The digital world is much different from the physical. Here we see the move from scarcity to abundance.
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