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The Ethereum Premine Debate On Fairness, Regulation, and Centralization

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  • “A pre-mine is unethical and favors some actors over others in a political fashion.”
  • “The ICO can be classified as a security offering and the ether tokens as securities.”
  • The ETH sale was actually more open and distributed than critics claim.
  • The ETH camp claims that PoS doesn’t favor actors with large holdings in ETH.

You may not be aware of this, but back in July 2014, Ethereum (ETH) had a premine in which around ETH 60m (worth around USD 272bn now) tokens were sold for a total of USD 18.3m, while 12m was kept aside for early contributors and the Ethereum Foundation. At ETH 72m, this total accounts for around 63.7% of Ethereum’s current total supply, raising the specter of centralization, particularly as the platform transitions to a proof-of-stake (PoS) consensus mechanism.

Indeed, for many of Ethereum’s detractors, its premine is one of the key reasons why it will never be as decentralized as Bitcoin (BTC), and why it may end up being controlled by a relatively small group of people (if it isn’t already). At the same time, they suggest that premine is akin to an initial coin offering (ICO), thereby putting Ethereum potentially in the line of fire of the US Securities and Exchange Commission.

However, the Ethereum community denies that the 2014 premine has any effect on the platform’s decentralization, arguing that the premined ETH was distributed to thousands of people. At the same time, they argue that Ethereum’s shift to PoS won’t decrease its decentralization.

Ethereum premine = bad?

“A pre-mine is unethical and favors some actors over others in a political fashion. Consequently, the issues that are created are not only in the future, but also in the present and in the past,” said Bitcoin author and advocate Gigi.

He suggests that one of the big issues with Ethereum’s premine sale is that it risks regulatory repercussions for the platform, particularly in the event that it distributed tokens to only a relatively small number of buyers. This does appear to be the case, given data from the sale indicating that 40% of the sold total went to only 100 purchasers.

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“More and more people come to the conclusion that the Ethereum presale has the characteristics of an illegal security offering,” he told Cryptonews.com, advising readers to study articles published by lawyer Preston Byrne and researcher Hasu in 2018 (as well as the Amy Castor piece linked to above).

And Gigi isn’t the only observer who asserts that the premine likely qualifies ETH as a security. This is also the view of Josef Tětek, the Trezor Brand Ambassador at SatoshiLabs.

“First, the ICO can be classified as a security offering and the ether tokens as securities. The SEC can change its previous stance on this matter, simply because the offering isn’t much different from what subsequent ICOs — classified as unlicensed securities offerings — have done,” he told Cryptonews.com.

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On top of this, Tětek also notes that the premine will exacerbate problems surrounding concentration of ownership and centralization, particularly as Ethereum becomes Ethereum 2.0 at some point (next year?).

“Second, the switch to the proof-of-stake system will benefit mostly those that were there for the premine and the initial sale and thus cement the power of these insiders and make Ethereum even more centralized than it is today,” he said.

Basically, the thinking here is that, because the Ethereum Foundation sold ETH now worth hundreds of billions to a ‘handful’ of buyers, these individuals/entities will be able to exert an undue influence over staking once Ethereum 2.0 becomes a reality.

“Proof-of-stake leads to centralization even without any premine — already we can see staking-as-a-service offered by exchanges and other third parties […] The premine paves the way for even faster centralization, as those with most coins will further concentrate power over the network and gain on relative importance over time,” said Tětek.

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Ethereum premine ≠ bad?

Meanwhile, the ETH camp presents two primary counterarguments against the charges leveled above against the premine. The first involves contending that the sale was actually more open and distributed than critics claim.

“Over 10,000 distinct BTC addresses participated in the crowd sale, which means a large number of people were able to get exposure to Ethereum at the earliest stages. While the space has grown since and such a crowd sale would be hard to replicate, I think it was a great launch approach at the time because it allowed for a broad set of participants, many of which are still involved in the ecosystem today,” said Ethereum developer Tim Beiko.

It’s also arguable that, not only was the sale broad, but that ownership of ETH has widened since 2014.

