Introduction to Philosophy and Values Behind Blockchain Technology Part 7

The issues of centralization.


Satoshi Nakamoto launched the Bitcoin network in January of 2009. He wanted to introduce the world to a peer-to-peer payment system that would protect people from what happened during the world financial crisis of 2007/2008. The Ethereum network came into existence in 2015 and has introduced the smart contract functionality on blockchain networks. The main difference between Ethereum and Bitcoin is that Ethereum has EVM or Ethereum Virtual Machine, which can execute computer code. Bitcoin is a blockchain network that has only one type of functionality, which is financial. The capabilities of the Ethereum network are much wider because of the EVM and since 2015 all kinds of projects used the Ethereum platform to get started, including EOS (which plans to become Ethereum competitor), Tron TRX, VenChain VEN and others.

However, the underlying principles of decentralization, transparency and inclusion are the same for both Bitcoin and Ethereum, which is why many people have found the analogy between the actions of the governments all around the world during the world financial crisis and the actions of the Ethereum foundation during the hack of “The DAO” so troubling.

The Great Recession has occurred in the United States because big banks were operating based on the erroneous assumption that property values in the country would be always going up. Because of this assumption, banks started giving mortgages to people who could not afford homes. The logic of the banks was very simple: it doesn’t matter that people can’t afford homes because the values of homes will always be going up. In practical terms, this assumption meant that is someone buys a home today for $100,000 and can’t afford a mortgage in a month, the home in a month will be worth more, say, $110,000. The person would then be able to sell the home for $110,000, pay off the mortgage of $100,000 and keep the $10,000, so that everybody would win.

The scheme started to collapse when the prices of homes became unaffordable and the banks ran out of unqualified people to give mortgages to.

The problem was that it was not just a few big banks giving mortgages to unqualified people. Mortgages needed underwriters and insurance. Once, sold, companies such as Bear Stearns were packaging these mortgages into securities and trading them.

Eventually, the prices started to go down, people started defaulting on their mortgages and the whole economy was on the brink of collapse.

The government has then decided that some of the banks and companies were too important for the economy and that letting them go bankrupt would be worse than saving them, which led to massive bailouts.

Practically speaking, the governments have decided to spend money they have been receiving from regular taxpayers who did not do anything wrong on saving big corporations who have made a lot of mistakes. This is the issue that Satoshi Nakamoto had a problem with and one of the reasons for the creation of blockchain networks, where a centralized authority can’t make such decisions.


Debates about “The DAO” and the involvement of the Ethereum Foundation in the hack of “The DAO”

At the time of the crowd sale, “The DAO” was the largest crowd sale to date, having collected over $100 million worth of Ether coin or about 15% of the total circulation of ETH at the time.

Many members of the Ethereum ecosystem viewed the involvement of the Ethereum foundation into the matters related to the hack of “The DAO” as a big mistake. The Ethereum network has always functioned the way it was supposed to function. The hack did not occur because there was something wrong with the network. It happened because the creators of “The DAO” did not foresee the potential vulnerability that the hackers later used. For this reason, many of the users believed that putting the entire network through a fork would be similar to a government bailout and would ruin the integrity of the network. Fundamentally, it would send a message to big companies and project that they can use the network to their advantage because of their size just like big banks and insurance companies have used the existing system to their advantage.


The hard fork and the birth of Ethereum Classic

Eventually, the Ethereum Network chose a hard fork solution. The Ethereum network used block 1920000 of its blockchain to move approximately 12 million Ether coins from the address of the hackers to the new recovery contract.

The network that did not go through the upgrade became known as Ethereum Classic.