Ethereum, Ethereum Classic and Useful Lessons From the Fall of Ancient Rome
Back at Ethereum Devcon1 in London last year I was pleased to meet diehard bitcoiners who were strongly warming to the concept of Ethereum. Lately there have been many signs that even fundamentalist Bitcoin Maximalists are adopting a different stance. The super vocal minority of “Bitcoin priests” who beatify Satoshi like a kind of Harry Seldon (which he wouldn’t have wanted) and misuse his works like scripture to control and attack progress they worry threatens The BTC Price Rapture have been losing their grip! This is brilliant for everyone, but as I shall explain comes with some risks for the Ethereum community.
The secular view is that the future belongs to trusted computing. The reasoning is that decentralization is about far more than currency tokens alone and isolating decentralized currency behind trust boundaries makes it very difficult to build completely decentralized systems. This view holds that in the coming years we will see not just high-value fiduciary applications of smart contracts, but scalable systems that allow us to fully reinvent the business logic of critical computing infrastructure as decentralized protocols — and those of you who follow my Dfinity work on scalability will know that I expect banking, the sharing economy (e.g. Uber), social networks, email and even things like Web search to move onto such networks. Furthermore our increasingly globalized world and the pressures of over-regulation will eventually drive trusted computing into many areas of business and life.
Thus far the trusted computing community has been remarkably free of Ethereum Maximalism. For this we can largely credit Vitalik Buterin who is preternaturally wise for his age and has even given his support to the right of others to back Ethereum Classic even though it does not excite him personally. Of course, the “one chain to rule them all” ideas of Bitcoin Maximalism have long been shown up as complete nonsense by the rise of Ethereum. Even before there was no such thing as “The Internet of Money” only “Internet money” as demonstrated by altcoins. For the same reasons we can look forwards to different variations and flavors of trusted computing networks that will drive advancement of science through competition and evolutionary selection.
Nonetheless, despite many in the Bitcoin community unclenching their fists and a general thawing of relations with Ethereum folks, Bitcoin Maximalism is potentially more dangerous to progress than before. I understand the reasons partly through my experiences in 2014 while canvassing venture capital support for a new scalable cryptocurrency protocol directed towards micropayments in The Valley (I’m based in Palo Alto). I will never forget partners at one of the world’s top 3 firms emailing me a bizarre diagram of the Internet protocol stack with Bitcoin included. At the time I could not understand why they were being so presumptive about the evolution of open platforms on the Internet.
Later the pieces came together. On good authority from an insider with knowledge of an AML audit performed at one of the major Bitcoin exchanges, I heard that some of the world’s best known venture capitalists had acquired substantial personal bitcoin holdings (they were from another firm but I suspect this is quite widespread), which in one case had been bought after a partner meeting where strategic decisions to back Bitcoin had been agreed. A tacit agreement between the top firms basically formed that Bitcoin would be anointed as the Internet money by leveraging massive capital resources unlocking fantastic investment opportunities, with lemming firms following along in a fomo frenzy. Although I too was gripped with fervor when first reading Satoshi’s white paper and understand how this happened, in truth the lure of quick profits made them jump the gun.
Billions of dollars of capital were misdirected. Bitcoin companies discovered that although the currency was decentralized, as legal entities they were not, and they existed in jurisdictions where regulations would apply. The potentially disruptive nature of Bitcoin meant monopolistic interests (for example in the financial industry) lobbied hard to direct furious regulator interest their way, which made building a company on Bitcoin harder than building a normal startup. Desperate attempts to appease regulators followed, with venture capitalists hoping that regulations they complied with might create defensive moats for their well funded companies — in a similar way Uber benefits from expensively reaching agreements with local unions and councils. Thus in a final folly major Bitcoin actors demanded Ben Lawsky of NYDFS create more regulations for the space — and he obliged with the BitLicense — but this backfired by weakening the collaborative ecosystem and drove down the bitcoin price.
Bitcoin Maximalism now exists in a strange space. Many are stuck in personal, business and venture investments and are aware the currency depends on establishment acceptance for value. What they wish to create, is a new officially sanctioned asset class. Such “digital gold” would indeed have great potential value, and the value of BTC has crept up as they have made progress. But the far grander trusted computing vision poses an enormous threat to their sunk investments. While Bitcoin depends for demand more on speculation to drive up the value of its fixed supply, Ethereum has shown how completely decentralized systems might drive much more substantial real velocity and demand. The DAO for all its misjudgment, wildly inappropriate marketing and weak coding sounded the bell. 14% of all ETH currency was invested into a fully decentralized financial vehicle. If such systems became popular, the demand would quickly drive Ethereum’s value far higher than Bitcoin’s.
