5 ms·

Whether Ethereum is a security

49 points by pjbyrne 8y ago

SRTP 8y ago
Those 2 charts the author cites describe different things: the Ethereum chart shows _cumulative_ amount of BTC raised over time, while the Swarm chart shows BTC raised per block. Furthermore, the author's argument that observing a power law distribution is an argument in favor of the Ethereum pre-sale being participated in by "one or very few hands" shows that his understanding of basic statistical concepts is lacking. Observing a power law distribution is an argument in favor of many, many participants. This is what we see in nature when looking normally distributed variables among large populations. Stick to law, Preston.
- pjbyrne 8y ago
  You must not remember how small the Ethereum universe was in 2014. If you think that curve is the outcome of an organic market process, there's a bridge in Brooklyn I'd like to sell you.
  - SRTP 8y ago
    I was actively involved in the Bitcoin ecosystem when the ETH pre-sale launched. I'd argue that the majority of pre-sale participants were BTC holders. That group was not small in 2014. Also, look at https://en.wikipedia.org/wiki/Cumulative_distribution_function https://en.wikipedia.org/wiki/Cumulative_distribution_functi...
    - pjbyrne 8y ago
      All of the pre-sale participants were BTC holders because that is the only currency the Foundation accepted for presale Eth. The question is how many of those BTC holders there are and whether presales/ICOs usually follow that pattern. Most don't, they use all their powder in the beginning (there's no Indian summer surge of donations towards the end of the sale). Even when they do it is not as pronounced as here. That's what makes the curve weird.
      - drcode 8y ago
        This is totally wrong: Since there was no "upper limit" on total cap of ether in the presale there was a significant incentive in waiting until the last minute to benefit from additional information (i.e. to know what percentage of ETH supply you were bidding on) and similarly to withhold bid info from competitors- This was partially offset by a gradual decline in ETH/USD exchange rate set by the presale terms. It seems pretty clear that you haven't studied the mechanisms of these sorts of crypto auctions, since you are ignoring a lot of the underlying complexity and the many differences between different auctions in practice, or you have forgotten a lot of the intricacies of this particular auction. (which may have been a good or bad design in this case, both cases can be made.) If you think it's common for actors in an auction system to "use all their powder in the beginning" unless there's a explicit reward for bidding late then you've clearly never been a victim of ebay bid sniping LOL
        pjbyrne 8y ago
        I've updated the post to include a chart of the Tezos raise, which was both much larger than the Eth raise and I think illustrates my point rather well.
        drcode 8y ago
        So I'll grant you that the differences in the smoothness in the ethereum vs tezos charts is interesting, but your argument is still unconvincing to me for two reasons: First of all, you're basically saying "The ethereum graph is so perfectly what you'd expect from an ideal auction that it can't possibly be ideal" which is the sort of argument that requires more convincing evidence. Secondly, the Tezos auction had many differences in the auction design from the ethereum auction, which could be a more mundane reason for differences in these curves. ...also, I feel like you still need to explain more explicitly why bidders making purchases in multiple lots is a nefarious thing- Does the argument just boil down to saying there were too many big fish, which means that ethereum may not be "decentralized" and therefore a security? If allowing arbitrary people to make their own purchasing decisions on an asset is not adequately decentralized, then it seems you've defined "decentralized" to the point where no asset could ever reach your threshold to fall under that definition.
jasonlaramburu 8y ago
Kickstarter campaigns follow a similar pattern to the ethereum graph shown in the article. It’s not because of a malicious user who wants to secretly own all the kickstarters. It’s because time-limited crowdfunding campaigns tend to attract the most donations at the beginning (when enthusiasm/press is high) and towards end of the campaign (when FOMO is high). Also the author should really state in the article that the swarm graph is not cumulative.
- pjbyrne 8y ago
  Duly corrected.
  - jasonlaramburu 8y ago
    Nice. I think your point comes across much more clearly now. The eth presale graph is much smoother than all the others. Could the smoothness be partially explained by the fact that one could only use btc in the eth presale, whereas later token sales accepted eth and btc?
    - pjbyrne 8y ago
