A Positive Spin On the History of Ethereum Should Not Influence Investors

by Tim Sloane 0

Let me state up front that I recognize the awesome potential of Ethereum, but given the insane crypto investing occurring today I’d suggest it is more important that potential investors know the challenges ahead for Ethereum than it is to read about past successes. This Forbes article entitled “Blockchain: A Very Short History Of Ethereum Everyone Should Read” begins by describing how Ethereum differs from Bitcoin – however I’ll assume Payment Journal readers already know that Ethereum is faster, enables smart contracts, supports permissioned and permissionless operation and has other critical differences.

There are two areas where I think this article has glossed over important information regarding this comparison to Bitcoin. First, it states Ethereum utilizes a proof-of-stake security protocol instead of a proof-of-work as used by Bitcoin. While true, I think potential investors might be interested in understanding the multiple challenges that had to be overcome to begin the deployment of a proof-of-stake algorithm. It took far longer than Buterin expected and was modified so many times that I question if its operation has been properly vetted.

The second issue I have is based on this articles lack of detail regarding the “scripting language” and problems encountered with it:

“Buterin was introduced and intrigued by blockchain technology when he got involved in Bitcoin as a 17-year-old programmer in 2011 and co-founded Bitcoin Magazine. He started to imagine a platform that went beyond the financial use cases allowed by Bitcoin and released a white paper in 2013 describing what would ultimately become Ethereum using a general scripting language.

The key differentiator from Bitcoin was the platform’s ability to trade more than just cryptocurrency.

In 2014, Buterin and the other co-founders of Ethereum launched a crowdsourcing campaign where they sold participants Ether (Ethereum tokens) to get their vision off the ground and raised more than $18 million. The first live release of Ethereum known as Frontier was launched in 2015. Since then, the platform has grown rapidly and today there are hundreds of developers involved.

Ultimately, Buterin hopes Ethereum will be the solution for all use cases of blockchain that don’t have a specialized system to turn to.

Ethereum is still experiencing growing pains and suffers from some of the same issues that Bitcoin does primarily in its scalability. In 2016, $50 million in Ether was stolen by an anonymous hacker which resulted in questions about the platform’s security. This caused a split within the Ethereum community and it broke off into two blockchains: Ethereum (ETH) and Ethereum Classic (ETC).”

My argument with the above is that the $50 million loss was not caused by scalability problems; it was caused by criminals taking advantage of a bug in the code and then a critical decision made by the developers to recover the stolen money, so the primary issue here is who actually manages the platform?

Investors should be aware that the current management will make decisions that favor some participants and have negative consequences for others. Ethereum, like Bitcoin, has a built-in mechanism for polling participants but there are so many different perspectives represented that even a simple decision becomes impossible to implement without having a negative consequence for someone. The ability to run applications suggests that Ethereum will be executing many contracts, from land titles to automobile registration, and each will have its own use case and constituency. If modifications to the underlying platform will impact each solution in a different way, how will the “right” decision be made?

Ripple and Evernym solve this problem by creating foundations that have wide representation of users that are responsible for the software maintenance and deployment decisions. Both Ripple and Evernym limit participants to just one use case, remittances and self-sovereign identity respectfully, which also reduces the chance that a difficult decision will need to be made. However, if such a decision is required, each has a foundation staffed by representatives of all major stakeholders involved in that one use case, which should make a decision easier.

The Ethereum Foundation has three members, two of which are the founders. I’m not stating that the three are incapable of managing Ethereum, but these three will make decisions, such as the one they made in 2016, that will have negative consequences for some.

Lastly, we have the articles closing statement that stresses its ability to run multiple applications:

“It’s still a very young platform, but its potential and applications could be limitless. Ethereum’s infrastructure was enhanced over the last few years when it was challenged with security issues and since it’s less monopolistic than Bitcoin, it is more open to reform measures that might ultimately make it a superior solution to Bitcoin.”

While the ability to run distributed applications is the strength of Ethereum, it also introduces more vectors for bugs to enter the system. Every operating system, compiler, and runtime has bugs when first deployed. Typically it take years before these bugs are eliminated, but even as old bugs are fixed new bugs are injected into the environment as enhancements are made to support new capabilities and platforms. What impact bugs will have on Ethereum and the applications that run on it is unknowable, but the more complicated the environment, the more likely bugs will appear.

Investors need to know what they are investing in. I fully expect Ethereum will overcome these challenges, but there may be significant disruption to the environment along the way or the promise of a platform that operates any type of a distributed application may need to be reigned in. Specific to this last statement, anyone considering the deployment of a regulated solution on top of Ethereum had better study all of these risks and others very closely.

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

Read the quoted story here