“Excluding infrastructure wallets, such as the ETH 2.0 Deposit Contract, and exchange wallets, there are only 3 wallets in the top 10 holding what approximately amounts to be 3.3% of the total supply of ETH. Over time, the amount of ETH in the hands of people everywhere has continuously increased,” said a spokesperson for ConsenSys, an ETH-focused major blockchain company.

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Furthermore, the ConsenSys spokesperson notes that the actual count of ethereum addresses (a person can own multiple addresses) has sharply increased since its inception, from 9,205 to 172,088,521 today. 

Tim Beiko also disagrees with the ‘premine’ label, preferring instead to refer to the event as a crowd sale. He also disagrees that the sale threatens to weaken Ethereum’s decentralization.

“The crowd sale went to a large group of participants and I think there is a strong argument that this group is more diverse than early miners. Second, even if that wasn’t the case, Ethereum ran on proof-of-work for ~5 years, so anyone who wanted to mine ether had ample opportunity (as well as access to several mining pools),” he told Cryptonews.com.

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In addition, Beiko argues that PoS doesn’t favor actors with large holdings in ETH, and by extension won’t result in any concentrations of ETH-based wealth from increasing.

“It’s not true that Ethereum’s PoS grants ‘more weight to actors more able to stake more ETH’: the rewards are the same for every staker, and even diminish as more stakers join. There are also several things in the protocol which are meant to ‘tilt the scale’ towards smaller stakers, such as the anti-correlation penalties [see here for an explanation of such penalties],” he added.

This goes some way to assuaging concerns that PoS and the 2014 sale might transform Ethereum into something comparable to the ‘current fiat monetary system,’ as more than a few critics suggest. And while it is possible for single entities (with enough ETH) to run multiple validators, the anti-correlation penalties mentioned above (among other things) may make it difficult for them to do so.

Secondly, a number of people have responded that, despite initially being large, the premine will come to matter less and less over time, as more ETH is issued.

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Coinbase

Coinbase adds ETH2 ahead of key upgrade this week

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  • The ETH2 coin listed on Coinbase will mirror the original Ether (ETH) token at least up to June 2022.
  • This comes just ahead of the Arrow Glacier update that would delay the difficulty bomb on Etheruem.

Cryptocurrency exchange Coinbase seems to be preparing for a key upgrade on the Ethereum blockchain coming up this week on December 10. The crypto exchange has added a mirrored version ETH2 of the Ethereum blockchain’s native cryptocurrency Ether (ETH).

This new version of Ether just tracks the original Ether market data synchronously. As you can see in the below tweet, the cost of purchasing ETH2 is the same as that of the ETH crypto. Interestingly, the two trading volumes, market cap, circulating supply and price turn out to be the same.

However, unlike the original ETH, the new ETH2 crypto shows no trading activity. It seems that the newer version will just merely track the ETH market data at least up to mid-2022. It also shows that Coinbase is making all the early preparations for Ethereum 2.0 upgrade. Thus, ETH2 seems to be posing as the native cryptocurrency of the ongoing update of the Ethereum blockchain.

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Interestingly, the recent ETH 2 listing on Coinbase happens just before the upcoming upgrade “Arrow Glacier” which will further delay the difficulty bomb.

Arrow Glacier update before Ethereum 2.0

The upcoming Arrow Glacier update on Ethereum will delay the difficulty bomb which would make it difficult for people to mine Ether. However, if the BOMB is triggered, it will slow down the Ethereum blockchain as far as it remains proof-of-work.

One of Ethereum’s core developers – Tim Beiko – said that the Arrow Glacier upgrade could probably be the last upgrade before Ethereum 2.0 goes live by June 2022. The Ethereum 2.0 will bring a significant change to the network design. Firstly, this includes a full-scale transition from the Proof-of-Work (PoW) to the Proof-of-Stake (PoS) blockchain.

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In the existing PoW Ethereum network, nodes have to validate each transaction to maintain the Ethereum public ledger. However, the Ethereum 2.0 upgrade will introduce “sharding”. This will divide the entire network into small segments dubbed “shards”. Later, it will randomly assign the nodes to each shard.

