The Dark Side of Ethereum
The second cryptocurrency in market cap terms, Ethereum, is also considered the top candidate to dethrone BTC from its leading position.
The "flippening" is an expected outcome since another cryptocurrency will eventually overthrow Bitcoin-BTC and become the market leader. The term applies in the hash rate wars we've watched in previous years as well.
Ethereum has delivered tremendous innovation and helped the cryptocurrency field become a serious industry. Today tens of thousands of developers are working on top of Ethereum and other networks based on similar smart contract protocols.
Undeniably, Ethereum deserves its current popularity and perhaps can achieve the flippening, but it also contains a few dark pages in its history, with most of them often ignored by the ".eth and 0x" crowd.
Moreover, just as BTC did not scale to reach mass adoption, Ethereum also reached its peak of throughput and did not achieve much-desired scalability.
This article does not represent negative sentiment toward Ethereum, it is about setting the historical facts accurately and initiating a more critical thinking process.
The Dark Side of Ethereum
You might think of Ethereum as a shiny and exciting hyper multiverse of decentralized opportunities.
Every newcomer feels the positive vibes expressed by the vast community of devs, investors, and users of this platform.
Ethereum has achieved a lot, and it is probably not prudent to follow the maximalist's way of thinking. Ethereum is an innovation that deserves the praise it gets.
However, it has also failed in blockchain standards at least twice in its history.
Let's start with the essentials:
- Vitalik used to be a columnist for Bitcoin Magazine!
Vitalik was a reporter for Bitcoin Magazine.
A distinguished writer too, as we would have expected. Probably, the only part that still matters from what has become today of this magazine.
- Vitalik Originally Planned Ethereum as a Sidechain to Bitcoin
Vitalik was an OG in the Bitcoin universe as a columnist in Bitcoin Magazine and an upcoming star in the field. He was planning Ethereum as a sidechain to Bitcoin, but how could he ever succeed with that?
Probably it doesn't matter, but it is yet another indication of the short-sighted approach of the BTC maximalists. It sums up the destructive attitude the Bitcoin developers are following, isolating BTC from innovative developments and its potential to disrupt finance.
It was already decided that BTC would not scale and not achieve any further innovational developments. At a time Blockstream appeared and slowly taking control of Bitcoin, Vitalik tried to persuade some from the Bitcoin community to support his project but found only shut doors and closed-minded Core devs. Eventually, he decided Ethereum has no future as a Bitcoin sidechain and proceeded independently.
- 72 million ETH were PREMINED!
The total supply of ETH started out at 72 million - Coindesk
On July the 30th 2015, Ethereum was released together with 72 million ETH supply, a volume of ETH that was immediately allocated for presales (60 million ETH) and to the Ethereum devs (12 million).
Nothing to see here!
Whenever this topic is brought up we always find inaccurate excuses, even from people inside the industry, trying to justify or even deny the pre-mine of 72 million ETH.
Who conducted the presales if not the Ethereum Foundation that pre-mined 72 million ETH? Who mined the 12 million ETH the devs received?
It makes no sense. The ETH was pre-mined allowing a single party alone to mine the blocks after the Genesis block was initiated. There is no other approach here but no decentralization and no open mining during the initial stage right after the genesis block and during the presales.
The transaction I provide below presents the allocation of 12 million ETH to devs' wallets (550,000 of these ETH were transferred to Vitalik's wallet).
5 ETH were mined with new blocks every 15 seconds, but the question is who mined them in this initial stage if not the Ethereum Foundation, which sold 60 million ETH during presales.
Researchers have published multiple articles on the matter, and all are leaning towards accepting that 72 million ETH were premined (i.e. this Trustnodes article)
Investopedia also presents Ethereum as the top example of a premined cryptocurrency:
"Ethereum (ETH) is one of the noteworthy cryptocurrencies that premined a large number of coins before going public through an ICO."
