Ethereum DossierEthereum Dossier
Hello, Stackers! Reading time: 17min
Gradually Ethereum is simply recreating the fiat system only with new characters.
Resume:
- Centralization Appears in the Following foci: Ethereum Foundation, validators, updates, distribution of tokens and nodes.
- Security Risks: Regulatory capture, bugs, rug pull and exit scam.
- Howey Test: Positive.
Description:Description:
Ethereum is a self-described decentralized protocol, focused on creating decentralized applications using smart contracts. It started with the Proof Of Work (PoW) consensus mechanism and migrated to Proof Of Satke (PoS) through programmed hard forks. Although insiders and enthusiasts ensure that ethereum applications work without any possibility of censorship, fraud or third-party interference and that contracts are immutable, this is not what we observe in practice.
How was Ethereum Created?How was Ethereum Created?
Ethereum was created in 2013, when Vitalik Buterin released his yellow paper, which described how the project would work. Then, in 2014, the Ethereum Foundation was created in Switzerland and the plan to make an ICO, a kind of crowdfunding to finance the project, went public.
What stands out in this process is that about 70% of the ethers were pre-mined to be sold in the ICO. Until today, 60% of the ethers that exist in circulation were issued at that moment before the first block was mined, of the approximately 119 million eth that exist today, 72 million were created before the genesis block. That is, only 40% of the ethers in circulation today were created through proof of work, 60% were created from nothing, with no issue cost. Just as central banks also print money out of thin air at zero cost.
The image below demonstrates this difference before the protocol migrated to PoS on the etherscan.io website. In blue the amount of tokens that were created via pre-mining and in black the tokens created through PoW.
The critical point in having these tokens pre-mined and distributed to insiders is that it makes the launch of ethereum totally unfair, asymmetrically benefiting project insiders. Of these pre-mined tokens, around 17% remained in part with the Ethereum Foundation, founders and “contributors” to the protocol.
In the article below, now removed from the air, by The Block it is clear the sequence of events and how ethereum insiders disproportionately benefited from its creation.
Of the 72 million pre-mined ETH 60 million went to the ICO and 12 million to project insiders in the following ETH distribution:
- 3 million for the ethereum foundation
- 6 million for 85 contributors
- 3 million as right for developers to buy in ICO (50 people)
- 550 thousand for Vitalik
- 300k to 7 other co-founders (Anthony Diiorio, Charles Hoskinson, Amir Chetrit, Mihai Alisie, Joseph Lubin, Gavin - Wood and Jeffrey Wilcke.
The image below demonstrates how the distribution of ethers is now, notice how the tokens that were pre-mined at the beginning of the network are still the majority. Only the PoW and PoS component correspond to ETHs that were created from chain work or validation.
In addition, in a subsequent event of the launch of the DAO, 14% of the ETH were in the custody of that organization. Maker DAO was later hacked and a hard fork was made to undo the theft. We'll talk more specifically about this event later in this article.
Pre-mining benefited these early contributors. This is a way of launching projects that is very similar to shares in a company, where the founding partners and initial investors already leave with a slice of the business. This initial distribution without proof of work is even more critical as the project will become proof of stake with the merger known as The Merge. What power will these entities have over the network since the amount of coins you have determines the validation power of each block?
In addition to the token giveaway providing an early slice for insiders, ICO sales appear to have been quite targeted as well. In the image below, watch how ethers flowed with mathematical precision for two weeks in a row. There were no fluctuations in sales, dips and spikes in demand, as with any crowdfounding. Random purchases from early adopter users of a new technology don't behave this way. It can represent the flow of coins to a specific person or group, as reported by Preston Byrne in his article.
The graph should behave more like crowdfunding images on Kickstarter, like the one in blue below, with demand fluctuations that are natural to the process.
This leads us to believe that the issued tokens flowed directly to portfolios already predetermined before the launch and not due to a natural demand that has oscillations.
