When news broke that the Ethereum Foundation had a $9M shortfall due to the falling price of Ether and Bitcoin, it immediately brought to mind the situation with the Bitcoin Foundation, which had huge financial problems come to light early this year.

Vitalik Buterin wrote a blog post both explaining the situation and attempting to ease the concerns of Investors. The situation wasn’t as dire as the Bitcoin Foundation’s was a little over a year ago. It has the money to continue activities for a while longer, and they look to extend that date, indefinitely if possible, by bringing in new sources of income and lowering their operational costs.

We sat down with him so he could further clarify the situation, talk about how they plan to operate moving forward, how the Ethereum platform could live on without the Foundation, and much more.

Ian DeMartino: Is the Ethereum foundation going anywhere any time soon?

Vitalik Buterin: Basically what is happening is what I wrote, which is that the Foundation is definitely sticking around. It does have funding for a substantial amount of time. The thing that is happening in the ecosystem that is positive, I think, is that even though we just launched, there are groups of Ethereum developers that aren’t hired by the Foundation. I feel that up until now, we have been doing a huge amount of the ecosystem, like maintaining three clients, building a whole bunch of middleware, programming languages and so forth. That definitely contributed to our costs being very high, but at the same time, has provided a lot of infrastructure that people really appreciate. The general feeling that we are getting from the community is that they do want the Foundation to exist and they do want it to continue to be involved in a leadership capacity. That is completely understandable, because the alternative is the Bitcoin situation where people can’t even agree on the blocksize. There is an entire three to five year road map that we already have for Ethereum including Proof-of-Stake upgrades and so forth.

People definitely seem to feel [about the Foundation] number one: that all that research happens and comes out on schedule and number two: They want it to actually exist to do the work to the core [client] in order to get people to upgrade.

The concern is that if the ecosystem diffused too quickly, even something like Proof-of-stake, we will be unable to get people to adopt it and we will be stuck at 1.0 forever. So the foundation is going to have a strong focus on those kind of things as well as non-developmental tasks like education and outreach.

That does mean its budget is going to be going down in the near future, probably by something close to half. And we are not going to be keeping up four core clients forever. But I think there are very good reasons to expect the community to do a lot of those things.

As an example, when Ethereum launched we put out stats.ethdev.com that’s a page that gives a whole bunch of information about the network. If you watched some of my presentations, I show it quite often. Back then, that was basically all we had. In about a month, we already have three block explorers, Etherapps, Etherchain, and Etherscan.

One of our other key products is this integrated development environment. I already know one person in the community who is developing a browser based IDE that itself looks extremely good in its own right. So the key idea is that we don’t want to compete with our own community. We don’t want to compete with any individuals that are doing something cool or compete with companies trying to do things that are best left to companies.

That is some of what have been driving the change in focus. So at this point right now, a lot of the stuff the Foundation has been working on, MIX, an IDE for DApps is basically at 1.0 stage and will probably release in a week or two, and a lot of other things are roughly at that same level. Solidity, for an example, is at a point that it is quite usable. We definitely have dreams of taking it further, but there is one key project that I am really excited about: functional programming in formal verification and they are thinking of taking it further themselves [without Foundation involvement].

DeMartino: You mentioned a budget of 340,000 Swiss Francs (~345,900 USD) with a goal of getting it down to 200,000. Is that going to be a sustainable burn rate?

Buterin: It depends, so there are a lot of short term and long term factors that are to some degree a question mark. The price could stay at $0.70 or go down to $0.30 or go up to $5.00. There is also the possibility of getting other channels [of funding] to support the foundation. There is a possibility of having more software done by outside entities and collaborating with other groups. I think the under current conditions, the 200 number will mean we can survive for a year, if not slightly more. So I think it is pretty stable for the mid to near term. Going beyond that, if, after about six months, if we decide that we can’t support even that, it might go down to 100,000 or it might go back up. I think the best approach for us is to look at all the different channels we have. One of them is ether, another is to align with different groups, one is trying to find donors or sponsors of some kind. Basically, we need to see what the realities are and adjust to him.

DeMartino: If the revenue streams aren’t as effective as you guys hope, will you be able to get that number lower or even work on a voluntary basis?