      Thanks! Possibly, I don't know. The point of the post really was to show that the pre-sale process was amenable to a more forensic/scientific analysis than anything else.
- stordoff 8y ago
  > towards end of the campaign (when FOMO is high). I suspect there is also some degree of not wanting to back things that won't make it/wanting to back at around the time the money is taken. I know the latter is a consideration for me at least.
drcode 8y ago
Near as I can tell, the Howey precedent is for a type of asset so vastly different from a cryptocurrency such as bitcoin/ethereum that it is pretty much completely at the discretion of regulators as to whether they consider it to be a "security". I know it would be nice to live in a world where judges can use an objective reading of the law/constitution to decide for certain in one way or another on such a fact, and that it would be nice to live in a world where lawyers like Preston could therefore make a reliable prediction from their expertise as to how courts will rule, but sadly in our world things don't work that way. In an outlier situation like this, without strong precedents, regulators can make any decision they please and then create post-hoc rationales for defending their view. (similarly, responses to this comment from either side will be easily able to make equally convincing absolutist arguments as to why bitcoin/ethereum are/aren't securities, given the vagueness in interpretation of precedents.)
- pjbyrne 8y ago
  Well it's not the regulators who make the decision and set the precedents, it's the judges. Regulators are currently trying to figure out, to the extent existing precedents are inadequate, how to extend by analogy the existing precedents to the new circumstances in such a way as to convince a judge to extend the precedent. This is how a common law system is designed to work.
  - drcode 8y ago
    To be fair, It's totally reasonable that regulators/judges come come to the same conclusions that you make in your post, I just hold more cynical views as to how they arrive at those conclusions.
    - deleted 8y ago
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    - deleted 8y ago
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  - comex 8y ago
wyc 8y ago
Summary of argument: - Some claim that Ether is not a security because it is decentralized and therefore not a "common enterprise" by the Howey test, but the author disagrees with this specific argument because he thinks it's centralized. - Author believes that a "horizontal commonality" of interested Ether participants can constitute a common enterprise. - Author believes that that GitHub and commit rights are quite centralized. - Author speculates that the shape of the Ether pre-sale curve signifies very few participants because it strongly resembles a power curve.
- baddox 8y ago
  I’m not sure I understand the horizontal commonality argument. It sounds like the author is claiming that a technology (e.g. a computer program) is not decentralized if a large portion of the users of the technology use the same implementation of that technology (e.g. use the same exact implementation of the computer program). In other words, if a group of users all run the same Ethereum client software, then it sounds like the author is considering then centralized by definition, regardless of the reasons each user decided to use that computer program, the fact that they chose the same implementation means that technology is centralized. If I’m understanding that correctly, then I find that argument bizarre.
  - fjsolwmv 8y ago
    Why is it bizarre? Users are very intentionally using a specific protocol to create a single shared blockchain, not creating isolated objects of independent value.
    - baddox 8y ago
      It’s bizarre because, according to that definition, “decentralized protocol” is a contradiction of terms.
  - twblalock 8y ago
    > In other words, if a group of users all run the same Ethereum client software, then it sounds like the author is considering then centralized by definition, regardless of the reasons each user decided to use that computer program, the fact that they chose the same implementation means that technology is centralized. Seems logical to me. The motives of the individual users have created an outcome of centralization because they all use the same program to do the same thing.
chrisco255 8y ago