This is a big difference compared to bitcoin. Satoshi released the whitepaper publicly and anyone could copy it, there was no pre-mining, each BTC can only be created through proof of work, real work. There was no pre-mining with pre-distribution of coins to insiders, investors, developers or foundations. It's not even possible to spend the first BTC of the genesis block, they don't have UTXO. Bitcoin was created in a fair way where to benefit from the system you need to show work and follow the rules that everyone follows, without exception.
JP MORGAN's Close Relationship With EthereumJP MORGAN's Close Relationship With Ethereum
Another bullshit is JP Morgan embedded in the protocol from the beginning. Joseph Lubin himself, one of the founders of Ethereum admitted:
'Even before the first Ethereum block was mined and ConsenSys was formed, we collaborated with J.P. Morgan on the creation of Ethereum.'
How can it be decentralized if a bank the size of JP Morgan was involved from day zero? This speech is still on the Consensys website, a company that creates software for Ethereum.
Joseph Lubin did not hide from anyone this close relationship between Ethereum and secular banks in the traditional financial system. Check out in the videos below the several times that Ethereum founders declared ties with large banks:
Another point of concern is the risk of regulatory capture. This can happen in several ways. But Vitalik doesn't seem to be worried as he has been talking to central banks for a long time.
Infinite Issuance of Ethers Replicates Fiat CurrenciesInfinite Issuance of Ethers Replicates Fiat Currencies
There is also no limit of ethers that can be created. They are calling ether ultrasound money because the protocol burns transaction fee tokens in order to make ether scarcer. This started in a recent update called EIP 1559. The greater the demand on the network, the more ethers are burned. But this does not mean that it is not possible to issue more ethers in an unlimited way! If there is no emission limit, there is no predictability of monetary properties, it is not scarce.
In the image below, it is possible to observe that in 2022, with the market slowing down and the recent price drops, ethereum rates reached their lowest levels, back to the levels of May 2020. As a result: only 11% of the issuance was burned. This means that ethereum is inflating, it is creating more ethers than it burns.
Thus, there is no way to say that ETH is deflationary if the emission rules change all the time and according to market cycles. It is not predictable because sound money does not do monetary expansion.
The chart below shows Ethereum's monetary policy. The coin issuance schedule doesn't look like a schedule, it looks like a random squiggle. The tendency for emission to go to zero is no longer what is happening, as we saw in the previous graph.
On the website https://ultrasound.money Ethereum fans usually print the graph below.
Showing how ethereum has become deflationary and more solid than bitcoin. However, nothing guarantees that monetary policy will not be modified again as it has been in the past, through hard forks. There is no fixed supply delimited and, as much as ethereum is being burned, 60% of the supply was still created via pre-mining. The fees being burned are from the newly created tokens and not the ETHs that were created via pre-mining. This further amplifies the power of insiders who received tokens via fingerprint.
Centralized NodesCentralized Nodes
Another issue is also the centralization in the Ethereum network architecture. The nodes that verify and validate the blocks have their machines totally dependent on datacenters or centralized companies.
The https://ethernodes.org/network-types?ref=antiresearch.com.br website shows that 66% of Ethereum nodes are hosted under the responsibility of a third party. As in the image below which demonstrates that 66% of ethereum nodes are hosted on cloud servers.
Of these cloud servers, about 58% of the nodes are in Amazon datacenters and 14% in Hetzner, not counting the other datacenters in smaller proportions that appear there. This means that if a government orders Amazon to shut down Ethereum nodes or censor any specific user, they will have to comply.
Node centralization is a major security weakness and a major fiat strength with potential for censorship. This happens because running an Ethereum node in a decentralized way, with your own hardware at home and with the capacity to store the entire blockchain is expensive. At least 20 thousand reais! That's because you need a powerful computer with enough capacity to store the entire blockchain. According to Alchemy, a company that provides the service of remote nodes for Ethereum, it is necessary to have a drive with at least 10TB+ of space, to run a node archive. Not every PC has these settings.
