Why a Post Hard Fork Ethereum Will be More Valuable

Colony -

I am a “theDAO” token holder. That is of course a factor in my hard fork advocacy, but it’s not the main one.

As co-founder of two Ethereum projects (Colony and Ownage) which have swallowed more of my time and money than I care to mention, I want Ethereum to succeed and grow into the world changing technology I believe it can be. A clean, hard fork is the best way to put this debacle behind us and focus on what matters—building apps people love.

There still seems to be confusion and misinformation about what an Ethereum hard fork actually means. Unlike Bitcoin, an Ethereum hard fork will not involve a wholesale rollback of the blockchain state. It will involve only a surgical strike to convert theDAO to a withdrawal only contract, allowing theDAO tokens to be redeemed for Ether. That’s it. It will not effect any other transaction history or balances.

Furthermore, it’s important to note that nobody has the ability to unilaterally force a hard fork. Not Vitalik, not the Ethereum Foundation, not Ethcore nor any of the other client teams. The considerable spirited debate on this topic within the community clearly demonstrates that concerns about a hard fork being the thin end of a wedge of arbitrary censorship are without merit.

Ethereum client teams may provide a solution to a problem posing an existential threat to the network, and affecting a large proportion of its users. The miners, exchanges, nodes and users of Ethereum can then support whichever fork they believe is more valuable. One will emerge as victorious, the other will die off, and thus consensus will be reached.

As the decision therefore lies with us, the Ethereum community, here is why I believe the fork which excises theDAO from the chain will prove more valuable and why you should support it.

Caveat: I am not a lawyer. That said, I don’t get out much, and the law around blockchain technology is something that interests me.

At first blush, theDAO token sale looked like general solicitation of investment for an unregistered security. The test for this is known as “The Howey Test”. It states:

“[A]n investment contract for purposes of the Securities Act means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

Quoting from “Is Bitcoin a Security” by Jeff Alberts & Bert Fry of Pryor Cashman:

This definition, which the Supreme Court articulated in SEC v. Howey, has been interpreted as creating a three-prong test, requiring proof of (a) an investment of money, (b) a common enterprise, and (c) the expectation of profits to be derived from the efforts of others.

The interesting thing here is “(b) a common enterprise”. To my layman’s eye, whether by accident or by design, it looks like the theDAO team might have broken this prong of the test. Why is rather out of scope for this article, but if you’re interested, I recommend reading “Is Bitcoin a Security”, and drawing your own conclusions.

Regulations prohibiting general solicitation are designed to protect unsophisticated investors from loss. It has been possible to break that prong of the test because of the decentralised nature of Ethereum—something which could not have been anticipated when “SEC vs W J Howey Co” was tried seventy years ago.

Any ideas about theDAO being outside of the scope of any jurisdiction are mistaken. Smart contracts are not smart, and they’re not contracts. Code is not law; law is law. Notions to the contrary are naive, no matter what it says on any website’s marketing copy.

If the stolen funds are not returned, Ethereum projects in general are in jeopardy. There will be complaints to the U.S. Security and Exchange Commission (SEC), who have jurisdiction all over the world, so long as US citizens are affected. An investigation into theDAO will ensue, dragging Ethereum through the mud behind it.

If we demonstrate the ability to govern our own affairs responsibly, and the funds are recovered, no loss will have taken place. There will be far less merit to any complaint, which therefore reduces the likelihood of the SEC wasting scarce resources on complex overseas adventures.

It will protect token sales (for now)

It’s essentially impossible to protect IP within smart contracts on a public blockchain. While you may choose to not explicitly open source your code, once in the wild it’s accessible to all, so good luck trying to enforce copyright.

That’s OK though, you really don’t need to control IP if you have network effect. Token sales are an amazing way to generate network effect, because when done right, they align the incentives of everyone interested in a project. Rather than the incentive being for many similar projects to compete against one another for market share, a rational profit maximising strategy is to own a part of the market leader, and collaborate to increase its adoption, utility and value.

That said, most projects undertaking token sales are exhibiting a dangerously cavalier attitude to securities regulations. Generally speaking, that needs to change if we want to safeguard the existence of token sales. It puts the project issuing the token, the token holders and Ethereum itself at risk.

If an SEC investigation takes place and theDAO token sale is found to have been illegal, there is a very good chance new regulations will be drawn up to explicitly ban token sales.

It will return $150m earmarked for investment in Ethereum projects

The loss of $150m earmarked for investment in Ethereum projects would be an unmitigated tragedy, and an incalculable setback to Ethereum.

