Thread by @TrustlessState

The $ETH Ultra Sound Money Thesis 🔊🦇

This 3 word meme is the result of 12 years of applied crypto-economic research in both cryptography *and* economics

I wrote a 6,000 word thesis in @BanklessHQ:

newsletter.banklesshq.com/p/ultra-sound-…

But here's the Ultra Sound Money thesis, in a thread:

ECONOMIES

All economies exhibit the same fundamental structure.

- The Coordinating Body (the leadership, government, or ‘party in power’)

- The Economic Power (the productive output of the economy)

- The Protective Force (the army, militia, or defense force of a Nation)

Economies produce value, and are therefore desirable; Therefore, they must be guarded!

If economies are not sufficiently protected, then some other powerful entity will capture it!

Governments coordinate power of an economy, and directs some of this power into Defense Spending

'Money' is a tool created by Governments that allows them to coordinate and direct economic resources

Because governments control the military, they have a 'monopoly on violence', and therefore can force the economy to use its money.

This gives them the power to issue new money

Defense spending is strictly a *consumptive* endeavor. The costs of maintaining a defensive force do not circulate back into the economy

This is a drain on the power-output of the economy, but its benefits come from the long-term strategy of maintaining control over the economy

The costs of defense spending ultimately comes out of the value of the money used in the economy...

because defense👏spending👏is👏paid👏for👏by👏currency👏issuance👏

With the power of seigniorage, governments don’t have to collect taxes 1:1 with expenditures.

They can collect taxes at any given rate, and issue new coinage at any given rate.

Having these two variables decoupled from each other gives more flexibility and choice in how the government chooses to leverage the currency.

The power of seigniorage is advantageous to ensuring the long-term funding of security.

Taxes on the GDP of an economy isn’t stable; it fluctuates up and down.

Funding defense spending is better done via issuance, because its predictable; you can plan a budget around it!

CRYPTO-ECONOMIES

Crypto-economic systems like #Bitcoin and #Ethereum has massive efficiency benefits compared to physical economic systems like the USA or other global powers...

Because👏they👏don't👏exist👏in👏the👏physical👏world

Nation-states under-go arms races, because there is no meaningful difference between *defensive* and *offensive* forces.

A large defense force and easily be repurposed and turned into an offensive army, and start to gobble up lesser-economies using their physical power.

This is why nation-state defense spending is so comparatively high vs internal infrastructure like healthcare and education.

If you don't, you will be subsumed into a more powerful economy, and you will lose your sovereignty.

#Bitcoin and #Ethereum don't have this problem because they exist in the digital world, not the physical world.

Crypto-economic systems don't respond to violence like how physical economic systems do.

Here's the important part:

Because crypto-economic systems don't need to defend themselves against physical violence, defense spending is orders of magnitude more efficient.

This means that protecting #Bitcoin and #ethereum costs less.

These economic savings go back into the monetary units of Bitcoin and Ethereum!

These system's don't need to issue as much currency to pay for defense!

The retention of economic power output is stored inside the money of these crypto-economic systems!!

As currencies, BTC and ETH will hold their value over time better than fiat currencies, because the costs to protect them are orders of magnitude lower than their fiat counter-parts.

BTC and ETH simply don't need to be issued as much to fund defense!

But what about the differences between #Bitcoin and #Ethereum?

These aren't the same things; they coordinate resources differently...

Here's where the Ultra Sound Money thesis comes in to play:

Long-term Bitcoin security:
- 0 BTC issuance
- 100% of all fee revenue immediately directed to miners
- Secured by a race to produce as much hashpower as possible, which by proxy creates a race to consume as much electricity as possible.

Bitcoin believes that issuance is the root of all evil, so it forfeits the right of seigniorage.

Instead of maintaining a PnL, Bitcoin just immediately forwards all profits to miners.