This graph below shows how Ethereum tends to demand more and more powerful computers, with greater capacity and more expensive to run your own node at home, just to check the network and not receive anything in return. That's why most of the ethereum nodes and other cryptocurrencies are located in datacenters centralizing the hardware structure of the network. The code was written in a way that restricts the decentralization of the network.
If the nodes are centralized they can be easily censored in a government attack, as we saw with Tornado Cash, for example. When projects are not decentralized enough and their creators are known, they are more susceptible to government censorship. The previously camouflaged centralization ends up being exposed in these attacks by oppressive governments that come to see open source codes as a threat.
Because of the high cost of running an archieve etehreum node, many users run remote nodes and feel that they are decentralizing the network. In fact, this user is just running a program that depends on the hardware (of the machine) and on the blockchain copy of a third party: datacenter or exchange. That's not decentralization, it's just running an interface. It's depending on Amazon and the same old centralized big techs.
The don’t trust, verify is only valid when you have a copy of the blockchain and you can verify in your own copy, in your own machine, if the information is valid or not.
This centralization in datacenters is a reflection of Vitalik's initial posture, which in the past disdained the need for users to run their own node. But that's just another point on which he also changed his mind later on.
In his last presentation at ETHC22 (Ethereum Community Conference) he talked about focusing on decentralization and the role of running nodes that have lighter hardware. The big difference is that light and full Ethereum nodes are not like bitcoin full nodes that have a copy of the entire blockchain. Nodes that can scan the entire Ethereum blockchain are called archive nodes. They would be the equivalent of bitcoin's full nodes. These similar nomenclatures can confuse those who are not aware of the node types of each network.
To exemplify: bitcoin nodes can run on old PCs or even on mini computers like Raspberry Pi that cost from 500 to two thousand reais. It is much more affordable than the 20,000 reais to run an Ethereum node archieve.
Centralization in Proof Of Stake (PoS)Centralization in Proof Of Stake (PoS)
Ethereum's shift from PoW to PoS in addition to being a top-down shift from devs to users, was also an extremely centralizing factor. The distribution among eth 2.0 staking pools is mostly with exchanges like Kraken, Coinbase and Binance. Centralized companies that have the clout to pay for the hardware plus the 32 eth to stake, which has a cost of around 320,000 BRL adding the cost of hardware + the 32 ethers which alone cost around 300,000 BRL.
In addition to exchanes, 31% of staking ether is in the Lido protocol, a defi protocol that brings together users to stake in a “decentralized” way. But Lido is a DAO and DAOS are formed by people. There has been a lot of debate about the lack of decentralization of DAOS. Lido's centralization appears in the distribution of governance tokens where:
36% remain in the protocol treasury
22% for investors (Venture Capitals)
20% to early developers
15% for founders and future employees
and 6.5% for validators
Those players who have decision-making power in this DAO which currently concentrates 30% of ethers in staking! This architecture heavily supported by these 4 players (binance, coinbase, kraken and lido) compromises the security of Ethereum and how much these entities will have decision-making power in the protocol.
As Nick Szabo said, “Trusted third parties are holes in security”. Slowly Ethereum is simply recreating the fiat system only with new names, characters and new stories, but the centralized dynamic supported by the new banks, the exchanges, remains even after The Merge.
Forced UpdatesForced Updates
In Ethereum, decision-making power is fully supported by the Staking pools, which are part of the consensus, and by the Ethereum Foundation, which hierarchically modifies the code.
During the switch from PoW to PoS, Ethereum miners who did not upgrade to PoS would be excluded from the network, as shown on the ethmerge.com website. That is, the protocol forces consensus through more recent updates, those who do not update will be excluded and will lose years of investment in machines.
The execution of several hardforks throughout the history of ethereum, exemplified by its roadmap below, show how it ceased to be backwards compatible.
When making several hard forks ethereum lost the ability to go back to previous versions in case of bugs or problems in the code. Users and validators are required to constantly update or they will be deleted from the network.
