The Debate Over ETH's Monetary Policy

hey guys we have a bankless takes episode for you today on the docket is ethereum changing its monetary policy again question for you David um so there's this debate in the ethereum community right now and I've been paying attention to it but a bit on the margins I think you've been more directly paying attention to it but um it's a debate about changing the monetary policy of ethereum this this Holy Ground we're treading in should we do it who gets to decide what should the eventual monetary policy be what's the context for this

conversation yeah so two ethereum Foundation researchers uh introduced a blog post like a research blog post propos the idea of changing the monetary policy of eth changing the eth issuance curve from what it is today to something else um along with this research post came a proposal Al in alignment with the research post to include a change to eth monetary policy for the next upcoming hard fork in Electra which could be a hard Fork as soon as the end of this year

uh and this um expediency this speed created a ton of controversy and debate about the politics and Optics of EF researchers rushing in a monetary policy change into the next hard Fork uh and this is something that some members of the ethereum community had this like immediate negative reaction to so really in this debate that we're experiencing that we're seeing in the ethereum community there's really like two pillars here there is should we change the E monetary policy and then there's also like the much more more

controversial thing which is like what is the appropriate process for changing the E eth monetary policy how fast should this be how rushed should this be I think in this episode today Ryan I actually kind of want to just focus on the monetary policy of eth there's the politics around the governance of ethereum that I think the community and EF researchers and core devs will all kind of figure out that's not really our realm uh what I'm primarily interested in is are we at the end game of E monary policy and if not what should we do

about it and that's the subject of today's episode before we get into this episode a quick shout out to our friends and sponsors over at cartei what is cartei cartei is the first modular execution layer with a Linux runtime in real world computing environment for web 3 devs if that was kind of a mouthful to you imagine running Doom as a layer two on ethereum So onchain state with an onchain gaming engine or anything else that like Linux can run so you can boot up a Linux environment and leverage all

of the like Linux developer ecosystem code libraries open source tooling Etc that has been building around the Linux ecosystem uh so you can do just a lot you can do a lot with that perhaps like literally Infinity kinds of things with a Linux runtime on your chain uh cartei is a giving away $1 million in Grants for their ecosystem and this is now live this is the call to action so if you would like to apply to get some of that grant money you can get up to $50,000 from cartez there is a link in the show notes to get your Grant applied they're

given away but you also you got to earn it you got to go build something that's uh the oldfashioned way David um all right should we get into the topic today yeah let's do it but maybe we should let's go like all the way back let's just like start at the very fundamental Foundation of just like monetary policy Ryan what's monetary policy monetary policy is how a entity kind of controls their money right and I would say that any any um money that has Supply that is

somehow impacted or arranged by human beings has a monetary policy associated with it actually so not gold gold does gold have a monetary policy I would say it does it's just like actually completely uh immutable from a nature perspective right unless unless we can find some way to do alchemy which has you know eluded us through through all of human civilization but just gold is birthed in the aftermath of a supernova explosion right it's a on the periodic

table of elements there's only a certain amount of gold in the universe and so it's sort of derived its um scarcity due to that everything else besides natural elements even Bitcoin even ethereum we'll get into it uh and especially Fiat currencies they all have a monetary policy which is just their issu in how much of the supply are they issuing both now in the past and into the future what would you add to that yeah I would say

monetary policy like on the human Tech Tree of like advances in technology emerges sometime after both government and army uh and so like armies they protect a fiat currency right they enforce its value uh governments like produce the actual monetary policy and and then armies give these governments power uh and so like it you know it's a human controlled phenomenon policy implies some sort of like opinion about what money should be uh and so I call

like I call it like relatively like a new phenomenon in the world uh and then monetary policy really came into like its you know its like climax post um the uh the gold leaving the gold standard right so like we had a monetary policy while we were on the gold standard as the dollar uh but it was really am out of like how much uh fractional Reserve are we okay with then when once we went off the gold standard we can like all right well we now have complete and contal control over the monetary policy of the US dollar uh and so it's been

this emerging thing alongside the role of like Fiat currencies yeah may maybe we should uh talk about that in the context of the different types of money that exist in a modern fiat-based economy so a modern nation state economy and um all of these are kind of like subject to manipulation because you you just talked about you know the birth of government the birth of sort of you know paper money um getting off of uh you know the gold standard which had sort of an an immutable uh monetary policy

inherent in it and there are like three there there's more than these but the three areas of money that we could focus on are m0 M1 and M2 so money Z money one and money 2 money Z maybe we should start there and do some quick definitions so m0 is base money what what exactly is that I I call Base money almost like bare asset money it's not a precise definition but it's like kind of close it's literally just like the raw

