The lure of cryptocurrency is its decentralization. If decentralization and the prospect of making poor people get access to the same financial opportunities as the rich with no gatekeeper dictating what happen are slowly eroded, then Satioshi’s purpose of developing bitcoin, which served as the building block (no pun intended with blockchain) for other cryptocurrency projects, is defeated.
There is a growing fear among cryptocurrency enthusiasts, traders, and analysts that Ethereum will become centralized.
Of course, it should be, especially when one considers what motivated Vitalik Buterin, the co-founder of Ethereum, to develop Ethereum.
Why Did Vitalik Buterin Develop Ethereum
Vitalik Buterin, according to interviews he granted, got the idea for Ethereum after his favorite character in a game was stripped of its powers, powers that he (Vitalik) had spent years building. His disgust with one person having so much power led him to develop Ethereum. He hated the centralization of powers. in games and the financial sector.
Vitalik was a boy genius and had heard about bitcoin from his father. After reading up on bitcoin, and writing for a blog that paid him in bitcoins, he decided to develop a solution better than Satoshi’s decentralized solution. The Ethereum blockchain was the solution to that problem.
So, for a cryptocurrency whose founder was propelled by a need for decentralization of powers, whether it is financial or otherwise, one wonders why Ethereum is being rumored to be centralized.
The simple answer is PREMINING. Premining is why critics are sceptical of the decentralization promises of Ethereum.
First, what is PREMINING?
There are several technical terms online, but the simple explanation is this:
Before a coin is publicly released, the developers call a few people and distribute some of the currency to them. In this case, Ethereum was given to some people before it was officially launched.
Now, the detractors of Ethereum are saying that the premining distribution has put the majority of ethereum in the hands of a select few, people who can easily do a rug pull, and when ethereum finally moves to proof-of-stake, will be the major determinants in the validation process.
If these fears are being projected to happen, then the whole idea of decentralized finance is defeated.
But are they right?
Did the Ethereum premine leave Ethereum in the hands of a select few?
Do The Ethereum Detractor Have A Case?
The people talking down on the premine are saying it has centralized Ethereum’s power, which defeats the purpose of cryptocurrency and decentralized finance.
According to the detractors, 40% of Ethereum that is being sold were purchased by just 100 people. The presale, which we are calling the premining, has been touted to have the same components as an illegal security offering.
An illegal security offering is when a company tells investors within a close circle when the asset will be listed, and these people buy at ridiculously low prices. Illegal security offerings leave the powers to a select few.
That is what many are accusing Ethereum and its premining phase of giving powers to a few.
The premine issue is a major problem because when Ethereum finally moves to proof-of-stake, as was announced on Ethereum Foundation, the new protocol that ensures less energy is used in completing transactions, people with huge Ethereum, some argue, will benefit more. Because they hold more Ethereum, they are more likely to be ‘chosen’ to validate transactions. We’ll explain more of that later.
“Ethereum’s Premine is Not As Bad As You All Make It Seem,” Ethereum Defends
Ethereum supporters have come out to defend the premine, and rebuff the claims of detractors who claim that people who benefited from the premine were going to take over the network when proof-of-stake starts on the blockchain.
According to them (the supporters), more than 100,000 addresses were involved in the premine phase. With a large number like this, it is okay to say that the presale phase ensured that many people got involved early in the Ethereum space, and is great for the market.
Also, the supporters argue, with the rate at which Ethereum’s adoption and popularity are growing, the number of people holding Ethereum on exchange wallets such as Redot.com has increased significantly. The increase in Ethereum wallets shows that more people are owning Ethereum, and that only 3.3% of total Ethereum is held in large wallets, whether they are on crypto exchange redot.com or hardware wallets. As more people own Ethereum addresses – the number is now 172,088,521 from 9,205 on exchange wallets and hard wallets – which means there is more democratization.
However, it can be argued that more wallet addresses don’t equal wide distribution because a person can own more than one wallet.
However, there are no verifiable statistics to prove that most of the addresses are owned by a few persons.
On the issue of those with large Ethereum holdings having more advantage when Ethereum is moved to proof-of-stake, the counterargument is that there are systems installed on the network that fight against it. One of such systems is the anti-correlation penalties.
If you are wondering what anti-correlation penalties mean, I will explain, and tell you how it helps mitigate against favoring wallets with large Ethereum holdings.
The penalty offense is implemented when a validator commits an offense at the same time other people commit that same offense. What this entails for the network is that multiple accounts controlled by one person can’t control the activities; the system penalizes them when it notices it. And the penalty is worse if more people are committing the same offense.
So, for example, if a validator makes an honest mistake, say the person doesn’t validate a transaction early enough due to power issues, the penalties are small. But if a large portion of validators does the same at the same time, it means the validator’s accounts are being managed by the same person.
The anti-correlation penalty, although still causes a lot of debate as to how effective it will be in curbing whales and big-money spenders manipulating the network, proves that decentralization is still possible.
Another counter-argument is that as more Ethereum is mined, the presale numbers then become small, inconsequential in comparison to the total Ethereum in supply.
In the end, decentralization is possible with Ethereum 2.0. As Ethereum transitions to proof-of-stake, there is burgeoning hope that decentralization will remain its reality.