On Wednesday, Paxful CEO Ray Youssef tweeted the following: “We finally kicked #ethereum off our marketplace. 11.6m humans safer. Integrity over revenue 🤝🏽 Who is next?” The tweet, which followed earlier tweets in which Youssef telegraphed the move, was accompanied by a screenshot of a letter Youssef sent to customers explaining why he decided to purge the ETH token from Paxful’s platform as of December 22.
— Ray Youssef (@raypaxful) December 21, 2022
Under the headline “Revenue is nice, but integrity trumps all,” Youssef stated that the world’s biggest problem is “economic apartheid. It is the root of all of humanity’s pain.” Youssef believes this system has “held back” billions of people, “especially those unnecessarily harmed living in the Global South.”
As for why ETH was being herded toward Paxful’s exits, Youssef cited three reasons. First is the Merge, Ethereum’s recent transition from a proof-of-work (PoW) consensus model to one based on proof-of-stake (PoS). Youssef states that PoW is “the innovation that makes Bitcoin the only honest money there is, whereas [PoS] has rendered ETH essentially a digital form of fiat.”
Secondly, “ETH is not decentralized. It is controlled by a small group of people, and one day you will need permission to use it.” And finally, regardless of how one views Ethereum’s purported ‘world computer’ utility, Youssef says the network “thrives because of tokenization. The tokens that ETH has spawned have been scams that have robbed people of billions. They have stolen valuable momentum away from Bitcoin and cost us years on our mission.”
Youssef summarizes his argument by noting the digital asset sector “is under attack right now – which means our responsibility to protect our users is greater than ever before.” While the ETH ban may cost Paxful in the short run, Youssef believes “the payoff for all humanity will be so great that the billions scammers have stolen via token will seem pennies by comparison.”
‘Crypto Twitter’ had mixed reactions to Youssef’s announcement, with some accusing Youssef of ‘virtue signaling’ and questioning why Paxful continued to list other ERC-20 tokens, including the controversial stablecoin. Others concurred with Youssef’s views of Ethereum’s centralization and applauded him for taking this stance. Ethereum co-founder Vitalik Buterin has yet to weigh in on the news.
CoinGeek has long tried to boost awareness of Ethereum’s centralization, the extent of which has only increased following the merge. To become an Ethereum PoS transaction validator, one needs to stake a minimum of 32 ETH, currently worth around US$38,000. Since this hurdle is too high for most ETH users, the PoS model clearly favors ETH whales, including those Ethereum Foundation members who received tens of millions of ETH via the network’s controversial pre-mine.
Since there’s no limit on how many of these 32-ETH stakes any entity can deploy, whales have a greater likelihood of being ‘randomly’ selected to (a) create the next block on the chain and (b) claim the block reward, which can then be plowed back into deploying more stakes, and this imperfect circle of life continues in perpetuity.
Minnows do have the option of participating in staking by pooling their ETH with centralized entities, including the Coinbase (NASDAQ: COIN) digital asset exchange or the (so-called) decentralized autonomous organization (DAO) Lido Finance. Following September’s Merge, those two entities accounted for over 40% of the first 1,000 blocks, and the top seven staking entities accounted for around 2/3 of all staked ETH.
A report prepared for the U.S. military’s Defense Advanced Research Project Agency (DARPA) recently found that the PoS version of Ethereum could be hijacked by as few as 12 staking whales. And Ethereum’s infamous 2016 rollback of its chain following the hack of The DAO was made possible by the fact that votes were weighted according to how much ETH a voter held, a scenario that echoed Orwell’s famous maxim that “all animals are equal, but some animals are more equal than others.”
The Ethereum Foundation has tried to downplay the centralized downsides of PoS by trumpeting its supposedly less intensive environmental footprint. But the way to fix a PoW blockchain’s energy requirements is to dramatically expand the size of the chain’s individual blocks, which allows transaction processors to stuff millions of transactions into each block. Supersizing a chain’s blocks, coupled with a reliance on renewable forms of energy, is a path that Bitcoin SV (BSV) is pioneering and offers the most promising model for achieving an energy-efficient blockchain.
SEC is done playing
Ethereum’s problems go well beyond losing its spot on Paxful. The U.S. Securities and Exchange Commission (SEC) has long hinted that it views ETH as an unregistered security, and these hints grew louder post-merge. The amended complaint the SEC issued against FTX CTO Gary Wang and Alameda Research CEO Caroline Ellison this week offers new insights into how the SEC plans to proceed against tokens that meet the Howey test for identifying securities.
The SEC’s complaint illustrated its belief that “from the time of its offering, [FTX’s in-house token] FTT was offered and sold as an investment contract and, therefore, a security.” The complaint notes that “FTX’s FTT marketing materials … described FTT as ‘the token powering the FTX ecosystem.’” FTT holders were led to “reasonably expect to share in FTX’s growth and future earnings, and from appreciation in the value of FTT.”
FTX minted 350 million FTT one month before the launch of the FTX exchange, of which 175 million were designated as ‘company tokens’ and the rest as ‘non-company tokens.’ FTX then sold around 73 million of the latter to the public at prices ranging from 10¢ to 80¢, raising $10 million in the process.
From the start, “FTT was marketed as an investment that would appreciate in value as it grew and expanded in other ways,” including through “carefully designed incentive schemes to increase network effects and demand for FTT.” As a result, “FTT investors had a reasonable expectation of profiting from FTX’s efforts to deploy investor funds to create a use for FTT and bring demand and value to their common enterprise.”
The SEC reasons that “if demand for trading on the FTX platform increased, demand for the FTT token could increase, such that any price increase in FTT would benefit holders of FTT equally and in direct proportion to their FTT holdings. The large allocation of tokens to FTX incentivized the FTX management team to take steps to attract more users onto the trading platform and, therefore, increase demand for, and increase the trading price of, the FTT token. As a result of FTX and its management team’s large holdings of FTT, the interests of the company and its management team were aligned with those of investors in FTT.”
Like most alt-coins, FTT was Ethereum-based, and Paxful’s Youssef isn’t wrong when he slammed the network for enabling the flood of worthless tokens that have sullied all blockchains in the public consciousness. The SEC’s patience appears to have worn thin with these antics, and those who promote unregistered securities are about to discover that prisons, much like Ethereum, are highly centralized.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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