Informational Report on Ethereum

This is a live document and will be updated based on most recent information.

The following report is NOT intended as advice to pre-purchase software. This report is presented for informational purposes only. ALWAYS conduct your own research before buying digital tokens associated with a software project during a crowdsale.

TL;DR

Ethereum https://www.ethereum.org/ is an open source project to build a smart contracts and decentralized applications platform. The projected use cases involve issuing digital tokens, prediction markets, trading, and decentralized hosting coded on the Ethereum platform by its users. The crowdsale is underway and has already claimed the title as the largest crowdsale yet, with more than 25,000 BTC collected in exchange for more than 50,000,000 Ether. The crowdsale ends September 2nd at a price of double what it started at during the beginning of the crowdsale (from 2,000 Ether per BTC to 1,000 Ether per BTC). There are risks in the technology development, but a solid development team is addressing them in a methodical way. The number of Ether that can be purchased is uncapped during the crowdsale, however the price appears headed for a spot among the top five crypto coins on the market today. If you decide to participate, now is likely the moment where you can still get most of the early bonus and have a reasonable sense (order of magnitude) of the scale of the total Ether sale and thus very general knowledge about its price.

Whitepaper, Blog, Wiki Links here:

Whitepaper — https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-White-Paper

Blog — https://blog.ethereum.org/

Wiki — https://github.com/ethereum/wiki/wiki/%5BEnglish%5D-Ethereum-TOC

Summary:

The Ethereum crowdsale of Ether is one of the most anticipated events of the year 2014. The project has attracted a high number of developers and contributors to its vision and has captured a great deal of attention from investors, media outlets and programmers alike. The project is an effort to extend the advantages of the blockchain technology. It adapts bitcoin to a wider set of general use cases where scripts, smart contracts and programs can be easily written by developers/users and executed within the Ethereum network.

Problem & Solution -> Value Proposition:

Today’s bitcoin blockchain is extremely powerful and stable. However the rate of innovation in the protocol and the confidence of bitcoin core developers to make fundamental changes to its features or extend existing scripts is declining as the protocol matures and greater levels of value are actively held and traded on the platform. This increasing conservativeness on the part of the bitcoin core developers limits the types of use cases and projects that can be built on top of the bitcoin network.

Ethereum’s core solution and value proposition revolve around its separate blockchain. Custom developed to support programmers seeking to build projects and decentralized applications, Ethereum’s more advanced blockchain technology positions itsself to be the next-gen blockchain. This more powerful and flexible blockchain designed for advantageous use cases holds great promise in unlocking the power of decentralized consensus for a new wave of applications.

Crowdsale Facts in Bullet Points:

  • Launched On July 14th and End September 2nd 2014
  • Amount of Ether sold as of August 11th 2014: 51,000,000
  • Price of Ether as of August 11th 2014: 1,760 Ether per BTC
  • Price of Ether as of September 2nd 2014: 1,000 Ether per BTC
  • Ether tokens will not be issued to crowdsale participants until the test nets are complete and the main network launches (potentially 6 to 12 months from now).

The most difficult point that has to be assessed when considering making a purchase in the Ethereum crowdsale is the price of what you are buying. Because the Ethereum sale is uncapped (no limit on the sale of tokens associated with the software) the number of Ether in circulation at the end of the crowdsale period is unknown. This is part of why we have withheld analysis until this time, in order to have the maximum amount of information available in order to conduct analysis.

From what we know right now (as of August 11th) more than 50 million Ether have been purchased (with around 25,000 BTC) and at the rate at which additional Ether are being purchased, it appears that the price at which the crowdsale participants are buying Ether is likely going to be higher than almost any other crypto coin project in the market today. With the notable exceptions of bitcoin and litecoin (perhaps Ripple and NXT will also be more expensive than Ether depending on the final amount of Ether sold). http://coinmarketcap.com/

If for example more than 80 million Ether are sold by the end of the crowdsale and considering the price is set by the last Ether sold at the 1,000 Ether per BTC rate, than the total Ether will exceed a value of $48,000,000 USD or around 80,000 BTC. This will place Ether as the third most expensive / valuable crypto coin on the markets today. By participating sooner in the early stage bonus and purchasing Ether at the current 1,760 rate you are purchasing Ether at effectively around half this cost (though you risk lots of additional purchases pushing up the price above this level).

The primary worry that purchasers express is that all of the demand in the market will have been satisfied by the crowdsale period and that due to this fact Ether demand in the post market will be low thus the price of Ether will fall on the secondary market after the crowdsale and those that get the best deal will be those purchasing after the crowdsale. The Ethereum team has partly addressed this concern by waiting to issue the Ether purchased during the crowdsale until the time of the launch of the main net (which is distinct from the test products and is projected to launch in the next 6 to 12 month period). However, despite this effort by the Ethereum team, there will be and already is a secondary market being created by those who purchase Ether during the early stages of the crowdsale, where early comers have made agreements to transfer it after the Ether are issued, effecting a time arbitrage of the value of the tokens. Furthermore, the presence of these agreements imply that the demand demonstrated in the purchase of the Ether thus far may be a function of capital flow generated by parties intending to sell ether at the lower prices available at the beginning of the crowrdsale, thus making it likely that post- crowdsale price could be negatively impacted. These “back-stage” dealings of course carry counterparty risk, and thus are less desirable than the actual token. However, the market will determine a price based on the net supply and demand possibly heavily influenced by these secondary sales.

I would conclude this analysis by saying, if you plan to purchase Ether it is best to do so if you believe in the LONG TERM success of the underlying technology and aren’t trying to play the market day to day where these fundamental questions of short term price are impossible to answer.

