Cryptocurrency Laffer Curve: Cryptocurrencies cannot ever be worth millions, or transaction fees would halt the network

Cryptocurrency Laffer Curve: Cryptocurrencies cannot ever be worth millions, or transaction fees would halt the network
on February 7, 2018

We see daily speculation about future cryptocurrency prices. Bitcoin will be worth U$ 10 million or “I’ll eat my private parts”, Ethereum will overtake Bitcoin, and so on.

Speculating about prices is part of human nature, but there’s a catch about excessive valuation of cryptos: crypto transactions are paid in cryptos themselves. Consider, then, an analogy between cryptocurrency fees and government taxation and the analogy to the Laffer Curve becomes obvious: there is a point in crypto valuation where transactions become too costly to be worth it. What is this point? Is it Bitcoin worth millions of U$? Or are we closer to it than we might think?

Ethereum GAS

Let’s have a look at the most popular smart contract-based cryptocurrency. The minimum GAS needed to transfer Ethereum is approximately 21,000 GAS. To transfer tokens involves a function call in a smart contract, which costs around 50,000 GAS.

According to GAS Station, right now a simple Ethereum transfer costs 1.8 pennies of a dollar. A token transfer is approximately 2.5 times the Ethereum transfer cost, therefore 4,5 cents of a dollar. Now imagine a smart contract with 100 function calls, at today’s prices it’d be ~U$ 5 just to run these functions. If Ethereum were to valuate 10X over the next few years, each such contract interaction could cost U$ 50 or more.

Right now contracts are simple and involve token creation, energy trade like in Power Ledger and so on. These are simple contracts, their source code is available online and you can check that their business logic is rather straightforward.

But the expectation of Ethereum being worth tens of thousands of U$ depends on more sophisticated logic to be implemented in Ethereum contracts and as we’ve already seen this might make computation too expensive on the Ethereum Virtual Machine.

We’ve had a look at two other false expectations investors may have, namely:

  1. Cardano ADA staking rewards
  2. Ethereum computing costs

Both of these cases illustrate how crypto investors have unreal expectations about future valuations of their coins.

Reality Check

We at Crypto.BI also invest in cryptos and we surely hope the prices soar to the levels dreamed by all crypto aficionados. But we try to be realistic about our expectations and we like to share our own analysis with fellow crypto investors, so that the value of crypto can grow in a healthy fashion, not in chaotic boom/bust cycles.

Keeping expectations realistic help the core developers build the right features into cryptos. We’ve seen the quick adoption of Lightning Network in Bitcoin, which is currently showing impressive results, and we’ve seen Ethereum’s own efforts to lower mining costs an to be more energy friendly. These are healthy developments for all of crypto. The last thing we need is pumps and dumps based on unreal expectations.

The truth is, the price of the cryptocurrencies in themselves cannot rise above a certain point or it’ll start slowing the network itself, which in turn will run less transactions and mining profits will dwindle for everyone.

This is the cryptocurrency Laffer curve : intrinsic network taxation (fees) cannot overwhelm network productivity, or it’ll start to have a negative effect on the network itself. Therefore, cryptocurrency prices cannot ever reach the levels intended by those predicting Bitcoin at millions of U$, as it would make transactions too expensive for mass adoption.

 

 

Laffer Curve illustration: By Lawrencekhoo – Own work, CC0 / Wikipedia