2Ether dynamic block rewards: adjustment based on the market price
In our previous post, we described how the base block reward in 2Ether changes gradually with time to control inflation. In this article, we’ll see how miners’ rewards are adjusted depending on the market price.
In a perfect world, price should clearly follow supply and demand. For example, if you reduce the block reward, fewer new coins will enter the market every day, while the demand will remain the same. So the price will go up. There won’t be as many buyers willing to pay the new higher price, and a new equilibrium will be reached.
This is what happens every time Bitcoin goes through a halving. The number of BTC produced every day is cut in half, and the price invariably rises. Everyone expects the same thing to take place in May 2020, after the new halving.
However, the pricing mechanism in the crypto market — especially for altcoins — isn’t so efficient. We all know that huge fluctuations can happen suddenly. And besides, altcoins tend to react strongly to what happens to Bitcoin.
On the one hand, when something bad suddenly happens in the BTC market, it can be great for ETH and other tokens. For example, when the SEC ruled against Bitcoin ETFs, BTC lost almost 30%, but ETH grew by 200%.
On the other hand, most cryptocurrencies show a significant correlation with BTC. For Ethereum it surpassed 0.90 in some periods. We can expect ET2 to be correlated with Bitcoin to a certain extent, too. So for example, if a crypto whale suddenly places a huge sell order on Bitcoin and pushes the price down by $1000, all other coins — including 2Ether — can experience a price decrease.
In such a situation, miners will lose some of their income. They will sell the ET2 they mine but get a smaller amount of fiat money in return. At the same time, they will still have to pay for energy, hardware, and rental spaces in fiat. So their fiat revenue will go down, but their fiat costs will stay the same. If their profit becomes negative as a result, they might leave the market.
In 2Ether, we use an intelligent and efficient solution to this problem. The base price will be adjusted regularly depending on how the market price of ET2 changes. We use the following formula:
Price-adjusted Reward = Base reward*(last price/current price)
Every 30 blocks, our system will fetch the up-to-date ET2 price from Coinmarketcap. Since our average block time is 1 minute, this will happen roughly once in every half an hour.
For example, if the price was $1 and then fell by 1% to $0.99, the base reward will be increased by 1%. This way, the mining revenue will remain stable even when the price fluctuates. The miners will have a clear strategy:
- Sell their mined ET2 when the price is high to maximize revenue;
- Save their rewards when the price is low and then sell them when the price increases — they gain an additional profit.
We believe that this system is much more fair towards small miners, who cannot benefit from economy of scale. One of the main goals of 2Ether is to create a framework where GPU miners have a level playing field with big farms. The price adjustment of the base reward will help us achieve exactly that.
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