underlying money of the whole economy like literally printed dollars and then dollars also held like digitally at the Federal Reserve uh so this is like strictly currency in circulation plus Commercial Bank Reserve balances inside of the Federal Reserve it's like the mo you can't there's no deeper level other than m0 it's at like the basement level of currency and and you said the Federal Reserve so this is kind of um we're doing this mostly in in US terms of course uh it's so we're talking about

the dollar as the unit of account here and and the dollar being sort of The the Reserve currency for the world right now it makes sense to talk about the the Federal Reserve and the dollar specifically so that's all of the physical cash that you see in the economy shrinking I would say there's not there's not much physical cash in our daily usage and it's also the bank notes that are held at the fed the Commercial Bank notes held at the fed and if we look at what that number is right now this is um monetary base total monetary base since n

1959 and you can kind of see this over time so David we are at about 5.8 uh trillion dollars in m0 as of today and you can see this chart um it's you like pretty pretty Ste steady up curve through the you know the 7s 80s 90s uh 2000s and then whoa what's this 2008 what happened here and we shoot back up and uh like the last you know 14 years or so have been the spike upwards in in terms of m0o liquidity as as more cash is uh injected into the the mzero

economy yeah there's worth there's like two eras in this curve that really like stand out to me there's the first era up to 2008 where like the slope is like pretty like linear consistent like regulated dependable and then 2008 happens and then the curve is it first it jumps up as in like we me added a lot of money supply into the world but then it like kind of gets erratic and unpredictable and you can kind of see opinions showing up in m0o you can see this is the Federal Reserve starts to be

like oh you know what we can do we can like Leverage these levers we can spin these dials a lot more than we have and this call kind of came into V in 2008 you said opinions but and what I go into more detail on those opinions they seem like very short-term opinions it seems like somebody is drunk on the levers and just like leaning into them like jerking them One Direction or another it's much more jerky opinions were expressed before this but like they were very gradual you know and here here's these incredible jerky ups and and downs as far as mzero but always up I'll note

that it's almost always the long-term trajectory is up so that is m0 what's the next M that we should consider uh we're going to talk about m and M2 but I just also kind of want to put an ed a wedge between m0 and M1 that doesn't exist between M1 and M2 um M1 is derivative money uh and M2 is also derivative money so like we're now once you go beyond zero you're into the world of derivative money and really like M1 M2 M3 technically it keeps on going it's like

MN like an infinite number uh but really once you start to get Beyond M3 it starts to get kind of um uh f um M1 derivative money first order derivative money is money like with a trusted intermediary uh It generally includes the most liquid forms of money things that are essentially money without actually being money that can quickly and easily be used for transactions uh this is money um held in commercial Banks uh savings held by Banks and financial institutions it's basically base money with a single order

of intermediary between you the user of M1 and base money so like I would simply very call it like M1 is like first order derivative money very liquid uh but just not as perfectly liquid as m0o so the way this manifests to you is so M m0 of course is like a $20 bill in your wallet okay M1 is the money in your savings account your checkings account in Wells Fargo right that's that's very accessible but technically still subject to run on the banks yeah exactly it's

there you know PayPal you know all all of the digital money that you see in kind of like your own consumer personal savings account that's sort of M1 it's kind of the the stuff that we uh you like basically use today the point is is that there's risk at M1 and there's zero risk at m0 like with any sort of centralized trusted intermediary there's insolvency risk credit risk uh you know theft risk there's some sort of trust happening at the M1 layer which is the meaningful differentiation between m0 and any other M which is like there's a

intermediary between you and anything above M right I don't feel like we feel that uh trust anymore like it doesn't feel risky anymore because you know there used to be runs on the banks and things like this where your M1 is at risk and you better switch your bank now we have FDIC Insurance up to 250k and it seems like the the the the you know fed system will bail out any bank that you like leads to insolvency but uh I I guess there is some risk here one important point to note is um this is a lot bigger in terms of like M M1 is a

like it's it's much larger it's kind of like another Circle uh outer layer I would say if if just m0 is kind of the nucleus M1 sort of surrounds it we're looking at about 178 trillion of M1 right now versus the 5.9 trillion of m0 and part of this comes from the F fractional Reserve layer of the commercial Banks exactly so like $1 in turns into to like $10 out at the Commercial Banking layer uh and so this is where we see like expansion of the

