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CFTC fields industry feedback on Ethereum futures contracts

Posted: 18 February 2019 1:27 pm
News

How will futures contracts affect proof of stake? The CFTC wants to know the answer to this, and more.

Last year the Commodity Futures and Trading Commission made a "Request for Input on Crypto-Asset Mechanics and Markets". It was largely focused on Ethereum, with the CFTC saying the request "seeks to understand similarities and distinctions between certain virtual currencies, including Ether and Bitcoin, as well as Ether-specific opportunities, challenges, and risks".

It posed 25 questions as a framework, largely focused around what drove the creation of Ethereum, how it's different from bitcoin, specifics such as how many confirmations are needed to safely settle a transaction on Ethereum, and whether proof of stake systems have ever been tested at scale.

The feedback from the request could tangibly impact future regulatory developments in cryptocurrency, and for Ethereum in particular, with the CFTC saying industry input "will advance the CFTC's mission of ensuring the integrity of the derivatives market as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets".

Specifically, the request is being viewed as an entry point to begin discussing the benefits and risks of regulated Ether futures contracts, especially in light of the frictions that might rise between a proof of stake system and Ether futures contracts.

And whether you're looking for Ethereum advocacy, insightful top-down analyses of what makes Ethereum different to bitcoin, interesting answers to interesting questions or a walk inside the mind of a bitcoin maximalist, the industry feedback did not disappoint.

It's worth considering some of the responses to specific CFTC questions, especially in the context of the different experiences brought to bear on certain questions.



What are the current functionalities and capabilities of Ether and the Ethereum Network as compared to the functionalities and capabilities of Bitcoin?

The general opinion is that Ethereum offers considerably more functionality than bitcoin.

The Ethereum Foundation says:

The Ethereum foundation explained it in terms of functionality, saying the bitcoin blockchain simply says who has how much BTC, and accounts are simply BTC balances, while Ethereum allows for the creation of fully-fledged smart contracts.

The Futures Industry Association says:

The Futures Industry Association (FIA) approached this extra functionality as an additional risk to be managed.

"With the Ethereum Network’s architecture, risk management is potentially more complicated than for Bitcoin by orders of magnitude," it said. "Whereas Bitcoin is a payment unit on a shared and distributed ledger for transactions, Ether is a unit of work on a distributed functionality tool that offers super-computing power on the Ethereum Network, in exchange for value."

Circle says:

Circle, unsurprisingly, approached it as a technical question in the context of making payments with bitcoin relative to Ether, explaining some of the technical features of transactions and block rewards, and the role of additional tokens.

"As with bitcoin, Ether can be used to pay for transactions and can be used for payments. Unlike bitcoin, tokens on the Ethereum network can be generated using smart contracts and can be used in smart contracts and transfers," it concluded.

ConsenSys says:

ConsenSys approached it as a question of pragmatics.

Ether is a means to an end, to get people on the same page for the operation of the Ethereum world computer it said. Similarly, any scarcity and value attached to Ether is a necessary element to prevent spam attacks and secure the network.

The unspoken corollary is that the bitcoin network was created to drive functionality to the BTC digital asset, while the ETH digital asset was created to drive functionality to the Ethereum network.

Craig Wright says:

Craig Wright of Bitcoin SV also wanted to have his say. After an opening in which he explained that he is Satoshi Nakamoto and that he invented bitcoin, he answered the question by saying bitcoin can also do smart contracts in theory, but the only reason it can't is because the network was hobbled by bitcoin core developers in their misguided quest to introduce privacy to the system.

"Ethereum is a poorly designed copy of bitcoin designed with the purpose of completing the promise of smart contracts and scripting that were delivered within bitcoin but which were hobbled by the core developers of bitcoin," he argued.

Other:

Meanwhile, someone going by "Spike Spiegel" writing on behalf of the "Ethereum Scam" organisation generally frothed.

"Centralized Ethereum cannot do anything decentralized like Bitcoin due to its centralization via premine by design, but Bitcoin can do everything Ethereum can," they said.

On the principles of decentralisation

Depending on who you ask, decentralization is either simple, complicated or a completely nonexistent myth. Many respondents, such as the FIA, didn't hazard a perspective while others went into great detail.

Circle says:

Decentralisation is neither better or worse than centralised equivalents, so much as a different type of architecture with its own pros and cons. This point of difference is one of the things that makes cryptocurrencies useful where existing systems aren't.

In cryptocurrencies, it says, decentralisation is a by-product of mining systems. It is a practical advantage in many situations, but comes with a lot of new risks to be managed.

ConsenSys says:

ConsenSys points out that decentralisation is complicated and multi-faceted.

Despite being "logically centralised", in the sense that people think of both bitcoin and Ethereum as a single monolithic entity, both are "operationally and architecturally decentralised" it says.

