In this article, I discuss the chronic problems of Ethereum. Using Ethereum as an example, I talk about real cryptocurrencies as well as fake cryptocurrencies, which simplifies the real concept and camouflages itself under it to make quick and guaranteed profits from the public who do not understand this difference.
I tried to write this text with minimal technical details, but still, reading the text will require some effort from those who are new to the world of crypto. The reward for the effort will be a better understanding of the underside of today’s crypto world, where among the abundance of fake projects there is real gold hidden.
The popularity of cryptocurrencies such as Bitcoin, on the one hand, and the unwillingness of the average user to go into the technical details of their implementation, on the other hand, led to the appearance of fake cryptocurrencies.
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Fake cryptocurrencies, they say, allegedly use the same technology, but do not guarantee fair play, and also lead to an increase in their centralization.
A symptom of the lack of fair play is the presence of a giant pre-mine. The main task of crypto, for which it was created, is decentralization and independence from the dictates of the big players, including the government. But pre-mine means a significant emission of coins right at the start for the benefit of project developers.
It gives great preferences to their creators, making them the main beneficiaries from the launch of such fake cryptocurrencies. With a large pre-mine, such fake cryptocurrency actually turns into an initially privatized coin (although the masses of ordinary people may not realize it).
“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.
Let’s talk in more detail about this and other unpleasant specifics of Ethereum, which they do not like to talk about publicly.
Given that ETH 1.0 has turned out to be a scam, advertised repeatedly as scalable by people like you who knew it wasn't, why shouldn't an article lead with the obvious question: Will ETH 2.0 also be a scam?
— Peter Todd/mempoolfullrbf=1 (@peterktodd) October 9, 2019
Wild wild pre-mine
The zero Ethereum block gave away 72,009,995 ETH to 8903 addresses. This is more than the block mining rewards received during the modern life of Ethereum! At first, the mining reward was 5 Ether (per block), then they made 3 and 2 Ether, and now they switched to PoS!
Once again, more than half of all Ethereum that is now available was distributed at the start of this cryptocurrency to developers (and its investors), and a smaller part came as a result of block mining.
This information is especially poignant due to the recent switch from PoW consensus to PoS. To simplify things, in the PoS, it is the holders of large sums of money who decide everything. When you consider that most of the money in the network is obtained by the creator of zero block — then PoS just looks like a legalization of taking control of the network.
After that, do you really believe in an independent and decentralized blockchain called Ethereum?
I’ll quote another source to summarize an important point:
“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 (SEC).”
It’s only a matter of time before the regulator figures out these details. It’s interesting that the fact of pre-mining in Ethereum is not widely advertised and is not reflected by the crypto community in any way. Or maybe even hidden?
- The Ethereum geth node doesn’t show these initial transactions, as if they don’t exist. It reports that the zero block is empty. But why?
- Many popular Explorers either show their existence but don’t let you see details (etherscan.io) or don’t show them at all, making the transaction history at the address look strange: only spending, no income, but a positive or zero final balance.
- Viewing this zero block is still possible over some Explorers.
Sure enough, within days of Ethereum changing to Proof of Stake it is no longer regarded as a decentralised network by the SEC
Which is why no bitcoin node operator, developer or miner will ever destroy the 1 thing that protects it from centralisation, govt control & censorship pic.twitter.com/FRNv1ZI7OH
— Daniel Batten (@DSBatten) September 21, 2022
More importantly for me, Ethereum has a weird ideology if you compare it with Bitcoin. Here is another practical example of the difference between approaches of real and fake cryptocurrency.
- The rules of new coins appearing in Bitcoin are set from the start; it is predetermined starting from which blocks “halving” will be made (halving is the event of reducing the reward for mining, which usually leads to an increase in the price of the asset). Thus, the code describes how many Bitcoins will be released in total.
- In Ethereum, the situation is different: the size of the mining reward is written as a constant in the code, and the code needs to be updated regularly, and some updates change the size of the reward (see Ethereum history). Nothing is clear in advance, it all depends on the human factor. Feel the difference in approach?
In other words, by buying Ethereum, I’m not trusting the open protocol, algorithm, and startup block (like in Bitcoin), but specific people who will release updates and update constants in the code based on their personal benefits in the current moment. These are very different values with BTC, and there is no algorithmic predetermination or decentralization in that approach at all.