This means that Bitcoin could be overpaying for security one day, and under-paying the next

Bitcoin does not meter defense spending. It lets the race to produce Bitcoin hashes be maximally competitive

This fierce competition is why Bitcoin consumes so much electrical energy; there's nothing stopping overpaying for security, this leads to maximum energy expenditure!

This maximum energy expenditure ultimately is a drain on the value of BTC, because BTC is sold to fund these endeavours!

Regardless of what side of the Bitcoin energy debate you fall on, BTC is perpetually sold to fund its own security!

AND it's security COSTS A LOT

This is why Proof of Stake is so revolutionary:

Proof of Stake only uses the *opportunity cost of money* to fund security

Costs of staking $ETH are:
- Raspberry Pi
- Internet Connection
- $50/yr electricity costs
- 32 ETH

That's it. No ETH needs to be sold to pay for security.

Even more elegantly, PoS surgically targets those who are MOST BULLISH on $ETH, and provides them with a security mechanism that enables them to not have to sell any ETH!

$ETH staking rewards increase or decreases as a function of the supply of ETH being staked to Ethereum.

If there is less ETH staked, ETH rewards are higher and vice versa. As more and more validators stake ETH to Ethereum, the ETH-denominated rewards are reduced.

This process washes out the lesser-ETH bulls who are less interested in the smaller rewards...

leaving those who are willing to receive the least amount of ETH possible.

Through this, Ethereum organically discovers the optimal balance between security and issuance

As a result of this mechanism, Ethereum needs to issue the least amount of new currency to provide adequate security for Ethereum.

AND

No ETH needs to be sold to fund it's security!

Once Proof of Stake is adopted and the Proof of Work system is forked away, yearly ETH issuance drops:

~4.75M ETH (~4%)

to a projected 0.6-1M (~0.5-1%)

EIP1559 is the second of Ethereum's crypto-economic 1-2 punches

EIP1559 formally links the economic power behind the Ethereum economy with the value of the ETH currency.

BASEFEE is the crypto-economic analogue to Central Bank interest rates; it goes up when the economy heats up, and it falls when the economy cools down.

Importantly, it adds value back to the balance sheet of the holistic economic system.

This is Ethereum leveraging the power of maintaining a PnL balance sheet.

When Ethereum collects profits, instead of overpaying for security like #Bitcoin, it issues an $ETH buyback, and adds monetary power back into the value of ETH

This is how $Ethereum funds long-term, predictable security, while ensuring it doesn't overpay for security, and it returns its excess security budget back to those who help secure Ethereum:

$ETH holders and stakers

With EIP1559, yearly ETH burn is at 1.9%, an estimated ~1M ETH will be burnt in fees

(at current fee markets, assuming 60% transaction fee burn).

ULTRA SOUND MONEY

All of these factors feed into each other and make each other stronger, creating a positive feedback loop into the value of ETH.

PoS: Reduces ETH issuance to under 1%

EIP1559: ETH burn rate ~1.9% (given current fee markets and projections)

This positive feedback loop is furthered by the fact that ETH is the most trustless asset on Ethereum.

As the native asset on Ethereum, ETH has favorable risk parameters as collateral on DeFi.

$ETH has favorable collateralization parameters in applications like @MakerDAO, @AaveAave, or @compoundfinance

$ETH is the dominant trading pair in apps like @Uniswap, @BalancerLabs, or @SushiSwap

$ETH is the ONLY asset used by apps like @reflexerfinance

ETH’s privileged position as pristine collateral in DeFi applications will add to the scarcity tailwinds to the supply of ETH; an additional source of power that feeds into the monetary energy behind ETH.

With 12 years of progress in crypto-economics, a new era of economic efficiency and monetary soundness will be unlocked, and will assist humans everywhere to more effectively achieve their economic goals and aspirations.

With the Ultra Sound Money putting power into our engine, a new age of human coordination and flourishing is upon us!

Should we say it one more time?

$ETH is ultra sound money 🔊🦇