"Despite the 'fee' of a single system, there is no single computer or operational architecture for either the Bitcoin or Ethereum blockchains," it says. "There is no single infrastructural or operational architecture for either the bitcoin or Ethereum blockchains. There is no infrastructural or operational single point of failure."

Ethereum is open for anyone to participate, and is politically decentralised, by design it says. While the CFTC examines forking, a la Ethereum Classic, as a risk for investors, ConsenSys argues that the ability for anyone to fork the network is a valuable fallback governance tool.

Craig Wright says:

Wright argues that decentralisation is a myth that has never existed in cryptocurrency or blockchain.

"The governance model in Ethereum is controlled by one central group who uses misleading statements saying that they are decentralized to cover up the fraudulent creation of a digital security. All choices are made by one central group," Wright argues.

Bitcoin core is also a central group in control of bitcoin's development for the purpose of creating anonymous drug money, he continues, and "the myth of decentralization has been spread with the sole concept of enabling illegal markets to exist".

He also goes on to argue that "blockchain's (sic) do not fork as the community tries to mislead regulators to believe".

Others:

The pseudonymous bitcoin maximalist wrote to the CFTC saying bitcoin invented perfect decentralisation, and all other cryptocurrencies just co-opted it for the purposes of buzzword profiteering.

On proof of stake

Different perspectives offered different takes on the viability of Ethereum scaling solutions and proof of stake.

ConsenSys says:

Proof of stake is functionally less centralised than proof of work in terms of how easily an individual entity can seize control of the network.

"In short, under the current proof‑of‑stake plans for the Ethereum Network, the risk of a party successfully and materially manipulating the Ethereum Protocol is low. In particular, any party that stakes ether to validate blocks on the Ethereum Network will have less of an ability to directly impact the network, even relative to their proportional 'staked wealth', than miners on proof‑of‑work protocols relative to their proportional hash power," ConsenSys says.

Circle says:

"It is arguably harder to gain the tokens necessary to conduct a majority attack on a PoS-based network, compared to PoW," Circle agrees. It points at the difficulty of buying up enough ETH without anyone noticing, compared to the relative ease of sneakily accruing enough mining power.

The Ethereum Foundation says:

Proof of stake has been implemented on smaller and relative simple scales, the Foundation says, giving NXT, QTUM and Tezos as examples.

"However, the form of proof of stake used in these blockchains is much simpler than the form that Ethereum aims to eventually use (Casper), as Casper provides much stronger properties, including much faster confirmations and the concept of 'finality'," it says.

This more advanced type of proof of stake has not yet been tested at scale.

"The relatively untested nature of more advanced forms of proof of stake is a key reason why the Ethereum roadmap for upgrading to Casper aims to roll out over time in stages so that the functioning of the network is not dependent on the new proof of stake system until its stability is proven," it adds.

Craig Wright says:

Wright says proof of stake is inherently flawed and can never work, and that he knows this because he was testing proof of stake since before bitcoin was invented.

Ethereum's only hope for survival is to use the techniques he has patented, Wright adds.

"I tested the equivalent proof of stake mechanisms between the years 2003 to 2007. All proof of stake mechanisms collapse into single-user control and allow alteration rather than the creation of an immutable record. The economics of proof of stake are flawed and are based on an oligopoly game. There is no working proof of stake model. The only way that Ethereum can scale is reliant on altering the model to copy bitcoin. I have patented most of these techniques," he said.

Others:

Ethereum developers are too evil and stupid to ever understand proof of stake, Spiegel argues.

"Ethereum developers lack the technical understanding or ethics to understand proof of stake has been tested since 2012 by hundreds of cryptocurrencies," they complain.

Ethereum's scaling solutions are just a bitcoin rip-off, Spiegel says, and not a single one of the hundreds of thousands of Ethereum developers has the technical competence to do anything about it.

"The terrible designer behind their centralized premine called Vitalik came up with some more buzzwords like Plasma and Sharding, which are just another way of badly designing Lightning Network and Sidechains of Bitcoin. Ethereum developers simply don’t have the technical literacy capable of creating any unique technology, so they copy others work without giving credit," Spiegel complains.

Incidentally, the concept of sharding – in that word – in computer science as a way of sharing loads, dates back to the 80s.

The upshot

The main takeaway from the CFTC's enquiries into Ethereum ahead of regulated ETH futures proposals is that the cryptocurrency ecosystem is able to furnish regulators with a wide range of perspectives, all of which make compelling arguments in favour of the long term viability and seriousness of Ethereum, even if they don't do so intentionally.

The CFTC's willingness to incisively examine sticky issues, such as the risk of forks or the two-way impacts of ETH futures and proof of stake, ahead of regulated ETH futures, bodes well for the space as a whole.


Disclosure: At the time of writing the author holds ETH.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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