- “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.
“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.
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.
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.
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.
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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Learn more:
– Decentralization in Crypto Is a Hard to Measure Ideal
– Narratives Blur as Bitcoin and Ethereum Target Each Other’s Field
– The Ethereum Economy is a House of Cards
– Why Ethereum is Far From ‘Ultrasound Money’
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