This is a CRUCIAL difference between altcoins and bitcoin. Bitcoin is backward compatible. Users can run previous versions that they will not be excluded from the network or lose security for it. Ethereum and other altcoins are not backward compatible. Those who do not update their software are excluded from participating in the consensus or may have bugs in their contracts. This is one of the reasons for many hacks in defi and other protocols where the lack of updates exposes users to the risk of theft or bugs.
These changes in the code, in the consensus mechanism from PoW to PoS also show how Etheruem is not immutable. A key feature for any protocol to be considered secure and decentralized. Even the change to PoS even has a “date” and a block height. Vitalik himself posted this from his twitter.
The fact that you have a creator and a team driving these changes from the top down is great evidence of centralization. Many crypto “experts” say that talking about decentralization is ideology, that “it's of no use if you don't make money from the market”. However, it is when one discards principles and fundamentals, such as decentralization, that one is exposed to risks. It is in the most critical moments that one realizes that giving up fundamentals can be the most expensive and painful lesson.
In the case of Ethereum, when you want to withdraw your ETH in staking, you may not be able to. The devs are putting locks on so people can't withdraw their ETH all at once. In this tweet one of the Ethereum devs explains that:
It's like the california hotel, once you get in, weird things happen and you can't get out. This is because many people who left ETH staking a year or more ago and, after the Merge, may want to withdraw their ETH, but they will not be able to withdraw when they want because there will be this “queue” of withdrawals and there is no transparency about who will have priority or not. There is also no timetable for what staking rewards will look like over the next decade or century. Everything is in the hands of Vitalik and his foundation, there is no public and transparent predictability.
Rollups, Layers 2 and BackdoorsRollups, Layers 2 and Backdoors
In a recent interview Vitalik also revealed that protocols adjacent to the ethehreum blockchain, such as rollups and layer 2, have features where developers can stop the protocols to resolve possible bugs.
Any kind of backdoor or excuse exits are full plates for malicious developers to perform rug pulls or exit liquidity in case of bugs. What often seems to be created to protect users, can be a Trojan horse for security and end up facilitating exorbitant privileges for the network developers themselves.
Low Resistance to CensorshipLow Resistance to Censorship
As shown in the image below, from the https://www.mevwatch.info/?ref=antiresearch.com.br website, about 47% of Ethereum blocks comply with orders established by the United States Office of Foreign Assets Control (OFAC).
In November 2022, the number of blocks that followed compliance reached 79%, something worrying because if a blockchain can censor blocks for not following regulatory rules, how resistant to censorship and regulatory capture is it really?
OFAC-compliant blocks exclude related party transactions sanctioned by the US Treasury Department's Office of Foreign Assets Control.
This happens because of a mechanism called Miner Extraction Value (MEV), where miners can modify the sequence of transactions within the blocks they generate. Many of the validators (90%) were using MEV-boost Flashbots relays that follow OFAC rules.
From November 2022 until now the number of validators using these relays that can censor blocks has dropped significantly, but this does not exclude the fact that ethereum per lost its neutrality and resistance to censorship at the protocol level. After all, 49% of censorable blocks is an absurdly large number and demonstrates a great susceptibility to regulatory capture.
Ethereum Foundation Sold Ether on the RiseEthereum Foundation Sold Ether on the Rise
Now the last point why we don't trust ethereum is due to ethical conflicts. Vitalik through the Ethereum Foundation, sold 70 thousand ethers, or 336 million dollars, in the top of 2017, he confirms this in this video:
And again Ethereum Foundation sold at the top of the cycle in November 2021 as shown in the image below. Did they have inside information again? Two cycles selling at the top..
Unlike Satoshi, who never made a profit, Vitalik, through the Ethereum Foundation, sold ethers on the minds of retailers, that is, people. This is quite unethical, especially since on the Ethereum Foundation's own website they call themselves a non-profit organization. It gets worse if we remember that it is a protocol that created its own tokens from scratch and that insiders have a considerable volume to sell if they want.
