11 Feb Ethereum: What are the advantages/disadvantages of a continuously decreasing block reward compared to the current method?
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 that can be managed relatively small, developers have implemented various mechanisms to control the block reward. One such mechanism is to reduce the block reward by 50% every 210,000 blocks, a period known as the “block reward halving”.
In this article, we will explore both 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 have control over the block reward, making it harder for a single entity to manipulate the network.
- Increased Adoption: A reduced block reward encourages more people to participate in the network, leading to greater adoption and use of the Ethereum platform.
- Reduced Mining Volatility
: A reduction in block reward can lead to reduced mining volatility, as fewer miners would be willing to take on the high-risk mining venture. This could result in a more stable ecosystem for new entrants.
Disadvantages of constantly decreasing block reward
- Reduced Transaction Speed: With a reduced block reward, transaction processing time increases significantly, leading to slower network performance and higher fees.
- Reduced Scalability: The increased mining difficulty required to maintain a 50% halving rate can lead to reduced scalability on the network, making it difficult to accept new users and transactions.
- Increased incentive for mining conglomerates: Reducing the block reward encourages mining conglomerates to accumulate wealth through mining, rather than individual miners contributing to the network.
- Reduced EVM capacity: With the reduced block reward, the capacity of the Ethereum Virtual Machine (EVM) is reduced, limiting the amount of smart contracts that can be executed 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:
Advantages:
- Reduced centralization compared to Ethereum
- Increased adoption due to reduced difficulty in mining
Disadvantages:
- Increased transaction processing time and fees in the short term
- Lower scalability and increased network congestion
- It encourages mining conglomerates to accumulate wealth by mining Bitcoin, instead of individual miners contributing to the network
Conclusion
The ever-decreasing block reward mechanism has both advantages and disadvantages compared to the current method. While it reduces centralization, increases adoption, and encourages more people to participate in the network, it also leads to reduced transaction speeds, scalability issues, and increased mining difficulty.
As Ethereum continues to evolve and improve its scalability solutions (e.g. sharding), a balanced approach that combines decentralized validation mechanisms with incentives for individual miners may be needed. This balance will help keep the number of unique addresses on the network relatively small and manageable, while still ensuring increased adoption and usage.
Recommendations
- Introduce scalability solutions: Implement solutions such as sharding, off-chain transactions, or layer 2 scaling to improve scalability and reduce congestion.
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