- Proof of Stake will be implemented via Casper with a rough estimate around the end of 2017
- Holders in ETH who meet a certain threshold will be able to collect interest just by holding ETH
- While unconfirmed, I have heard up to 8% interest on holdings paid out in ETH for stakers who meet the threshold
- Stakers of course can buy more ETH to get compound interest and live entirely off interest on their ETH
What is Compound Interest?
In dividend investing compound interest is the holy grail. It is when you invest your dividends to buy even more shares which pay out even more in dividends. This was facilitated by a mechanism known as DRIP (dividend reinvestment program). It will not be hard to simulate this mechanism in a smart contract on Ethereum allowing compound interest for holders of ETH.
In my stock calculator code tutorial I used compound interest as an example to teach C++ because it is so pertinent and powerful of a concept. Compound interest can make anybody a millionaire or a billionaire.
If Proof of Stake (Casper) is a success there may be no reason to cash out into fiat any more than is necessary to self sustain
In a sense, these ETH tokens could become exponentially more valuable than they are today. $100 per ETH today is meaningless if ETH start paying 8% interest in the form of Proof of Stake. The incentives currently are to cash out only as much as necessary to live because of 40% income taxes, as well as capital gains taxes, etc. In a situation where there is 8% interest on the equivalent of 1 million dollars in wealth, this would mean large crowdsale Ethereum stakeholders might never in their lives exhaust their stakes and simply live off the interest indefinitely. If developers are among these individuals then the developers will in a sense be "set for life" off 8% stake assuming Ethereum is a success and continues growing with their help. For this reason developers and stakeholders will have every reason to expand the pie, continue to grow Ethereum, and maintain it.
The holy grail of crypto assets are the assets which pay the equivalent or interest or dividend rewards. Proof of Stake entices individuals not to cash out, not to sell, and to simply acquire as many tokens as they can over time, to generate compound interest. The key questions will be what is the threshold for being able to stake? What will the process of staking look like and how secure is it from hacks? What will the interest be and whether it is static or variable rate? In any case the main reason most people would want out of Ethereum is to diversify their wealth but even that might not be necessary if Ethereum establishes itself as unstoppable. The fact that many corporations, banks, and other entities are involved in the Ethereum alliance looks interesting but it can also produce a long term result where the biggest stakeholders are the Ethereum Alliance and the original founders, crowdsale holders, and other early stakeholders have sold out into fiat chasing the quick buck.
What would you do if you have to choose between being a lifetime stakeholder via Proof of Stake and selling into fiat for the quick buck? I would assume most people have a price per ETH which they'd decide enough is enough and sell their entire stash? If you do then what price would that be and if you never intend to completely sell and choose to go to the path seeking compound interest then why wouldn't you?