Why does centralization of the holders have anything to do with whether Ethereum is a security or not? There are four requirements for the Howey test: 1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party Ethereum tokens are virtual commodities useful for purchasing computational services on the Ethereum network. The token's value increases as the value of the network increases...but this can only increase in part due to Ethereum holders themselves promoting and propagating the network and pluggable services into the ecosystem. By this point alone, number 4 is invalid. Another point is that Ethereum is forkable, which means that anyone is free to take the project in a different direction if they disagree with the governance or stewardship of ETH core devs. It has even undergone one major fork (ETC being a totally divergent blockchain at this point). Even point #2 is debatable. There certainly are no expectation of profits in the classical sense with Ethereum. That someone is buying up limited supply in anticipation that demand will increase does not a security make. If that were the case, then dot com domains are securities, and all those savvy 90's speculators who snatched up desirable domain names are guilty.
- pjbyrne 8y ago
  I agree it's all debatable. This post deals only with the "common enterprise" prong as that appears to be the prong of the test that Coin Center and others are trying to challenge most assertively. Centralization of holders makes it look like a more traditional scheme with a central promoter.
  - chrisco255 8y ago
    Well, what do you think about the forkable nature of blockchain technology and how that relates to the definition of common enterprise? Which "common enterprise" are we talking about at this point, Ethereum Classic or Ethereum? The presale tokens apply to both of these forks after all. At this point, the two chains are completely divergent, run by different devs, and have completely different directions. Anyone is free to fork ETH and take it in a third direction if they like.
- deleted 8y ago
JumpCrisscross 8y ago
For a discussion about certain Ethereum holders forming a common enterprise, I'm surprised to find no mention of the DAO fork [1]. "Management" undoing the DAO was, to me, a defining delineation of Ethereum from Bitcoin. [1] https://en.wikipedia.org/wiki/Ethereum#The_DAO_event https://en.wikipedia.org/wiki/Ethereum#The_DAO_event
- hudon 8y ago
  I appreciate highlighting how centralized this blockchain is, but Bitcoin also benefits from centralized coordination. For example, in 2013, two developers and a mining pool operator successfully commandeered a fork away from the fork with majority hashpower [0]. The conclusion in the linked article is a pretty good summary of how we should look at this issue: > In summary, we have a lot to learn from looking back at the fork. Bitcoin had a really close call, and another bug might well lead to a different outcome. Contrary to the view of the consensus protocol as fixed in stone by Satoshi, it is under active human stewardship, and the quality of that stewardship is essential to its security. [2] Centralized decision-making saved the day here, and for the most part it’s not in conflict with the decentralized nature of the network itself. The human element becomes crucial when the code fails or needs to adapt over time (e.g., the block size debate). We should accept and embrace the need for a strong leadership and governance structure instead of treating decentralization as a magic bullet. [0] https://freedom-to-tinker.com/2015/07/28/analyzing-the-2013-bitcoin-fork-centralized-decision-making-saved-the-day/ https://freedom-to-tinker.com/2015/07/28/analyzing-the-2013-...
blackrock 8y ago
Is equity crowdfunding the killer app for Bitcoin?
- ENGNR 8y ago
  I'm starting to think the killer app isn't just breaking the back on public security over-regulation (ie pulling an Uber by just disobeying it until they cave), the killer app might be governance in general. An algorithm to gain consensus, which is virtually the sole reason governing bodies exist I just made an Ask HN to explore this topic more
thisisit 8y ago
> But the Ethereum pre-sale looks perfect – and that’s what makes it worth querying. “Donations” from Eth-heads around the world not only flowed into the Ethereum Project’s wallet in great quantities, but they flowed in with the mathematical precision of a power function, 24 hours a day, 7 days a week, for two weeks straight. I went through holdings of top 5 ICOs on Ethereum. One of things struck me was that many of the ICOs had huge amount of cross holding. So, X was holding a lot of Y and Z coins, while Z was doing the same with other ICOs. The number of inter-connections was astounding. So my opinion is that something is off with the ethereum ICO system. I know that sounds tinfoil hat wearing conspiracy and I don't have solid proof or graphs. But given the evidence of Ethereum's distribution it looks more likely.
- nivertech 8y ago
  Dotcom-style revenue swaps? "Internet infrastructure companies were simply swapping equipment and putting it on their books as revenue. They essentially handed pieces of paper back and forth and called it money." https://www.inc.com/niel-robertson/brilliant-failures/dot-com-mistake-silicon-valley-start-ups-still-make.html https://www.inc.com/niel-robertson/brilliant-failures/dot-co...
  - thisisit 8y ago
    That was an illuminating read. I think the whole ICO system might be something similar.