This will remove the need for each node to scan the entire chain while improving the speeds and lowering the costs required to maintain the network. These individual shards will share the transaction details with the Beacon Chain, which is the backbone of Ethereum 2.0.

ETH2 won’t be a new crypto

The Beacon Chain will validate transactions on each shard while assisting the Ethereum 2.0 network in reaching consensus. It will detect dishonest validators and further initiate penalties by removing a part of the validator’s stake from circulation.

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The current ETH token will serve as a staking token in the Ethereum 2.0 PoS design. Staking of ETH will allow validators to participate in a network consensus and thus receive block rewards.

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Ethereum

Ethereum Challenger Terra Becomes Third-Largest Blockchain by Total Value Locked, Surpassing Solana and Avalanche

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Decentralized finance (DeFi) platform Terra (LUNA) has surpassed its rival blockchains to become the third-largest crypto by total value locked (TVL).

Crypto market intelligence firm Delphi Digital says that the Ethereum competitor has now overtaken Solana (SOL) and Avalanche (AVAX) in terms of TVL primarily due to value growth in Bonded Luna (bLuna), which is the token used by liquid staking protocol Lido as collateral to borrow stablecoin TerraUSD (UST) within the Anchor protocol.

“TVL on Terra network overtook Avalanche and Solana, making it [the] third-largest blockchain by TVL after Ethereum (ETH) and Binance Smart Chain (BSC).

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It’s important to note that TVL numbers are highly reflective alongside native token prices as they are commonly used as collateral in DeFi and as base pairs for DEXes. In Terra’s case, DEX base pairs usually utilize Tether instead of LUNA, therefore this growth in TVL is primarily contributed by value growth in Lido bLuna.”

The TVL of a DeFi platform is the total value held within its smart contracts. It is calculated by multiplying the amount of funds locked into the network as collateral by the current price of the assets.

Delphi Digital points to how LUNA’s rise has helped Terra’s stablecoin UST increase its overall supply by 4 billion tokens due to a proposal to mint UST on the Terra network.

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“The increase in UST Supply from under $3 billion to $7 billion across mid-November was due to this proposal to mint UST with LUNA in the community pool to grow the Terra ecosystem through UST usage.

UST did another ~$1 billion of growth in circulating supply after 19th November.”

LUNA is exchanging hands at $70.85 as of writing, an 46% increase from its 30-day low of $38.06.

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Ethereum

Fourth-Largest Ethereum Whale Pounces on Large-Cap Altcoin, Accumulating $580,000,000 in Crypto

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One mega-whale just loaded up on an Ethereum (ETH) token that powers a popular crypto marketplace.

The blockchain-transaction tracker WhaleStats reveals that the unnamed wallet received 14,000,000 FTT, the native token of the FTX exchange. The transaction was worth $581,444,018 at time of sending.

The whale now holds over $1.2 billion worth of FTT with a total value exceeding $3.8 billion and is now ranked fourth on the WhaleStats’ list of the top 1000 Ethereum wallets, excluding the ETH cryptocurrency itself.

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Source: WhaleStats

Popular crypto analyst Smart Contracter is also showing interest in FTT, noting that the Fibonacci ABC spacing between sharp highs and lows on the coin’s historical chart offers encouraging signs for future price action.

The trader says in a tweet to his 196,000 followers,

“Been a long while since I played FTT but I actually think a major bottom is in and we go to [all-time highs] from here.

Perfect ABC on super-high timeframes where ABC came below the 0.618 and bull/bear periods are almost 1:1 extension.”

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Source: Smart Contracter/Twitter

In late October news broke that FTX had purchased advertising airtime during the February 2022 Super Bowl as part of a wider push to bring crypto awareness to the mainstream.

Last week FTX also announced the launch of a marketplace for Ethereum-based non-fungible tokens (NFTs).

At time of writing, the FTT token is mostly flat on the day and trading at $42.73.

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