Ethereum's chain is profitable. The networks fees outweights the supply given to validators to secure the chain.

But it's still a Ponzi scheme in that you're paid out in the thing you stake, so you don't necessarily have any more value with respect to an external reference.

For all practical purposes, you could exchange the currency for something else. But that's outside the scope of the staking system as defined.

I'm not making any negative or positive judgement on the system, Ponzi scheme is just a description of how it operates. Similarly, any stocks that does not pay out dividend is also a Ponzi scheme.

> it's still a Ponzi scheme in that you're paid out in the thing you stake

> any stocks that does not pay out dividend is [sic] also a Ponzi scheme

Neither of these things are "Ponzi schemes." Read about Charles Ponzi's role in his investment scheme to understand why.

That’s not what a ponzi scheme is though. The most important thing about what makes a ponzi scheme a scheme is that the person running the scheme is obfuscating where the money being paid out comes from. It’s when someone pretends they’re doing something highly profitable to attract investors, but actually when they pay people with what they claim is profits they’re actually just using the money from other investors. The defining feature of a ponzi scheme is not that if no one would be willing to buy if off you, if would have no value (that’s definitionally true of all objects). It’s that if new people stopped investing in the company, the company would fall apart. There is no value in a ponzi scheme separate from more money piling into it.

This is very different from a stock that doesn’t pay a dividend. While you’d never get money out of it if no one was willing to buy it, what stocks generally promise is some amount of ownership and voting rights in a company (which theoretically could result in dividends, if enough stock holders agreed). That said ownership ended up not being valued by other people does not make it fraud. You can certainly feel free to believe that stocks that don’t give dividends are worthless though, that’s a separate question really.

I generally come down on the side that the major cryptocurrencies aren’t ponzi schemes, or fraud in general. (Plenty of fraud in the shitcoins, of course). Ultimately you decided to buy a data point on a ledger in a distributed system, and that’s what you get. But…well, mining sometimes confuses that. Without enough people coming into the system to buy new coins, the miners would start shutting down until none were left. Much like a ponzi scheme, crypto currencies seem reliant on new blood to keep functioning to me. Don’t know if that makes them a scheme necessarily, but they’re more adjacent to it.

The definitions you use match the recent failing crypto exchanges behavior. They completely obfuscated what they were doing. They had made loans if hard crypto assets to other companies, other exchanges, and either refused to describe the situation or outright lied about it.

Source?

https://ultrasound.money tracks this. You can play with the sliders projecting things out depending on how much ether is staked vs what the sustained transaction fees are.

It's unclear to me by looking at these numbers that the network is profitable. Profit is the difference between revenue and cost, so we need to know the amount of fees earned and the operating expenses.

Ethereum measures its "costs" as issuance paid to stakers while measureing "income" in the amount of eth burned by users via gas fees paid to transact on the network. Since the merge, there has been about 15K more eth burned in transaction fees then has been issued to validators.

Both issuance of eth and fees are forms of revenue to validators. You're saying that revenue is predominantly in the form of transaction fees. This is just one part of the equation. The other part is costs, and this doesn't tell us anything about the costs incurred by the validators. Therefore no conclusions about the profitability of the network can be inferred from this data.

The argument would be that transactions must be worth at least what people pay for them, otherwise people wouldn't pay for them.

Nobody is doubting that transactions aren't worth what people pay for them. The doubt is whether the fees that users pay exceed the costs of operating the network.

90+% of the transaction fees are not paid to validators. They are burned or thrown away. That reduces the supply of eth to the benefit of all other eth holders.

If fees are thrown away you can't count them as revenue. Also, still no mention of costs.

The cost is all the money paid to validators, which is currently less than the revenue the network receives. This is on the ultrasound money website and also token terminal (and a few other places)

The cost of running the validators is irrelevant to Ethereum (though it is tiny), it'd be like saying you have to calculate employees lifestyle costs to figure out the "real" cost to a company. The cost is the wages you pay the employees (the rewards given to validators) not how much the validators spend.

Sorry, aren't these "validators" part of the network? They run the network, don't they? The money that they get paid is therefore revenue, not a cost, from the standpoint of the network.

It seems like you’re making a semantic argument to equate the Ethereum network with its validators. That seems confusing. Here are some examples of how “A runs B” does not imply “A == B”:

“Employees” are part of a company, they run the company, don’t they? Yet the cost of having employees is not “therefore revenue” from the standpoint of the company.

“Drivers” are a part of Uber, they deliver the service, don’t they? Yet the money paid to drivers reduce Uber’s profits.