monetary Supply um whereas the monetary base is at one number the M1 number will always be some sort of multiplier on that because we have we live inside of a fractional Reserve System so David if you thought the m0 chart was uh ridiculous with all of these ups and downs uh look at the M1 chart here and not much actually occurred in like M1 Supply in uh 2008 but something happened around 2020 and we see this absolutely like massive Mountain Cliff Edge spiking

upwards uh what is that what happened here yeah well starting actually back at 2008 it's it's notable that M1 did not go down during 2008 even when like according to Central Bankers we were on the brink right we were on the brink of a of a financial depression but like we learned from the financial depression that we need to to quickly inject stimulus into the economy and so we did that uh and without being an expert in like the history of the Federal Reserve like kind of staved away like a

meaningful amount of depression out of the post2 2008 economy what happened after 2008 is like you see the in the the steady slope upwards of uh M1 actually Accelerate from pre2 2008 to post 2008 then we hit covid stimulus wow Co stimulus was like a different beast in which like everyone's memory goes back to 2008 and we like you know what worked in 2008 stimulus we're going into covid we're going into a pandemic you know what we should do stimulus turns

out like the covid crisis and the 2008 crisis were like meaningfully different types of financial crisis and we only really know this in hindsight in hindsight but like the co crisis didn't necessarily justify the amount of stimulus that we got but nonetheless we made that happened and so like it's hard to express how vertical the co and one growth uh line is but it goes from4 trillion up to like what is that 126 trillion dollar inside of one year like

inside of maybe a quarter or two and so we just quadrupled the M1 supply of money inside of the economy in 2020 because of covid and then like what happens we experienced inflation for the first time in like 30 years like go figure uh and then it also continues to rise up until the point where you actually see it come down a little bit when we all remember the Federal Reserve hiking interest rates for the fastest time since like 40 years or something yeah tightening right basically so we were doing the opposite of of tightening we were doing massive expansion very

quickly in M1 and then we move back to tightening so we've got our m0 we've got our uh M1 just wrap a bow on this how about M2 what what does that include yeah that's just even more uh derivatives on money that's slight even less liquid than M1 this is Commercial Bank and credit loans uh so this is money in Money markets uh this is money available to Banks and financial institutions for Lending so it's money that's been put into a bank turned into M1 and then it's lent out again uh to

money market funds or other or or other creditors or lenders creating M2 still very liquid but like you have like a couple orders of derivation which separates it from m0o okay and so the total amount in M2 is uh 20 trillion so larger than M1 certainly significantly larger than m0 so this is how the the money that we experience in in the typical Fiat system this is essentially how Supply issuance monetary policy is kind of like managed so so what's the

problem with this David or what can be the problem with this what is the criticism of uh you know C Central Banking policy from let's say you know austrians and and those who think that uh all of this expansion could lead to some disastrous effects yeah so there's a number of different ways to approach this conversation first I would say just like the Central Bank influences control over like a mass number of people's lives through the levers and dials that they have control over at the Federal Reserve like we have

all been uh told that a 2% inflation rate is good uh and that we should accept that and that the dilution of our money by 2% every single year is like good for society that's something that we are just told um there's also uh since the the the Central Bank also kind of influences its control over the Commercial Banking layer which is the layer that all like the average Joe has a relationship with and so there's it's it's really just a huge intermediary between you the individual the market

participant and the money that you use uh and so like when you use the dollar which is a liability from the Federal Reserve the Federal Reserve is your counterparty it is your counterparty on the other side of the transaction of you choosing to store your savings inside of a currency that is managed by the Federal Reserve so like you as an individual as a market participant are giving up some of your sovereignty uh some of your power and influence goes into the manager of your fiat currency and as we kind of saw with the M1 or the

m0 the very erratic nature post 2008 like these are people controlling the lives of like the entire Globe uh because every every transaction one half of every transaction IS F currency and so one half of every transaction has this like one Central intermediary which is the Federal Reserve uh and also commercial Banks uh and so and when we talk about like living a bankless life or living a a being a self- sovereign individual uh having a central bank is a obstacle to that because their choices

impact us and they are humans and they are Folly and they make choices that impact the entire Globe so this gives a tremendous amount of power to sort of the the central Bankers around the world to to effectively make decisions uh and um like this is kind of like an issuance tax now we're only looking at one side of the the equation so this is not showing us um the demand side for these dollars right this is just the underlying issuance and since you mentioned it you you mentioned 2% inflation I think it's important to draw