Ether Token Distribution Post Crowdsale (Mining Rate):

The images of the distribution of Ether over time:

After the Crowdsale: 83.5% Crowdsale Purchasers, 8.3% Early Contributors, 8.3% Long-term Endowment

After 3 Years: 50.6% Crowdsale Purchasers, 39.4% Miners, 5% Early Contributors, 5% Long-term Endowment

After 10 Years: 26.3% Crowdsale Purchasers, 68.5% Miners, 2.6% Early Contributors, 2.6% Long-term Endowment

Actually the model presented here is fairly attractive for those that want low levels of dilution (inflation) over time. Its important to understand that the 26% annual rate is multiplied against the base X which is determined by the number of Ether created during the Genesis period. And is thus is NON — COMPOUNDING. Effectively, each year the percentage of dilution decreases, and though the absolute rate of new tokens created is the same each year in absolute number of the tokens. For example say 100 million Ether are created during the sale. Then every year 26 million Ether would be available for miners. While is 26% dilution the first year, the second year the same 26 million Ether represent 20% dilution, the third year the same 26 million Ether represent 17% dilution, the forth year 14% dilution, the fifth year 12.7% dilution and so forth by the tenth year reaching annual dilution of 7.7% declining forever unless the rate of dilution is extremely small in percentage terms (approaching 0% over the longterm) because the base of outstanding Ether increases each year by the same 26 million Ether to offer an incentive to miners.

This is actually one of the most balanced and well thought out approaches to mining rewards I’ve seen, maintaining an early adopter premium which declines over time (much the same as the Bitcoin Network), but never stops issuing an incentive to miners over the long term.

In fact I would offer the rate of dilution (“inflation”) doesn’t really matter as long it is knowable by the community, predictable in its rate of increase and transparently set. If you have these three factors the future number of units is easy to calculate and thus the value of the coin in proportion to those now in circulation or will be in circulation over time is very predictable. To even further highlight this point, I’m not sure the system would be stable over time if the majority of the value didn’t flow to those directly adding value to the network, namely miners in the case of Ethereum. If this wasn’t the case then the risk of a well adopted fork would be much higher.

Code Contributors and Team Members:

As listed as contributors on the Ethereum Github account: https://github.com/ethereum/

Vitalik Buterin

Gavin Wood

Jeffrey Wilcke

Maran

Romanman

Nick Savers

Heikoheiko

Non-coding team members include: Anthony Di Iorio, Amir, Jonathan Mohan and many others.

Economics:

Ethereum has pioneered the idea of using a digital token as fuel. In the case of Ether this token is required for the running of scripts on the Ethereum network. While the fundamental basis for this feature is preventing spam or attacks on the Ethereum Network it also has the effect of making every holders remaining Ether more valuable over time.

Technical Description:

(From the Ethereum Whitepaper)

A Next-Generation Smart Contract and Decentralized Application Platform

When Satoshi Nakamoto first set the Bitcoin blockchain into motion in January 2009, he was simultaneously introducing two radical and highly untested concepts. The first is the “bitcoin”, a decentralized peer-to-peer online currency that maintains a value without any backing, intrinsic value or central issuer. So far, the “bitcoin” as a currency unit has taken up the bulk of the public attention, both in terms of the political aspects of a currency without a central bank and its extreme upward and downward volatility in price. However, there is also another, equally important, part to Satoshi’s grand experiment: the concept of a proof of work-based blockchain to allow for public agreement on the order of transactions. Bitcoin as an application can be described as a first-to-file system: if one entity has 50 BTC, and simultaneously sends the same 50 BTC to A and to B, only the transaction that gets confirmed first will process. There is no intrinsic way of determining from two transactions which came earlier, and for decades this stymied the development of decentralized digital currency. Satoshi’s blockchain was the first credible decentralized solution. And now, attention is rapidly starting to shift toward this second part of Bitcoin’s technology, and how the blockchain concept can be used for more than just money.

High level languages used- Serpent is one of the high-level programming languages used to write Ethereum contracts. The language, as suggested by its name, is designed to be very similar to Python; later versions may even eventually come to target the entire RPython spec. The language is designed to be maximally clean and simple, combining many of the efficiency benefits of a low-level language with ease-of-use in programming style. The latest version of the Serpent compiler, available on github, is written in C++, allowing it to be easily included in any client, and works by compiling the code first to LLL then to EVM; thus, if you like LLL, a possible intermediate option is to write Serpent, compile it to LLL, and then hand-tweak the LLL at the end.

Low level — Low-level “Lisp-like Language” specification, used to author contracts in the PoC series from PoC-3.

Implementations include: Go, Java, C++, and Python.

Challenges and Issues

The project is in its 5th version of the proof of concept for the underlying system. While lots of progress has been made it is not yet at the production stage and may encounter unforeseen obstacles which prevent it from functioning or scaling as is envisioned. This is well acknowledged by the team and is their primary focus in development to prove the methods which they are using will be scalable and stable in their implementation.

You can see an in depth discussion here: https://github.com/ethereum/wiki/wiki/Problems

Disclosures PLEASE READ

See link on Ethereum website by clicking the word “Buy Ether” the disclosures will pop up in a framed screen.

This will bring you to the “Terms and Conditions of the Ethereum Genesis Sale”

https://www.ethereum.org/

The Ethereum team deserves credit for doing more than any other project holding a crowdsale in terms of disclosures to users, legal work before hand to explore existing precedents, incorporating in a stable, crypto friendly jurisdiction (Zug, Switzerland), and getting letters from regulators as well as legal counsel on the subject matter. In fact the Ethereum team is likely the first to come up with or at least popularize the term “crowdsale” within the crypto currency community early in 2014.