Those who argue that a hard fork would damage the value of Ethereum in the long term, consider the impact of biting the hands of 22,000 people whose combined $150m was explicitly committed to investing in projects which would increase the utility, adoption, and value of Ethereum.

If that money is returned, those funds are still available for investment in the Ethereum ecosystem, and can still be put to good use creating employment, attracting talent and growing the user base.

It will improve mainstream perception of Ethereum

True story: a very smart friend of mine, a consultant paediatrician, recently wanted to acquire some Bitcoin. I encouraged him to sign up to, and get verified by, Kraken. Concerned about the personal disclosures he’d had to make during the verification process, he backed out citing his purchase of Bitcoin potentially landing him in hot water with the General Medical Council. :o

The mainstream perception of Bitcoin is still very much associated with illegal activity no matter the water that has passed under the bridge since the days of Silkroad.

Ethereum is an application platform. It will live or die on developer willingness and ability to build apps the mainstream loves. If we do it right, people will no more know Ethereum is under the hood of their favourite app than they know Facebook runs on MySQL.

If we allow this theft to go unchallenged, it will never get to that point though. Ethereum will forever be associated with risk of loss and that will hamstring our chances of mainstream adoption.

On the other hand, we have an opportunity to demonstrate the superiority of Ethereum’s technology by our ability to withstand and defend against attacks upon our network.

It will safeguard Casper

Proof of Stake has the potential to be extraordinarily beneficial to Ethereum.

It promises not only to avoid the insane energy wastefulness of Proof of Work, but to enable Ethereum to scale to thousands of transactions per second, with block creation faster than network latency.

The point of Casper is that it’s expensive to attack, but a known malicious entity with 14% of the ETH supply would not be a good thing.

It will defend innovation

Ethereum is still only a baby. It is a mere eleven months since the Genesis block of Frontier was generated.

Nobody actually knows what they are doing. Everyone developing on Ethereum are learning as they go. There will be mistakes; mistakes are how we learn. Trial and error is a fundamental method of solving problems. The biggest lesson we need to take from this is how we prevent analogous situations from arising in the future.

We do not however, need to seek to castigate and shame those who have had the bare faced effrontery to attempt innovation, or indeed those so insufferably stupid as to support them.

A culture of responsibility, solidarity, support and encouragement is what will make the hard forked chain strong.

It will eliminate distraction

A huge amount of time and effort is being diverted away from the primary purpose of Ethereum to deal with this issue. A hard fork will mean everyone trying so hard to make Ethereum great returns to the important, value generating work of building technology.

While I’m here, let’s also debunk a few of the dafter counter-arguments

Anything about philosophy, principles or immutability.

Blockchains are not immutable. If they were, we wouldn’t be having this discussion.

Ethereum is a technology not a religion; its purpose is to provide utility, not a belief system.

The characteristic of blockchain immutability is predicated on the miners’ economic rationality—miners derive value from earning block rewards. But, it’s well within their power to collude to change transactions if they so desire. The reason they don’t, is because doing so arbitrarily or maliciously would undermine confidence in the network, render the block rewards they have earned worthless, and cause them to lose money on the electricity they burned.

That’s it. It’s not immutability, it’s just a bunch of people not wanting to lose their bookkeeping gig.

On the other hand, if miners believe it’s in their best interests to fork, then because they are economically rational, they will do so rather than continuing to burn electricity mining a worthless chain.

The only arguments therefore which hold weight in this debate, are those which have a direct economic consequence. Philosophy, as any philosophy graduate will tell you, does not.

Moral Hazard

A term that was evidently on someone’s word a day toilet roll in /r/ethereum last week, now it’s every visiting troll’s go to when they want their FUD to appear worldly.

In economics, moral hazard occurs when one person takes more risks because someone else bears the cost of those risks.

The argument for a hard fork presenting moral hazard is weak.

We’re not talking about taking money from the taxpayer to bail out banks after they systematically profiteered from a system designed to hide the risks they were taking.

We’re not even talking about a failed investment in the traditional sense—it wasn’t because money was used to fund projects which didn’t make money.

This was a theft and it’s not usual to punish victims of theft. The mistake people made was to trust that something they were told was safe, was safe. We should have been more sceptical about that, and I think it’s fair to say that lesson has been learned.

It wasn’t theft.

If this is the way your mind works, remind me not to ask you to feed my fish while I’m away.

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