the distinction distinction between what we've been talking about which is issuance and inflation so inflation in itself is just the purchasing power that your unit of currency has your unit of money has for some basket of goods let's say it's like food you know shelter um like energy cost that that that is a basket of goods that is sort of defined and inflation is different than issuance okay so like issuance can Spike up but you might not necessarily feel that in terms of inflation at least

not right away not immediately because your purchasing power may not change right and so the the FED mandate it's important to know when the central Bankers around the world are kind of like managing the dials and the knobs for this they don't they're their mandate they don't really care about issuance they're not managing to an issuance curve they're managing to things like unemployment rate in the economy healthy GDP they're trying to at least they say they're trying to get inflation to a 2% annual range per year they're not managing to issuance Styles

like at some level they don't really care about issuance unless it starts to impact the things that they're really managing which is like inflation the overall GDP of the the economy and and only then do they actually care the problem with this though David is that the the issuance expansion of Supply does tend to manifest in inflation over time so this is a chart of um actual inflation from the early 1900s so 1913 uh over time so you can see you're starting on this chart with about $10

and if you scroll all the way forward to February 2024 um it takes it requires $310 to have the exact same purchasing power of $10 you had a year ago another another way to show this chart is sort of like what the purchasing power of a consumer dollar from the early 1900s to you know the 2020s where we are the dollar has lost over 97% of its value since you know 1913 so if you're holding wealth at least over the long term in a dollar it's basically

a shitcoin like you're not actually able to hold your wealth over uh any period of time yeah and this is something that like of course early bitcoiners uh instantiated inside of their culture which is like we don't stand for this uh in fact the purchasing power of money ought to go up over time not down over time uh the loss of the value of the dollar came to the benefit of a select few individuals there's this concept called the the cantelon effect uh where the people who are most

proximate to the issuance of money benefit the most because they are nearest to the money printer uh and so they get to purchase Goods before inflation sets in actually they are the cause of inflation because they have this privilege of buying goods uh before inflation defines other people's value of their savings and so Bitcoin has always been this reaction to this phenomenon like what if we actually had a supply schedule of our money that was not responding to human incentives or human desires of a select few people and

instead what if we use this money that stayed stable in Supply and in theory would actually grow in value as a function of its demand inside of the economy uh and so this is the Bitcoin um Theory the Bitcoin idea is like you take this little decaying dollar graph and invert it whereas in whereas the dollar loses money over time Bitcoins is would in theory grow in value over time as a function of the growth of the GDP around Bitcoin I I think the way that's best expressed though is like that that

that's sort of a theory the the the practice of that though is there's an algorithmic issuance policy so they look at sort of the FED M1 and M2 and these spikes and you know 12 guys in a room sort of controlling uh how much money is printed at any specific time they say let's get rid of all of that let's have a simple algorithmically defined uh issuance policy and this is the Bitcoin issuance schedule maybe you could kind of Define this so this is a chart that looks uh much less sporadic uh much more

calculated much more planned it starts at uh zero of course and it ends at 21 million uh Circa you know 2041 or so this is the Bitcoin issuance schedule this is the Bitcoin monetary policy this is essentially Bitcoin m0 what is the m0 calculation David yeah so there's a when you look at this graph you get a very clear idea like oh there's an algorithm happening here um Bitcoin before I Define that algorithm which is very simp Le to Define one of the benefits of Bitcoin like I'll just first state that

Bitcoin established the first non-sovereign monetary policy ever and so back when we were kind of defining monetary policy like on the human Tech Tree you needed both like a government and an army to create and then protect and manage a fiat currency and this is really the novel institution that Bitcoin created it has its Army it's called proof of work miners it has its currency it's called the BTC token the BTC asset it has its monetary policy which is this algorithm which from 2009 to 2012 the first like two and a half

years of Bitcoin miners received 50 Bitcoins for every single block that was Min largely when Bitcoin was like completely valueless like it started to have a value 2011 um but people were receiving 50 Bitcoins and they were mining on their CPUs it was very easy to mine it was very actually very loose monetary policy at the very very beginning uh and then the supply schedule of Bitcoin is that every four years the issuance of Bitcoin on a per block basis gets cut half this is why we call this the happing so November 2012 was the first happening reducing the

supply of issuance on a Bitcoin basis per block to 25 July 2016 the seven second havening 12 and a half Bitcoin per block May 2020 the third happing 6.25 Bitcoin per block and then right next week actually 2024 the next happening will reduce Bitcoin reward per block to 3.125 uh and then eventually at 2140 we will will approach 21 million Bitcoins and once we hit that 21 million Bitcoins per block we're done there will

