Whether Ethereum is a security
prestonbyrne.com
prestonbyrne.com
- 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.
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.
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.
Also, look at https://en.wikipedia.org/wiki/Cumulative_distribution_functi...
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.
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
...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.
Making purchasers in multiple lots isn't nefarious at all, it just disguises how many purchasers there are, which is a relevant consideration for the _Howey_ analysis. If (arguendo) 85% of the tokens are in the hands of 1 person, that would militate against a finding that Ethereum is like Bitcoin and lacks the necessary degree of organization to constitute a scheme in which any one person shoulders personal civil or criminal liability.
If, again for sake of argument, they find that the largest hodler only holds 1% of the tokens, then that tends to make it more difficult to identify a central promoter and parallel investors (think: LPs without a partnership deed) which is usually required to bring enforcement.
I'm not making normative claims here, just saying that those three factors (common fund, repo, likely centralization of Ether holdings in few hands) tends to suggest the scheme is in the "regulated" bucket rather than the "unregulated" bucket.
> The price of ether is initially set to a discounted price of 2000 ETH per BTC, and will stay this way for 14 days before linearly declining to a final rate of 1337 ETH per BTC. The sale will last 42 days, concluding at 23:59 Zug time September 2
https://blog.ethereum.org/2014/07/22/launching-the-ether-sal...
How much of it did you graph?
Also the author should really state in the article that the swarm graph is not cumulative.
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?
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.
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.
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.)
> 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-...
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.
Centralization of holders makes it look like a more traditional scheme with a central promoter.
Decentralization is also a red herring. The courts don't care whether Ethereum was hosted on a million servers or on a box under Vitaly's bed.
All of this hinges on what is a "common enterprise." Some might argue that Ethereum is a loose collection of volunteers that have come together to work on an open source project for various reasons. The project itself is simply a coordination and collaboration mechanism, indeed as I've been told you could say that cryptocurrencies are not unlike an online game. There is no single server hosting this game, and certain actions in the game require real money, but the important part is that the game is free, created by open source volunteers, and these volunteers do not expect to generate profits in their capacity as volunteers. (The volunteers may on the side actually become players in the game and buy the tokens etc, but they are acting in a different capacity.)
The problem here is precisely point #2 in the article: not all players in the game are equal. Some players have very unique privileges that literally let them change the rules of the game! Sure they're acting in a different capacity, but it's still the same people either way. Now the defense of this is that in theory anybody can come along and fork Ethereum and if they can convince the majority of the network to use their client then they too can change the rules of the game.
But how exactly feasible is this?
And this is where things get very murky. Because when you actually dig into Ethereum and Bitcoin what you find are many shadowy organizations and individuals colluding together to ensure that they win at the game. If it can be shown that certain entities are able to guide the development and price of Ethereum for their own benefit then you could see a judge saying there is a common enterprise at work here. Once you have any kind of "beneficial ownership" due to "effective control" -- no matter what form these may take because the laws are intentionally vague here -- then you almost certainly have an enterprise and what could be considered mega-scale securities violations.
In the end it doesn't really matter. The SEC isn't going to proactively go out and try to settle these questions. It's not how they, or any other regulator for that matter, works. (It's very rare to find a proactive regulator. There is little upside and potentially huge downsides to being a proactive regulator.) So they're going to sit back and wait until people start dying. Only when that happens will they spring into action ito save the day. What will need to happen first is for many investors to file law suits against the Ethereum Foundation (or maybe just Vitaly). There'll also have to be a terrorism/North Korea connection or the like. When it's clear that people are dying or terrorists are winning will the SEC will step in under the guise of "protecting investors" or fighting terrorism.
Wrong, ETH isn't a virtual commodity, gas is. But gas isn't tradable, it's a virtual Unit-of-Account which uses ETH as the only accepted payment method.
IMO, ETH is a tokenized membership unit* in Stiftung Ethereum and by proxy a stake in the Ethereum mainnet.
*) Stiftungs not supposed to have memberships or shares, but that is the genius of Ethereum founders that they found a way to hack non-profit Stiftungs in order to use them for for-profit activities.
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.
"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-co...
I just made an Ask HN to explore this topic more