It is also unethical because Vitalik himself said that Ethereum should be non-profit, that it would benefit the whole world, instead of enriching just a few people. It was the opposite of what he and his foundation did together selling at the top of the last 2 cycles.
It is the ultimate caricature of shitcoins in which project owners print tokens at ZERO cost, via pre-mining, and sell them on the heads of people who bought them, paid a real price, deluded that the project would fulfill everything it promises.
After realizing all this, what makes Ethereum different from a Central Bank printing money for its own benefit?After realizing all this, what makes Ethereum different from a Central Bank printing money for its own benefit?
Or a company that uses privileged information to profit from the future oscillation of their shares according to the news that is released by themselves?
Another ethical failure was when the etehreum foundation decided to create a hard fork to reverse a transaction resulting from a theft of MakerDAO. MakerDAO owned 14% of the ether supply and having that amount of ETH would put the hacker in a privileged position of power when Ethereum migrated to proof of stake. After much debate and division of the ethereum dev team it was decided to reverse transactions, end immutability to save MakerDAO. Not typical of cantillionaires? That, to save their friends, central banks rescue bankrupt banks that mismanage their resources.
The irony of it all is Vitalik's speech asking people to stop trading on exchanges so that they could contain the hacker.
Huge centralization also appears in other parts of the ethereum ecosystem. Metamask wallet linked Infura, a company that manages remote ethereum nodes, has censored users from Venezuela. Besides, Metamask was also bought by JP Morgan and other banks:
Howey TestHowey Test
After looking at all these factors it is clear that ethereum is actually a security, a share of an unregulated company disguised as a decentralized protocol.
When applying the Howey test, a classic to assess whether an asset (token) is actually a share of a company, the result is positive.
1. Does the Offer Involve a Monetary Investment?
Yes, the very fact that I raised funds via ICO with early investors is an affirmative point. In the video below Vitalik talks about the sale and the 'opportunity for anyone'
2. Is There an Expectation of Profits From the Investment?
Yes, both in the moment prior to the ICO...
...as before the merge to PoS, Vitalik promotes ethereum as a potential asset, saying that the merge 'was not priced in'.
3. Is the Investment a Joint Venture?
Yes, there is a hierarchy like in a company, where Vitalik is the CEO and the ethereum foundation makes the decisions about future upgrades and the direction of ethereum excluding users through hard forks.
4. Does profit come from the efforts of a promoter or a third party?
Today there are several ethereum promoters: ethereum foundation, exchanges that profit from trading fees of ETH and all tokens created in its ecosystem, social media channels, banks and even governments that already understand that ethereum is centralized and will issue their CBDCs using the protocol.
The video below compiles the last two topics and proves how Ethereum is a security. It is an ordinary company with a hierarchy and there are also teams promoting the project.
Conclusion and Risk Points: How can it Fail?Conclusion and Risk Points: How can it Fail?
After going through the main points about centralization and security risks of ethereum, we came to the conclusion that the biggest risks are regulatory capture via government pressure on the ethereum foundation, on validators, on datacenters that host nodes and on irreversible bugs, Terra Luna style, due to the constant changes in the protocol.
Another critical point is that there is a team centralizing decision-making power. In this sense, the main risks are rug pulls, exit liquidity and backdoors in the protocol.
There is also centralization through alliances with banks such as JP Morgan. This type of alliance serves the interests of the companies involved in the agreements and not of the users who expect protocol decentralization. In a protocol bug situation, would these players have their funds saved while users lose liquidity?
Once you understand what decentralization means, you realize that Ethereum is not decentralized at all. A lot of people deny this because they don't verify the data I've shown here for themselves or because they often benefit from the general lack of understanding about the subject.
If you want to read more articles like this one, subscribe for our monthly articles and more bonuses where I'll continue to bring up the failure points of major protocols.
This Article was Posted by: Carol Souza on the AntiResearch Web site.
Shitcoin
deleted by author