Of course, the financial types most heavily invested in Bitcoin are threatened. Once investors generally saw evidence of something like Ethereum decisively moving ahead due to fundamental advantages they may abandon Bitcoin. But the maximalists cannot unclench their fists and easily adapt due to their sunk investments. The venture capitalists of Silicon Valley do not generally make investments in competing ventures, and the conspicuous lack of funded Ethereum startups here (String Labs where I work is an exception) reflects the simple fact that they see Ethereum very much in competitive terms. But trusted computing still marches forwards. Ethereum ventures have successfully looked East to China for funding (as we did), vibrant new developer communities have arisen in Europe and large founder-funded companies such as ConsenSys in New York have made far more progress than a Bitcoin company ever did. An inflection point is on the cards and Bitcoin Maximalists are seriously worried.
Religious though they are, many have slowly been gaining an understanding of what trusted computing is all about, largely due to our education efforts. Some are waking up to the potentially game changing advantages of Ethereum-like networks that combine currency and business logic. In this position only two strategies are really available to them: firstly to integrate trusted computing technology into Bitcoin, which we see in RootStock’s miner-funded efforts to recreate Ethereum as a sidechain, and secondly to disrupt trusted computing outside the Bitcoin ecosystem. We should be cautious regarding this second strategy.
Finally, I can talk about ancient Rome and return to work after writing my 60 minute diatribe :) The situation is very weakly analogous but worthwhile anyway. The latest historical evidence argues Rome fell because it integrated and embraced its barbarian enemies over time, eventually giving them the knowledge and tools they needed to decisively attack them (see The Fall of the Roman Empire: A New History of Rome and the Barbarians). Counterintuitively, as we successfully bring round Bitcoin Maximalists they will evolve from mirth and denial to making attacks that are far more dangerous. Their religious faiths and sunk investments will remain strong directors of their behavior for a while, but we have explained the threat and provided knowledge useful for competing and disrupting.
Competition drives evolution and is good, but we need to be concerned with malicious disruption that simply slows the world down. For example, we may see contrived class actions that targets key people and institutions sponsored by shady backers, and the agitation of regulators to whom some bitcoiners have built strong links (for example, see this troll fantasy here). Furthermore, there will be efforts to split the community and divide its strength.
I don’t want to disparage Ethereum Classic because some in the Ethereum community have lent their support for completely valid principled philosophical reasons. However, I am personally suspicious not least because before the fork happened longstanding bitcoiners contacted me privately offering the chance to participate. That Ethereum Classic involved some amount of planning is reflected by the miraculously fast increase in its hash rate, rapid adoption by exchanges and more importantly the sudden appearance of serious market makers (who place buy and sell large orders on exchanges to provide liquidity to others) that has enabled it to hold significant price levels. Bitcoin Maximalists are triumphant and for example Barry Silbert who is deeply and inextricably invested in Bitcoin is enthusiastically trumpeting his backing (see this tweet, and watch his Twitter profile generally!).
Ethereum Classic will anyway have to hard fork later for technical reasons. The unique selling point remaining is that its community will never hard fork for social or business reasons. The need for such an alter ego seems reasonable on first sight, but in reality the Ethereum hard fork did not set a precedent. Most of the community saw this as an extraordinary but pragmatic response to an extraordinary situation occurring on a very nascent ecosystem that by merit of luck could be defended in this way (since the millions of hacked ETH were stuck and had not made it to exchanges). No leading proponents are proposing regular hard forks, and as Ethereum becomes more mature the volumes of non-technical users involved will anyway make this kind of thing extremely difficult to coordinate even if people did think it was a good idea.
Arguably then Ethereum Classic adds little in practice but it has succeeded in muddying the Ethereum waters and my guess this is the real reason for what we have seen. My advice: if you are an investor, beware of chimeras created for purposes other than stated, and if you are an Ethereum geek, beware of being drawn into supporting Classic as though it is a worthwhile variation. Regardless of whether Classic eventually becomes a meaningful alternative chain, going forwards we should expect more maximalism that appears to come from inside the trusted computing community.