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Explaining how #ETH is a con game & how their followers/promoters are being used for the enrichment of the Ethereum Foundarion
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Joe Lubin (ETH Foundation):
“Not sold for speculative purposes & started decentralized” pic.twitter.com/xRBTN7KBYs
— Dick Whitman (🌎/21M) (@GhostofWhitman) November 20, 2022
Rapidly escalating centralization
And finally, the effect of this style of management is the rapidly increasing centralization of the blockchain. And this is not a theory, a prediction, or a threat; it is the recent history of what is happening to Ethereum right now.
We have already detailed this aspect right here. Centralization in Ethereum is growing in three vectors, which seem to increase the dangers of each other:
1. At the protocol level
The so-called Flashbots, which are robots that allow miners to earn extra money, have been playing an increasingly important role in the Ethereum network lately. Because of their rapid growth in popularity, they have become a single point of centralization. In addition, fearing government sanctions, they began to comply with sectional regulations on their own initiative, at least in the U.S.
So Flashbots censor all transactions, effectively implementing a de facto MITM attack against the network. According to this MEV-Boost monitoring, 66% of relays are enforced by U.S. OFAC compliance (this is an unexpected effect of the sanctions imposed on Tornado Cash). And there will only be more such precedents, allowing this blockchain to be automatically censored at the protocol level. The mechanism for this is already working!
2. At the hosting level
Because of the danger of Ethereum being recognized as a security after the transition to PoS (U.S. authorities have already made such threats), many hosting providers refuse to host Ethereum nodes in advance.
The other side of the issue is that PoS architecture allows multiple validators on a single physical node, which will eventually lead to a reduction in the number of physical nodes, which can negatively impact network connectivity. More than 50% of the nodes are no longer classic standalone PoW nodes; they are on AWS, a centralized resource. According to Santiment, about 50% of the nodes on the network (running after The Merge update) were managed by just two addresses.
Earlier, Rocket Pool, a major validator of the Ethereum 2.0 nodes, stated that the only way to resist a regulatory takeover of the Ethereum network after The Merge is to topologically and geographically decentralize the validators. Despite the obviousness of this prediction, nothing has been done.
3. The possibility of a 51% attack
According to the latest data from Delphi Digital, 78% of all $ETH staked is handled by four stacking providers. Such enormous consolidation of resources gives a potential opportunity to seize control over the network. If we also consider the problem of pre-mining, then such a concentration of resources in the hands of just a few ultra-large players looks defiant for any real cryptocurrency.
Earlier, the problems with Ethereum decentralization were pointed out by a large P2P platform, Paxful, which acted quite radically in announcing the delisting of ETH.
— Ray Youssef (@raypaxful) December 21, 2022
One can hear the opinion that Ethereum took a wrong turn with the adoption of the PoS consensus, but before that, it was a normal cryptocurrency. In my opinion, Ethereum was initially programmed from scratch to become more and more centralized, until in several future years it will finally turn into a regular corporation, with an office in a skyscraper and a CEO sign on the door named “Vitalik Buterin.”
This project is certainly interesting and will live on, but it is not crypto in the sense that the Bitcoin White Paper talks about. Crypto was planned as an independent and decentralized system, where there is no boss or super-regulator, and thus no censorship or enforcement is possible.
Ethereum is quite a successful attempt to simulate a crypto project, under the camouflage of which hides quite normal centralized product development, with its own budget and top management, staff cuts, and other delights of usual corporate business. If you accept the latter as a correct conclusion, then centralization and pre-mine, subordination to regulation, and censorship no longer seem like a bug, but a feature. This is the real key to understanding the Ethereum project.
Ethereum is SaaS – scam as a service. Sums it up nicely https://t.co/773WljFqwN
— Trey Sellers ∞/21M (@ts_hodl) January 25, 2023
From this, we can draw two practical conclusions that are significant for long-term and large investors:
- This is a business project that is very likely under the control of some shadow third party. This is especially true for the new PoS era.
- Ethereum could face a legal attack from the U.S. regulator at any time, since it is a security by all parameters. Recall that at the stage of ICO, it was officially forbidden to invest in this asset by Americans (here with the same accusation, one can join the regulators in other countries).
Both circumstances together create a great cloud of uncertainty around Ethereum, while transparency and clarity of the asset’s nature are more relevant for investments.