And this link from Etherscan is the 12 million premined ETH allocated to the devs wallet. (named EthDev).
We should question everything that seems illogical, and not change our mindset into simply trusting what we've been told without verifying first.
Even some of the participants of the Ethereum presales don't realize they bought premined tokens.
"The dedication of a large pre-mine stock of currency to the developers of the platform means the software development, processing power, and holdings of the currency are all concentrated to a large degree in the hands of the Ethereum Foundation, which has a large degree of discretion in changing the rules of the currency."
Ethereum, at least in the beginning was concentrated to a large degree in the hands of the Ethereum Foundation.
Ethereum is a public ledger, there is no need to trust, but we can verify 12 million ETH tokens, were just allocated to the Ethereum devs wallet during the presales.
If mining was decentralized and open to everyone after the Genesis block, then ETH would be trading immediately in exchanges as miners would expect profit. Moreover, there would not be any need for presales, which simply were selfmined ETH by the devs and premined in the sense there was no competition.
A single trusted party mined the first 72 million ETH, this is the definition of a premine. Mined without open access to competition.
(source: Valerios Twitter)
This is the bitter truth.
The ICO ETH was premined coins. Backed by centralized PoW, perhaps locked for mining from a centralized entity, or mined in secret without announcing pools and mining software.
Is this the dirty little secret of Ethereum?
Probably to the newcomers in the field it is of no importance. Back when I was a newcomer it didn't matter to me either.
As we already know, Ethereum's innovation and Vitalik's brilliance created an explosive combination and opened up a new world of opportunities with Web3, DeFi, Dapps, and NFTs leading the race not just for the cryptocurrency industry but probably will shape the Metaverse and the growing digital economy.
Back in 2014, premined coins were considered a red flag. Any project with coins allocated to developers before the mining operations went public was shunned and regarded as a scam by the cryptocurrency community, until Ethereum changed this fundamental.
Verifying was not demanded anymore and the only reason Ethereum didn't use proof of stake immediately was that it didn't exist.
One of the changes Ethereum brought, was to change this sentiment by instantly releasing 70 million coins at once.
The developers received 12 million of the premined ETH coins in a single transaction, and another 60 million ETH was allocated to Ethereum presales.
The first ICO on Ethereum was Ethereum itself.
This is Ethereum's beginning, but not the only time it deviated from the fundamentals decentralized blockchains represent.
- The DAO Incident
Another dark page in the history of Ethereum, buried in the annals of blockchain history, is the DAO incident or "The DAO Hack".
Not mentioned frequently lately, but back in June 2016 and for the whole year, it was the most discussed topic in the Cryptoverse.
DAO stands for Decentralized Autonomous Organization, and it was an ambitious project aiming to automate governance decisions in a decentralized approach for businesses and organizations.
3.6 million ETH were stolen during the DAO hack (exploit), most of them belonging to Ethereum developers invested in the DAO.
There was a lot of discussion in the Ethereum community on how to deal with this hack, and eventually, the decision was to hard-fork Ethereum and restore the stolen funds to the original smart contract. Not a re-org, though, as some falsely claimed. A re-org would nullify and cancel all transactions bringing the network back to the state it was a few blocks before the DAO incident.
The hard fork reverted only those transactions influenced by the DAO hack. These were the ETH stolen by the attacker.
Such a move is equal to a centralized intervention, and Ethereum became (probably) the first cryptocurrency network than abandoned its neutrality while canceling the immutability of the blockchain for an exploit that affected a smart contract not directly related to the Ethereum project.
The initial concerns seemed valid as the Ethereum Foundation had the ability and control over the rules and change the Ethereum currency and network.
Ethereum became censorable as the Ethereum devs "permanently" reversed recorded transactions on the Blockchain with a hard-fork.
Ethereum Classic was the part of the Ethereum community that decided not to support this hard fork.
