- Ethereum founder explains why Eth 2.0 will function as a deflationary currency
- The ability of the new Ethereum 2.0 has been questioned
- Competition between DeFi and PoS will cause net vulnerability
Ethereum News Today – Ethereum founder, Vitalik Buterin has hit back at the critics of the proof-of-stake (PoS) switch. Recently the development of the Ethereum 2.0 protocol was questioned over its ability to function as a deflationary currency. The community has been waiting for the launch of ETH 2.0. This update on the Ethereum network will switch the Blockchain from a PoW (proof-of-work) consensus mechanism to the PoS (proof-of-stake) consensus protocol.
There is Strong Opposition Against the PoS Switch
Even though many Ether proponents have welcomed the move by the network, a section of the crypto community has come out strongly to oppose the switch. They claim that it would not make the system better when it comes to its deflationary currency metric. However, Buterin has come to the defense of his network’s project. He has bashed the critics of the PoS system. During the mini-tweet storm, the Ethereum founder said:
“I don’t agree with the ideology that the most recent “PoS will not work because staking will be outcompeted by lending.”
The competition between DeFi and PoS might cause net vulnerability, many believe. Grimm crypto co-founder, Andrew COP, also criticized the overall system of the Eth 2.0 upgrade to the PoS consensus model claiming that the growth of DeFi might end up in competition with the proposed protocol change. On the final days of March, reports indicated that the high growth rate of DeFi products was hitting the Blockchain space hard. It is making ETH’s ICOs and transactions slower.
Lack of Deflationary Policies Could Cause Issues with Lending and Staking
Additionally, Andrew talks about the lack of deflationary policies (a common issue with PoW chains like Bitcoin) that ETH 2.0 will cause lending to outdo staking eventually. PoS chains cannot safely use deflationary monetary policy.
If a PoS block reward is decreasing over time, then its long-run equilibrium will be for almost all assets to be lent, not staked. According to Vitalik, the analysis given by Andrew is off the mark because lending rates are not the same across all currencies.
However, the model Andrew used misses to identify the reverse reward ratio that ensures that “if the number of deposits becomes too low, the reward rates will go higher. This is designed to motivate more users to make deposits.” This structure is bettered by totally shifting to a staking platform compared to the PoW consensus algorithm. With Ethereum lending rates currently at a very low rate and the network’s present inverse rate ratios, Vitalik believes the Eth 2.0 upgrade will be successful.