How Governance Affects a Cryptocurrency's Coin Supply and Price

As of last year, the top 3 most well-known coins - Bitcoin, Ethereum, Dogecoin - have all become "predictable" in terms of its coin supply. BTC has always had a fixed supply cap, ETH has become aggressively deflationary after its EIP-1559 upgrade started "burning" its supply, and Dogecoin is technically "disinflationary" since the rate at which the protocol issues its coins is set to slow down gradually over time. (People have estimated ~5% going downwards to 1% or less over the course of many years.)

What all 3 coins have in common:

1) the supply curves for these coins are fixed and predictable
2) political leverage correlates directly with the ownership of money itself
3) the economic trajectories of each coin are basically unchangeable without some sort of centralized control

Bitcoin and Dogecoin's protocol decisions are handled by the mining community (they decide which blocks to continue mining, in case there is a disagreement), and now that Ethereum has moved over to proof-of-stake, most of its major decisions will be decided by the core team itself. With proof-of-work, hash power is political leverage, with proof-of-stake, the coins itself does the same. While maxis focus on the differences between the two, at the end of the day, leverage over the system is measured in terms of how much resources you're willing to spend on your particular "vote" - it just depends on which you prefer - hash-power, or money-power.

To be fair, this is how most coins operate right now since it is currently not possible to reliably do a "one person one vote" model (as is typically done in developed democracies) since identifying an anonymous wallet as a "person" is extremely difficult. So as a lesser evil, we use money-invested (aka your "stake") as means of measuring how much influence one should have on an ecosystem as a whole. (In this regard, most cryptocurrencies are similar to corporate shareholder models.)

Until we have a better way of identifying people online as being "real", we're likely to be stuck with this model for a while, but not all coin systems are created equal - some will probably have better long-term viability than others. And a lot of that will be determined by how each coin handles its governance procedures.

Proof-of-work systems right now have no means of reliably doing voting/governance on-chain - as a result, most coins opt to do their voting through third-party systems or platforms. While this can sometimes work, there is no "receipt" of whether the tally was legitimate or not - you just have to trust that the people conducting the polls were doing it in good faith. BTC/DOGE has never had on-chain governance and likely never will, while ETH currently possesses the potential to do, but seems unlikely now that it has also become deflationary.

The "fixed supply" argument is similar to the "buy gold" argument in that there is an inherent distrust of supply curves that are "flexible" - the idea that when there is less of something it's going to be worth more is an intuitive argument that makes sense to a lot of people, at least on the surface. But ideally, you want the price of a coin to go up because there's more demand for it, rather than inflating it artificially by burning your supply - the less there is of something, the more out of reach it becomes for newcomers and people will less money, after all.

So when a project puts "fixed supply" as part of its core value proposition, it's basically prioritizing the short-term appeasement of existing holders at the expense of future growth. We see a similar type of scarcity mindset (the "I got mine" syndrome) in assets like real-estate and gold as well, which are also both about to face corrections of their own. An asset starts to "bubble" when prices increase but quality goes down - then "pops" when the demand for it bottoms out as people realize that it's not worth it.

Ideally, you want the economy to be flexible enough to handle swings in demand/usage, while keeping incentives aligned between all parties (investors, validators, users) at all times. It requires a very careful balancing act that exists somewhere in between fixed and infinite supply - and even better if these decisions are made through consensus mechanism rather than a unilateral decision made behind closed doors. (Tezos' self-amending protocol, combined with its on-chain governance system stands out as unique in this regard.)


So what to do if you're an existing HODLer? Well, short to medium term, coins like Bitcoin, Ethereum, and Dogecoin will probably maintain their price as long as people come see it as a viable alternative to traditional assets as we get further into the recession -- that's the big bet that many are taking right now. But it does come with the understanding that it's probably only likely to happen once or twice more before the market saturates completely and hits its peak. Here crypto is at a disadvantage compared to assets like real-estate or tangible goods, since there's nothing forcing people to use BTC/ETH in particular - there are many other options in the market, after all.

For more discussions about coin supply issues, here: