Vitalik Reiterates Not All PoS Blockchains Allow Voting: Is Ethereum a Security?

In a recent Twitter spat with Bitcoin maximalist Nick Payton, Ethereum co-founder Vitalik Buterin argued that any blockchain, regardless of being PoW or PoS, can act as a security. Ethereum is not only the largest dApp host but the only blockchain network undergoing PoW to PoS transition.

In turn, this reflects how such a digital asset should be treated – as a security or a commodity?

Jimmy Song, prolific Bitcoin author maxi, further complicated the issue by claiming PoS is not even secure because it doesn’t solve the Byzantine Generals Problem. Both Vitalik Buterin and Charles Hoskinson dismissed this, with Cardano founder going the extra mile to frame the tweet as a “level of stupid beyond explanation”.

Should either BTC or ETH holders take sides here? First, let’s examine the question of security vs. commodity.

Commodity vs. Security = Privilege vs. Burden

How the government sees an asset has major consequences on its adoption, as one is more burdened with regulation than the other. SEC Chair Gary Gensler, recently emphasized that Bitcoin is the only digital asset he is comfortable calling a commodity.

In other words, Bitcoin doesn’t have an issuer per se, but an anonymous founder. Furthermore, it is an open-source P2P network with a limited coin supply, without having been attached to specific personalities or business entities. In contrast, Ethereum is clearly attached to Buterin and his teams.

More importantly, Ethereum launched as an Initial Coin Offering (ICO) project, which is similar to a company going public through an IPO. It could be then argued that ETH token holders are equivalent to shareholders, as they expect a return on investment. 

Michael Saylor, one of the most committed Bitcoin maximalists, makes a strong case why Ethereum could be considered a security. 

“I think Ethereum is a security, I think it’s pretty obvious. It was issued by an ICO, there is a management team, there was a pre-mine, there’s a hard fork, there’s continual hard forks, there’s a difficulty bomb that keeps getting pushed back.”

Michael Saylor on Altcoin Daily

What Makes Ethereum Not a Security?

However, every argument usually comes with a counter-argument. In a public company, shareholders have sway in shaping the company’s direction. However, Ethereum is a permissionless blockchain, so anyone can join its ecosystem, build dApps and commit transactions.

When it comes to upgrades, which can make or break a digital asset, Ethereum uses both on-chain and off-chain governance. In this hybrid model, ETH stakeholders get to vote on proposals, put forward by off-chain organizations.

These would be Ethereum core developers such as OpenEthereum, Geth, Nethermind, EthereumJS, Besu, and Trinity. Theoretically, anyone can contribute to Ethereum’s code, which is then voted on by Ethereum’s miners/validators and coordinated by the non-profit Ethereum Foundation.

Therefore, when viewed holistically, despite Ethereum getting its funding like a company, it functions as a public and decentralized infrastructure. It could be then argued that Ethereum is not a security because of the wide gap between the diffused managerial layer and investor expectations.

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Difference Between PoW and PoS

At the end of 2021, we covered the key differences between PoW and PoS. The critical one is that “work”, manifested as electricity usage through computation, provides a physical foundation for securing the network. 

On the other hand, PoS relies on economic staking, which gives it its negligible energy consumption. Some would say this leaves PoS blockchains without a proper anchor. 

Conversely, for a decentralized system to work, it has to have Byzantine fault tolerance (BFT). This is a measure for the system to function as intended, even if some of the system’s actors are unreliable. BFT got its name from the Byzantine Generals Problem.

This game theory depicts a scenario in which a battle needs to be effectively coordinated, but accounting for some of the messengers or generals to be traitors. Because of PoS/PoW differences, the BFT thresholds for Ethereum and Bitcoin are different.

• Bitcoin has 50% BFT under zero-latency conditions, going down to 49.5% in a real-world environment.
  
• In contrast, Ethereum has around 46% BFT under zero latency, which can go down to 33% under heavy network latency.

This translates to lower barriers for a network takeover by malicious parties. Moreover, when The Merge completes and Ethereum becomes fully PoS, it would take financial power to overtake the network. 

For Bitcoin, this would be virtually impossible, requiring a large nation-state actor to erect a parallel mining network. And even then it would be temporary.

By the same token, this line of “only applies to nascent altcoins” reasoning can be attached to Ethereum as well. If it becomes a de-banking infrastructure for Finance 2.0, Ethereum is also poised to be too big to fail.

In the meantime, tolerance for smart contract adventures has been reduced, as showcased by Bitcoin’s +13% performance and rising Bitcoin dominance.

Following Terra’s collapse and Celsius crypto contagion, staking and on-chain lending has been increasingly perceived as too risky. In times like that, a bare-bones digital asset like Bitcoin does seem like a safer bet.

Do you think Ethereum’s utility vs. Bitcoin’s safe haven is a false dichotomy? Let us know in the comments below.