49 points by pjbyrne 8y ago

SRTP 8y ago

Those 2 charts the author cites describe different things: the Ethereum chart shows _cumulative_ amount of BTC raised over time, while the Swarm chart shows BTC raised per block. Furthermore, the author's argument that observing a power law distribution is an argument in favor of the Ethereum pre-sale being participated in by "one or very few hands" shows that his understanding of basic statistical concepts is lacking. Observing a power law distribution is an argument in favor of many, many participants. This is what we see in nature when looking normally distributed variables among large populations. Stick to law, Preston.

pjbyrne 8y ago
You must not remember how small the Ethereum universe was in 2014. If you think that curve is the outcome of an organic market process, there's a bridge in Brooklyn I'd like to sell you.
- SRTP 8y ago
  I was actively involved in the Bitcoin ecosystem when the ETH pre-sale launched. I'd argue that the majority of pre-sale participants were BTC holders. That group was not small in 2014. Also, look at https://en.wikipedia.org/wiki/Cumulative_distribution_function https://en.wikipedia.org/wiki/Cumulative_distribution_functi...
  - pjbyrne 8y ago
    All of the pre-sale participants were BTC holders because that is the only currency the Foundation accepted for presale Eth. The question is how many of those BTC holders there are and whether presales/ICOs usually follow that pattern. Most don't, they use all their powder in the beginning (there's no Indian summer surge of donations towards the end of the sale). Even when they do it is not as pronounced as here. That's what makes the curve weird.
    - drcode 8y ago
      This is totally wrong: Since there was no "upper limit" on total cap of ether in the presale there was a significant incentive in waiting until the last minute to benefit from additional information (i.e. to know what percentage of ETH supply you were bidding on) and similarly to withhold bid info from competitors- This was partially offset by a gradual decline in ETH/USD exchange rate set by the presale terms. It seems pretty clear that you haven't studied the mechanisms of these sorts of crypto auctions, since you are ignoring a lot of the underlying complexity and the many differences between different auctions in practice, or you have forgotten a lot of the intricacies of this particular auction. (which may have been a good or bad design in this case, both cases can be made.) If you think it's common for actors in an auction system to "use all their powder in the beginning" unless there's a explicit reward for bidding late then you've clearly never been a victim of ebay bid sniping LOL
      - pjbyrne 8y ago
        I've updated the post to include a chart of the Tezos raise, which was both much larger than the Eth raise and I think illustrates my point rather well.
        drcode 8y ago
        So I'll grant you that the differences in the smoothness in the ethereum vs tezos charts is interesting, but your argument is still unconvincing to me for two reasons: First of all, you're basically saying "The ethereum graph is so perfectly what you'd expect from an ideal auction that it can't possibly be ideal" which is the sort of argument that requires more convincing evidence. Secondly, the Tezos auction had many differences in the auction design from the ethereum auction, which could be a more mundane reason for differences in these curves. ...also, I feel like you still need to explain more explicitly why bidders making purchases in multiple lots is a nefarious thing- Does the argument just boil down to saying there were too many big fish, which means that ethereum may not be "decentralized" and therefore a security? If allowing arbitrary people to make their own purchasing decisions on an asset is not adequately decentralized, then it seems you've defined "decentralized" to the point where no asset could ever reach your threshold to fall under that definition.

jasonlaramburu 8y ago

Kickstarter campaigns follow a similar pattern to the ethereum graph shown in the article. It’s not because of a malicious user who wants to secretly own all the kickstarters. It’s because time-limited crowdfunding campaigns tend to attract the most donations at the beginning (when enthusiasm/press is high) and towards end of the campaign (when FOMO is high). Also the author should really state in the article that the swarm graph is not cumulative.

