If anyone tells you that you can easily get rich with Ethereum-based tokens, he or she is lying. The most passionate developers and engineers in this ecosystem make no such promises. Ethereum inventor Vitalik Buterin took to Twitter last week to disavow the bad actors posing as cryptocurrency projects, adding: “Cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time.”
According to OnChainFX, ether tokens currently sell for roughly $949.21 each, having dropped 12 percent over the past month after a yearly growth rate of 7,356 percent. These assets are volatile, to say the least. Buterin and other Ethereum advocates are working on an autonomous smart contract to help make initial coin offering projects more accountable to buyers. It will be a long time until most token sales implement such practices to protect participants.
Time that it takes for scammers to copy my new profile picture: 10 minutes.
DON'T TRUST ANYONE ASKING FOR OR OFFERING MONEY ON TWITTER.
DON'T TRUST ANYONE ASKING FOR OR OFFERING MONEY ON TWITTER.
DON'T TRUST ANYONE ASKING FOR OR OFFERING MONEY ON TWITTER. https://t.co/wcDAJoh6jD
— Vitalik Buterin (@VitalikButerin) February 18, 2018
Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time. Don't put in more money than you can afford to lose. If you're trying to figure out where to store your life savings, traditional assets are still your safest bet.
— Vitalik Buterin (@VitalikButerin) February 17, 2018
Ethereum faces mountainous hurdles on many fronts, including security and scalability. Security experts are especially concerned when it comes to smart contracts. “You should be cautious. We, as an industry, are working on improving it,” Zooko Wilcox, CEO of the startup Zcash, told International Business Times. Before he created zcash cryptocurrency, Wilcox worked at Least Authority, one of the cybersecurity companies that audited Ethereum’s code.
“There is a risk that security could fail, could be exploited at the consensus layer, but in practice that has very rarely happened,” Wilcox said. “Very frequently, security has failed at the code layer, the next layer up. That’s where we’ve seen all of the massive losses that have happened on the Ethereum platform were at the code layer.”
These security flaws allowed hackers to steal millions of dollars worth of token from several Ethereum platforms and products, including the $50 million DAO hack in 2016 and the $37 million Parity wallet heist of 2017. Quartz reported hackers stole $400 million worth of all ICO investments so far, the vast majority of which involved Ethereum-based tokens and wallets. Ethereum fans describe it as a “world computer.” This is an oversimplified analogy at best. Regardless, the downside of such an interconnected foundational hub is a small bug can have a ripple effect across unrelated projects.
“This is why bitcoin is so much simpler. Because the core layer that everyone has to agree on, that impacts everyone, is just so much simpler. Ethereum isn’t simple at all. It’s very complex,” Bitcoin Core developer Peter Todd told IBT. “They set up this vault that controls everyone’s money. So if the thing that controls access to the vault [smart contracts] is broken, then the thing controlling everyone’s money is subject to the same problem all at once.”
The Ethereum Foundation could help rescue stolen funds. But fixing losses at the consensus layer is highly controversial in the Ethereum community. “The question is, who runs the patch? Because Ethereum has a shared consensus everyone has to run it,” Todd added. This debate is what led to the Ethereum Classic split. “These two issues [consensus and complex governance] are precisely the Ethereum philosophy, which I interpret as being willing to take risks in order to find better improvements,” Wilcox said. Cryptocurrency veterans like ShapeShift Erik Voorhees laud this virtue of daring to break things, out on the frontier, and try again.
Despite these risks, the ecosystem has absorbed a colossal amount of monetary value. CoinMarketCap estimates Ethereum has a global market cap of more than $92.4 billion. ICOs reportedly raised $5.6 billion in 2017. As such, the most obvious threat to this social experiment is scalability. There are too many cars that want to drive on Ethereum’s congested highway.
“Bitcoin has hit the wall. Ethereum is going to hit the wall this year. Zcash also needs to solve scalability before we hit the wall. I’m very focused on scaling as the number one unsolved issue,” Wilcox said. “It might be unsolvable. It might take too long, meaning that by the time you’ve figured out the science you’ve lost the market.”