I think where your argument runs into trouble is “from the standpoint of the network”. If you want to equate the network and its validators, to say they are the same thing, then your sentence becomes, “The money [the validators] get paid [by the validators] is therefore revenue, from the standpoint of [the validators]”. That’s non-sensical. You can’t give yourself money and say it’s revenue. Either these two things are in fact not the same thing and we can analyse the cashflow of “Ethereum the network” separately from “the validation service providers”, in which case Ethereum is paying out less than it’s taking in, so it is profitable. Or they are the same thing, in which case the “profit”, to the extent you can say a virtual entity like a network can have such a thing, is even higher.

This is because whatever costs the validators have to validate, it is less than the ETH they receive is worth. This is true if we assume validators are rational actors— they wouldn’t validate if they were losing money doing so. And even if we remove the assumption that they are profit motivated (maybe they’re all doing it as charity work for some higher purpose), the cost of running an Ethereum validator is tiny, so we end up in the same place: outgoings are smaller than receipts.

So wether we treat validators as a separate cost center with cost “X”, being the total paid to validators in the first case, or we treat them as “the network” in the second case with total costs less than “X”, the “profit” is the same or greater.

Seriously, this isn't rocket science. Ethereum provides a service, namely it stores data and does some computations in exchange for a fee. Ethereum users pay a fee and in return they have their computations done. By definition, Ethereum is profitable if and only if the fees that are paid by its users exceed the costs that are incurred by whoever is in charge of doing the computations and keeping the network running. (I thought these were the "validators" but I might have got the terminology wrong, apologies if this is the case.) Therefore we need to know, on one hand, the total amount of fees paid by the users and, on the other hand, the total amount of costs incurred by the network (i.e. by all the entities that do the computations and run the network), over a particular time frame.

Whatever that number is, it will be equal or less than the number already discussed. The network “hires” contractors to provide the services you mentioned and it pays a known figure for that. Not much else to it really. Since all we are discussing is whether the network is profitable or not in this thread we don’t need to dig into more specific analysis of the service providers’ internal costs (and indeed that would be difficult since they are globally distributed with different attendant costs and efficiencies). Just to note they are unlikely to themselves be making a loss is sufficient.

No, the costs incurred in providing a service is exactly what needs to be quantified in order to determine whether the provision of that service is profitable. If you insist that the contractors must be excluded from the analysis (for some reason), then you have to admit the possibility that the network is being subsidised by the contractors (as would occur if they were operating at a loss), at which point the entire concept of profitability of the network becomes rather meaningless. So you can't exclude the contractors. And you can't simply assume that contractors are unlikely to be making a loss either, because that's exactly the question that we're asking.

The disagreement here seems to be "how relevant are the real world costs and profitablity born by ethereum node operators and validators to the overall 'costs' of running ethereum"?

You seem to think that is the end all be all to measure the profitability of the network. And you aren't entirely wrong. If it requires too much hardware, too much internet bandwidth, too much in the way of skilled node operators relative to the value the folks running the nodes would gain, the number of particpants would dwindle and the physical network would suffer.

So there are boundaries that real world costs impose on the operation of the network. But at what level do those boundaries kick in? Well, that is why it's been an important value to the developers that a node can be run on 'commodity hardware and internet'. You can run a full node on a standard Pc from the last 5 years with 16gb of ram (less in some configurations), a 2 tb ssd (or 1tb if you don't mind some downtime every few months), a modest internet connection and can be done so by anyone with some basic command line skills.

Because of those modest demands, I can and do run a non-validating node on old hardware I already owned on an internet connection I would be paying for anyway. I make $0 from doing so, but it interests me as a hobby because I want non-intermediated access to the the network. In contrast some large node service providers have immense costs because they host on a cloud services and they hire expensive SRE's to keep it running at a high reliability level. But they woudn't be spending that money if they didn't seem some kind of profit or value in it. Because of that variability and the low baseline to get started, whether it is real-world profitable to any particular participant is irrelevant to "ethereum" as a whole.

So, from my view, it becomes reasonable to look at it as "how much ether is created vs how much is burned" to see if "ethereum" as a whole is profitable.

I don't know if it's relevant, I think it's interesting, to me at least as an economist, to ask these questions. What you do with this information is up to you.

Yea the costs are the tokens it pays to validators. I'm not sure what you don't understand about that. Ethereum the network takes payment for transactions, and pays validators for validating. It is profitable because it currently takes more payments for transactions than it pays to validators. All of this is on the sites I mentioned.