pjbyrne 8y ago
Duly corrected.
- jasonlaramburu 8y ago
  Nice. I think your point comes across much more clearly now. The eth presale graph is much smoother than all the others. Could the smoothness be partially explained by the fact that one could only use btc in the eth presale, whereas later token sales accepted eth and btc?
  - pjbyrne 8y ago
    Thanks! Possibly, I don't know. The point of the post really was to show that the pre-sale process was amenable to a more forensic/scientific analysis than anything else.
stordoff 8y ago
> towards end of the campaign (when FOMO is high). I suspect there is also some degree of not wanting to back things that won't make it/wanting to back at around the time the money is taken. I know the latter is a consideration for me at least.

drcode 8y ago

Near as I can tell, the Howey precedent is for a type of asset so vastly different from a cryptocurrency such as bitcoin/ethereum that it is pretty much completely at the discretion of regulators as to whether they consider it to be a "security". I know it would be nice to live in a world where judges can use an objective reading of the law/constitution to decide for certain in one way or another on such a fact, and that it would be nice to live in a world where lawyers like Preston could therefore make a reliable prediction from their expertise as to how courts will rule, but sadly in our world things don't work that way. In an outlier situation like this, without strong precedents, regulators can make any decision they please and then create post-hoc rationales for defending their view. (similarly, responses to this comment from either side will be easily able to make equally convincing absolutist arguments as to why bitcoin/ethereum are/aren't securities, given the vagueness in interpretation of precedents.)

pjbyrne 8y ago
Well it's not the regulators who make the decision and set the precedents, it's the judges. Regulators are currently trying to figure out, to the extent existing precedents are inadequate, how to extend by analogy the existing precedents to the new circumstances in such a way as to convince a judge to extend the precedent. This is how a common law system is designed to work.
- drcode 8y ago
  To be fair, It's totally reasonable that regulators/judges come come to the same conclusions that you make in your post, I just hold more cynical views as to how they arrive at those conclusions.
  - deleted 8y ago
    [deleted]
  - deleted 8y ago
    [deleted]
- comex 8y ago

wyc 8y ago

Summary of argument: - Some claim that Ether is not a security because it is decentralized and therefore not a "common enterprise" by the Howey test, but the author disagrees with this specific argument because he thinks it's centralized. - Author believes that a "horizontal commonality" of interested Ether participants can constitute a common enterprise. - Author believes that that GitHub and commit rights are quite centralized. - Author speculates that the shape of the Ether pre-sale curve signifies very few participants because it strongly resembles a power curve.

baddox 8y ago
I’m not sure I understand the horizontal commonality argument. It sounds like the author is claiming that a technology (e.g. a computer program) is not decentralized if a large portion of the users of the technology use the same implementation of that technology (e.g. use the same exact implementation of the computer program). In other words, if a group of users all run the same Ethereum client software, then it sounds like the author is considering then centralized by definition, regardless of the reasons each user decided to use that computer program, the fact that they chose the same implementation means that technology is centralized. If I’m understanding that correctly, then I find that argument bizarre.
- fjsolwmv 8y ago
  Why is it bizarre? Users are very intentionally using a specific protocol to create a single shared blockchain, not creating isolated objects of independent value.
  - baddox 8y ago
    It’s bizarre because, according to that definition, “decentralized protocol” is a contradiction of terms.
- twblalock 8y ago
  > In other words, if a group of users all run the same Ethereum client software, then it sounds like the author is considering then centralized by definition, regardless of the reasons each user decided to use that computer program, the fact that they chose the same implementation means that technology is centralized. Seems logical to me. The motives of the individual users have created an outcome of centralization because they all use the same program to do the same thing.

chrisco255 8y ago

Why does centralization of the holders have anything to do with whether Ethereum is a security or not? There are four requirements for the Howey test: 1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party Ethereum tokens are virtual commodities useful for purchasing computational services on the Ethereum network. The token's value increases as the value of the network increases...but this can only increase in part due to Ethereum holders themselves promoting and propagating the network and pluggable services into the ecosystem. By this point alone, number 4 is invalid. Another point is that Ethereum is forkable, which means that anyone is free to take the project in a different direction if they disagree with the governance or stewardship of ETH core devs. It has even undergone one major fork (ETC being a totally divergent blockchain at this point). Even point #2 is debatable. There certainly are no expectation of profits in the classical sense with Ethereum. That someone is buying up limited supply in anticipation that demand will increase does not a security make. If that were the case, then dot com domains are securities, and all those savvy 90's speculators who snatched up desirable domain names are guilty.