be zero more issuance on the per block basis for Bitcoin uh and this is something that you can review and audit the code on in the side of the Bitcoin system and it has been executing according to that code since the Inception of the Bitcoin machine the Bitcoin system unlike the Federal Reserve which changes which is why we have fomc day like fomc day is is the feds deciding to alerting us to a change that they're going to change the issue and that's why everyone pays attention to fomc yeah and but this is defining

code I I like that point you made earlier which is like so when you look at sort of monies in the past we had nature of course which really doesn't have it's nature defined monetary policy if you can even call it that then we had nation states which is government and army it's like violence and now we have algorithmic uh monetary policy a human did create monetary policy in Bitcoin he just threw away the keys yeah uh B basically and it's um the cryptoeconomic incentives that actually uh make this thing go another important important

point to to note of course there on this chart we're seeing Bitcoin issu and schedule this is m0o okay so there's no notion of M1 M2 the M1 in the Bitcoin economy would essentially be Bitcoin in an exchange let's say and so most of the time BTC on ethereum or or rap Bitcoin on ethereum most of the time that is not fractional Reserve so it's a one: one so except in cases like FTX where the Bitcoin wasn't actually there so like if you put your Bitcoin in coinbase that becomes M1 but it's not a fractional Reserve System it's like one Bitcoin in

coinbase for for one actual Bitcoin issuance doesn't really affect the total amount of Bitcoin in in circulation all right the only reason why it doesn't affect that is because there's kind of this like social contract to hey don't don't fractionally Reserve Bitcoin because no one wants your fractional Reser Bitcoin we actually kind of consider we tried that a couple times right like and so what happens is um things like blockfi and like like grayscale and you know FTX and this this is why there's this notion of not your keys not not your crypto is because

sometimes Banks can go fractionally fractionally Reserve things behind the scenes you don't even know they don't tell you because their Ledger is a little bit different so we did all of that to set up the conversation we're about to have which is ethereum's current monetary policy and the changes that are maybe being proposed are they being proposed I'm not sure so we'll talk about that in a minute but before we do we want to thank the sponsors that made this epode possible a nonf fractional Reserve crypto exchange if you do not have an account with Kring check them out if you want a crypto trading experience back by worldclass security and awardwinning

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meteoric rise with over 300 million transactions and 1.5 million monthly active addresses and now cell is looking to come home to ethereum as a layer two optimism polygon matter labs and arbitrum have all thrown their hats in the ring for the cell layer 2 to build upon their Stacks why the competition the cell layer 2 will bring huge advantages like a decentralized sequencer offchain data availability secured by ethereum validators and one block finality what does that all mean for you with cell layer 2 gas fees will stay low and you can even pay for gas natively using erc20 tokens sending

crypto to phone numbers across wallets using social connect but cell is a community governed protocol this means that cell needs you to weigh in and make your voice heard join the conversation in the cell forums follow cell on Twitter and visit c.org to shape the future of ethereum mantle formerly known as bit Dow is the first Dow Le web 3 ecosystem all built on top of Mantle's first core product the mantle Network a brand new high performance ethereum layer 2 built using the op stack but uses IG layer's data availability solution instead of the expensive

ethereum layer one not only does this reduce mantle Network's gas fees by 80% but it also reduces gas fee volatility providing a more stable foundation for mantle applications the mantle treasury is one of the biggest Dow owned treasuries which is seeding an ecosystem of projects from all around the web fre space for mantle mantle already has sub commmunities from around web 3 onboarded like game s for web 3 gaming and buybit for tvl and liquidity and on-rails so if you want to build on the mantle Network mantle is offering a grants program that provides Milestone based funding to promising projects that help expand

secure and decentralize mantle if you want to get started working with the first Dow Le layer 2 ecosystem check out mantle at mantle. XYZ and follow them on Twitter at zerx manle ethereum's monetary policy all right this is a different curve looks a little bit different than Bitcoin although like not smooth too much like if you look at sort of the the line over the last um you know ethereum is almost 10 years old so 9 years or so so what is ethereum's monetary policy what has it been what um like changes what events have occurred

give give us the timeline here in the rundown I would actually say ethereum kind of lacked a monetary policy and perhaps even like continues to lack a monetary policy to this day uh which is one of the biggest wedges I would say defined the difference between the Bitcoin and the ethereum community um B ethereum started its monetary policy when the blockchain started uh which was initial block rewards will be 5 ether per block with no future prescriptive nature about any changes in the future or like any sort of model or anything