- Supply - Inflation And Burn Process Of Ethereum
Today the total supply of Ethereum reaches 120 million. Seven years later, and the network still hasn't produced more than the initial premined coins (which today amount to 60% of the total supply).
There is no fixed limit, as with Bitcoin (BTC or BCH). Ethereum is inflationary by design. Regardless, in 2021 a new upgrade (London fork) created a deflationary mechanism, reducing rewards by burning newly created Ethereum (CNBC).
Ethereum is now planning a shift from PoW into PoS. While Ethereum 2.0 is in its initial phase, with millions of ETH locked for staking, the Ethereum side has often delayed developments for months or even years.
The burn process helped Ethereum recover from the May 2021 market crash, reducing the supply of freshly mined Ethereum. Ethereum decreased its inflation, leading to better price dynamics.
Ethereum Turned Out To Be Cutting-Edge Technology
Ethereum possesses a large userbase, but mostly within the DeFi realm which is its primary process since 2020. With DeFi, Ethereum moved funds from centralized control of exchanges into Web3 wallets.
It pushed users into DEXs and decentralized applications, out of the control and the custody of trusted third parties.
Ethereum is ever-changing. There was no DeFi in its original inception but Vitalik, although he had predicted virtual ownership and NFTs.
Initially, it was a platform offering a secure and efficient network for developers to materialize their ideas into smart contracts without worrying about the difficulties of recreating a decentralized PoW blockchain similar to Bitcoin. PoW was not easy, and hundreds of projects failed due to low security and hashrate.
With Ethereum, blockchain developers didn't need to wonder if their network will be 51% attacked. The Ethereum miners provide security.
ICOs (Initial Coin Offering) represented Ethereum's vision, with multiple blockchain networks starting as simple ERC20 tokens (EOS, Vechain, BNB, Tron). Maybe some of them could have managed without Ethereum, still, it was an advantage to run presales on Ethereum and ERC20 tokens, and use part of this funding to complete the developments of the mainnets.
Ethereum made this innovation possible, as new projects could launch their ICO and provide ERC20 tokens to investors backing their proposals, while later on, migrate to their mainnets when they are ready.
Most tokens, though, did not plan for a mainnet as Ethereum was going to cover their needs. Ethereum found ground in the corporate world as well, with E&Y utilizing this blockchain to build accounting and financial software on top of it. Although, even E&Y discovered that the scalability of Ethereum was vast, and is in the process of using more networks.
However, with this focus on DeFi, Ethereum turned into a mainly speculative platform.
Ethereum is ignoring progress in other fields such as Dapps and blockchain games, which today suffer and migrate to other networks to survive.
Even NFT creators started moving into Polygon, Solana, and new networks like smartBCH offer a better alternative. Multiple projects felt let down by the greed of miners and Ethereum's slow process to enhance scalability.
Ethereum will probably adjust again, but Ethereum 2.0 can't be the marketing message repeated for five more years until sharding is applied.
We meet astounding denial by many in the field about the 72 million ETH premine.
Maybe some didn't consider the facts or don't want to find anything negative about their investment. This is not how investing works, though.
Ethereum succeeded, no matter the DAO hack or other initial red flags.
Not just the current price of ETH, but mostly the dozens of Ethereum clones and sidechains suggest this was a success.
Maybe the initial investors being unaware of the premine felt more confident about the success chances of this platform. Perhaps the innovative technology was helping overcome all fears and skepticism.
Ethereum contributed to the rise of cryptocurrencies singlehandedly as a platform, enabling developers to produce multiple innovational technologies with its smart-contract capabilities (such as DeFi, NFTs, and Web3 applications).
Ethereum faced multiple threats and challenges, but it quickly and decisively overcame most issues. It now plans to scale with the use of sharding, however, many are concerned that perhaps Ethereum may have reached its tipping point.
Time is currently a decisive factor as competition is growing and EVM compatible blockchains are on the rise.
Cover Photo by Michael Förtsch on Unsplash
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