pjbyrne 8y ago
I agree it's all debatable. This post deals only with the "common enterprise" prong as that appears to be the prong of the test that Coin Center and others are trying to challenge most assertively. Centralization of holders makes it look like a more traditional scheme with a central promoter.
- chrisco255 8y ago
  Well, what do you think about the forkable nature of blockchain technology and how that relates to the definition of common enterprise? Which "common enterprise" are we talking about at this point, Ethereum Classic or Ethereum? The presale tokens apply to both of these forks after all. At this point, the two chains are completely divergent, run by different devs, and have completely different directions. Anyone is free to fork ETH and take it in a third direction if they like.
deleted 8y ago

JumpCrisscross 8y ago

For a discussion about certain Ethereum holders forming a common enterprise, I'm surprised to find no mention of the DAO fork [1]. "Management" undoing the DAO was, to me, a defining delineation of Ethereum from Bitcoin. [1] https://en.wikipedia.org/wiki/Ethereum#The_DAO_event https://en.wikipedia.org/wiki/Ethereum#The_DAO_event

hudon 8y ago
I appreciate highlighting how centralized this blockchain is, but Bitcoin also benefits from centralized coordination. For example, in 2013, two developers and a mining pool operator successfully commandeered a fork away from the fork with majority hashpower [0]. The conclusion in the linked article is a pretty good summary of how we should look at this issue: > In summary, we have a lot to learn from looking back at the fork. Bitcoin had a really close call, and another bug might well lead to a different outcome. Contrary to the view of the consensus protocol as fixed in stone by Satoshi, it is under active human stewardship, and the quality of that stewardship is essential to its security. [2] Centralized decision-making saved the day here, and for the most part it’s not in conflict with the decentralized nature of the network itself. The human element becomes crucial when the code fails or needs to adapt over time (e.g., the block size debate). We should accept and embrace the need for a strong leadership and governance structure instead of treating decentralization as a magic bullet. [0] https://freedom-to-tinker.com/2015/07/28/analyzing-the-2013-bitcoin-fork-centralized-decision-making-saved-the-day/ https://freedom-to-tinker.com/2015/07/28/analyzing-the-2013-...

blackrock 8y ago

Is equity crowdfunding the killer app for Bitcoin?

ENGNR 8y ago
I'm starting to think the killer app isn't just breaking the back on public security over-regulation (ie pulling an Uber by just disobeying it until they cave), the killer app might be governance in general. An algorithm to gain consensus, which is virtually the sole reason governing bodies exist I just made an Ask HN to explore this topic more

thisisit 8y ago

> But the Ethereum pre-sale looks perfect – and that’s what makes it worth querying. “Donations” from Eth-heads around the world not only flowed into the Ethereum Project’s wallet in great quantities, but they flowed in with the mathematical precision of a power function, 24 hours a day, 7 days a week, for two weeks straight. I went through holdings of top 5 ICOs on Ethereum. One of things struck me was that many of the ICOs had huge amount of cross holding. So, X was holding a lot of Y and Z coins, while Z was doing the same with other ICOs. The number of inter-connections was astounding. So my opinion is that something is off with the ethereum ICO system. I know that sounds tinfoil hat wearing conspiracy and I don't have solid proof or graphs. But given the evidence of Ethereum's distribution it looks more likely.

nivertech 8y ago
Dotcom-style revenue swaps? "Internet infrastructure companies were simply swapping equipment and putting it on their books as revenue. They essentially handed pieces of paper back and forth and called it money." https://www.inc.com/niel-robertson/brilliant-failures/dot-com-mistake-silicon-valley-start-ups-still-make.html https://www.inc.com/niel-robertson/brilliant-failures/dot-co...
- thisisit 8y ago
  That was an illuminating read. I think the whole ICO system might be something similar.