Many companies that once supported bitcoin payment options, such as the e-commerce payment processor Stripe and even the annual North American Bitcoin Conference, no longer accept bitcoin due to volatility and high transaction fees.
Unlike bitcoin, Ethereum was rarely used for mainstream payments before scaling issues loomed on the horizon. Yet there is a similar threat of losing the market because of all the startups and hype associated with Ethereum. According to a survey of 1,000 Americans by the online loan marketplace LendEDU, 31.6 percent had heard about Ethereum and 15.1 percent planned to participate in an ICO. The Ethereum community is often seen as one of the most accessible. Losing this market could create major setbacks for the movement. So Ethereum enthusiasts are hard at work on major infrastructure projects, including an update called Casper.
Mike Goldin, a programmer at ConsenSys, told IBT Casper will reduce the political power of miners. This helps protect Ethereum from certain types of attack. But it also restructures the food chain without actually addressing the types of attacks that are already happening. “Casper, on its own, is a security upgrade,” Goldin said. “But Casper does not speak to, in any way, the application layer and the security problems that are so famous in the Ethereum world.”
In the bitcoin community, miners make new digital tokens based on a process called “proof of work.” They get paid for the power they lend the network to validate transactions. Now Buterin and the other Ethereum community leaders are promoting a slow shift to a “proof of stake” model, where “validators” replace miners. Validators put up their own assets as collateral. The network then raffles of the opportunity for these stakeholders to make/earn tokens.
This will obviously have some impact on the power wielded by institutions and wealthy individuals, although Ethereum Foundation community manager Hudson Jameson isn’t too concerned. “There’s a concept of pooling together your resources. So if I have one ether, I can pool together with 99 people who also have one ether and make our own staking node,” Jameson told IBT. “That helps with the wealth distribution problem.”
Meanwhile at the application layer, Ethereum is about to get a scaling solution that almost brings the idea of a multiverse, from the TV show “Rick and Morty,” to life on the blockchain. This update is called sharding. It creates mini-universes branching off the Ethereum network. This could compartmentalize some of the risks. All these side roads are also supposed to help reduce traffic on Ethereum’s main highway. “Sharding is part of the long, ongoing story of researching how to scale blockchains,” Goldin said.
This proposal will take several years to implement. For now, many ICO projects are not reliable enough for the general public. “I believe the community has shown it accepts a philosophy of tradeoffs, of making more mistakes for more innovation and usability,” Hudson said. “It’s not ready for average consumers, at least not front-facing. I hope that over time Ethereum becomes like what TCPIP is [some of the internet’s foundational protocols]. I want Ethereum to be behind the scenes… I want the integration to be seamless enough that the consumer doesn’t even realize they’re using it.”
On the other hand, Hudson trusts and admires several startups already focused on eliminating third party arbiters in favor of computer programs. Not all tokens are created equal. Plus, the Ethereum community is growing rapidly, diversifying along the way. According to Etherscan.com, there are nearly 27 million Ethereum wallet addresses. Since November, that tally often grows by well over 100,000 a day.
“If the popularity continues to outpace the technology and innovation that we’re having to develop, there’s going to be problems. But they’re not going to be permanent,” Hudson said. “Even if Vitalik went away tomorrow, the Ethereum community could still thrive.”
The Ethereum community is remarkably vibrant, accessible and robust compared to most other blockchain ecosystems. Even so, there is a long road ahead if the technology is to solve both its security and scalability flaws. “It will be a while until we’re at the bitcoin level,” Alex Miller, CTO at the Ethereum-centric startup Grid+, told IBT. “I don’t know if there’s a singular Ethereum culture any more. I do think it’s riskier, on average… but I also think it will continue to evolve. The segmentation, and experimentation, will evolve as well. That’s super cool.”
Editor’s note: This is not investment advice. Any following statements are not legal pronouncements or endorsements regarding any specific project. This article is merely an illustrative reflection of the opinions expressed by interviewed experts.