How could validators possibly be revenue? Maybe it helps if you visualize them as contractors who do a job for the Ethereum network, and get paid for that. How the contractor manages their own budget is irrelevant to Ethereum.

Good heavens. The contractors are the network. If you leave the contractors out there's nothing left. There's no network. The network doesn't take payments. Contractors do. Other than that of contractors, there is no economic activity. In this view, the network is neither profitable nor unprofitable, since the entire concept of 'profitability' refers to an economic activity.

The actual cost of running ethereum is negligible, about $5k/day at the upper end. It's just the cost of running thousands of staking nodes.

So the cost of storing all the data and doing all the computations is only $5k/day? Where do you get that from, if I may ask?

If it weren't true the network wouldn't run longer than it takes one's idle curiosity yield to the electricity bills.

I don't know how to parse this.

The fees are larger than the amount staked?

The fees, when realized into gains, are worth more than the cost to run the validation? Are the validators converting back to pay for their costs? Or paying for them some other way?

Does it stay profitable if ethereum drops to 1% of its current trading value?

When people pay fees for transactions most of that fee is burnt.

Blocks have a fixed amount of rewards given to the validator that created them and the validators that attest it is valid.

When more fees are being burnt than Ethereum issued in blocks it is deflationary. It is deflationary at ~16 Gwei and fees have been higher than this for a while now.

Validators cost very little to run, they're usually NUCs that use 20w, the main cost is the Ethereum you have to stake.

That would mean that number of total ETH drops. Is that true?

Yep that's what the main number at the top of https://ultrasound.money shows.

Kraken is a huge network validator. They generate a lot of tokens which they return as earnings to their shakers.

No. A Ponzi scheme is paying existing investors with the deposits from new investors. That's not what's happening here.

That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price.

Once new investors dry out and price collapses stakers will be rewarded with same amount of coins now worth nothing (just like IOU in Ponzi) and will be left with staked coins of 0 value, just like in Ponzi.

> That's exactly what happens here because new coins minted for stakers have any value only because new investors purchase the currency and prop up its price

One could design a "staking" system that is directly reliant on other people's money coming in for your payout to happen. This is not what is happening here.

Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself.

Maybe you think crypto in general is a ponzi scheme because people only want to sell to new entrants for a profit, but that's a different issue (not not necessarily true - it also works with a fixed set of people you keep wanting to gamble).

> Staking as done by this protocols itself never promised you anything but a yield in the crypto currency itself.

That's a fixed percentage promise. There's relly no difference if it's expressed in crypto coins or in entries in the database of a software system of ponzi schemer.

If you have a fledgeling crypto on its ride up, it's not only fueled by new investors but sustained by new investors. If the coins are minted at will the supply will eventually exceed the demand and the coin will start loosing its value. And then the inevitable crash to the bottom happens. It's crypto equivalent of hyperinflation of normal currencies that happens when money supply exceeds demand for money associated with economic development.

> Maybe you think crypto in general is a ponzi scheme

I don't. I just feel like promising fixed, large percentage gains makes something Ponzi scheme. Something like Bitcoin or Ethereum that have tight control on coin supply are not ponzi schemes. Those are just new type of commodity. Mildly useful, but scarce, unique and easily transferrable and divisible.

Promising fixed, large percentage gains is not the definition of a Ponzi scheme. Also Ether in does not do this to begin with.

So do stocks and fiat currency though; it's not the crypto that generates revenue, it's what's done with e.g. investor money that makes it more valuable.

Where does a bank account's interest come from? It's fiat currency, it generates zero revenue just sitting in an account. But the bank invests it, by e.g. giving people loans for which they pay interest. Likewise so with cryptocurrencies and so.

In theory anyway, I'm an amateur but IIRC staking is a way to enforce stability in the crypto market, lock currencies into place to have some guarantees for the future and for certain projects that require currencies / things being locked in.

Banks make loans for people to buy houses and they pay interest, or they start a business and the business pays interest on the loan. There's economic activity that generates a return. All the crypto "loans" seem to be loans to each other using tokens and they pay interest in the form of more tokens. There's no fundamental economic activity. The only money they seem make is betting that other cryptocurrencies will go up or down, using leverage. And then when crypto falls all their investments lose so much money they go out of business. It just seems pointless speculation, and this is visible that they have all loaned money to each other and so it's a true house of cards.

There's just not much actual purchase of real goods with crypto, no one buying in the store. So the crypto itself serves no purpose other than as a financially lucrative asset.