Buterin: I think so. I think the key point here is that in order to keep Ethereum going according to the road map, we could go into a very minimal approach where we basically support one client and we work on getting Ethereum 1.1 and 2.0 out the door. If nobody else writes any other clients then that would be the one everyone would use. Theoretically, that is completely possible. The other point here is also that the Foundation isn’t the only entity in the project. If, for an example, let’s say somehow the foundation manages to lose all three million of its Ether tomorrow. There would still be the group in China, there would still be consensus, there would still be all these core projects and everyone working as volunteers in their spare time. Everything Bitcoin had going for itself up to 2012, we still have going for ourselves. One of the reasons I went with a crowdsale was because I felt the Bitcoin approach was insufficient and things were happening much more slowly than they could. I think especially when Ethereum launched into a system where realistically the ecosystem is, I think, stronger than the Bitcoin ecosystem in early 2012. We definitely have gotten past some of the critical milestones.

DeMartino: Does the instability in cryptocurrency price negatively affects the effectiveness of crowdfunding using cryptocurrencies?

Buterin: I think crowdfunding in cryptocurrencies in general is a model that has a huge number of flaws. The reason why we are using it is because ti is better than the alternative. The alternative is instead of getting 18 million dollars into the hands of a foundation is basically to mine all and what you have with that is a basically just 18 million dollars being burned by a whole bunch of GPUs and don’t actually produce much value to society at all.

But the fact that it is better than burning money doesn’t mean that it is perfect. It has a lot of issues. The fact that revenue is one-time and front loaded is definitely an issue, it does make it harder to be sustainable in a lot of ways. The price volatility issue is definitely a problem but even [when discussing] a more general model based off of printing cryptocurrencies in general. If the price is high the project will have more and if it is low, then less. There is a complicated set of trade offs, like in a lot of cases in real life, there aren’t a lot of optimal solutions, but I think it definitely got huge benefits and definitely has substantial problems and uncertainty from price volatility is one of them.

DeMartino: Building off of that, did the Foundation consider using a hedging tool like BitReserve or NuBits head off that volatility?

Buterin: The more general question is ‘why the hell didn’t you guys sell?’ And it’s something that a lot of people ask, and there is definitely a substantial amount of blame that can be placed on us for that.

So, to start that off, as I said in the article, we ended up losing somewhere close to nine million. Out of that, we agreed to not move more than a small amount out of that account during the crowdfund. The terms of the crowdsale said that the Ethereum Foundation had the right to sell up to 5,000 but not more than 5,000. The reason why we did that was because if we had the ability to withdraw as much as we wanted, we could have let people take out 20,000 bitcoins, then laundered them through mixers or buying [alternative currencies] or whatever and then put the 20,000 bitcoin back into the fund and make it look to the public like we had gotten 40,000. So we were concerned that we would get accused of something like that, so we set the hard rule that we wouldn’t withdraw more than that amount. Because of that, we were locked in for 42 days and by the time the crowdsale ended the end amount was already down from 18 million to 15 million as the price dropped.

After that, we were definitely considering [selling or hedging]. There were a few concerns that if we sold too quickly, that itself would drive the price down and that would hurt us, which is definitely true. Because no matter which hedging tool you use, no matter what you use, even if you sell off of exchanges the price will go down. The idea that there is some magic way of selling a huge amount of any cryptocurrency without affecting the price is just false.

You are going to knock the price down, whether directly or indirectly or through some opportunity cost mechanism. If you sell a huge amount, it is going to go down. I was just looking at Bitstamp and Bitfinex Order book, and there were times where if we sold, we could have knocked both of them down like $50, so that was one of the things encouraging us to slow down [selling] and there were also internal communications issues within the organization that prevented us from agreeing on a strategy on when and how it was going to be done.

By the time we got a serious push going to get it done, it was largely too late. I think definitely there were a combination of genuine issues and things that were our mistakes, we have learned from them.

DeMartino: You mentioned that at the end of 2016 is the time where you can last with the current funding when you get the cost down, what do you see is the most critical task for the Foundation to get done during that time?

This is one of the things that I want to listen to the community to. What people in the community are basically saying [so far]. The top priority is making sure the protocol keeps getting developed and getting things like proof-of-stake and scalability and zero-knowledge proof upgrades out the door.

Beyond that, everything else is kind of infrastructure and I think that especially with Devcon in London next month, one of our focuses will be trying to get the whole community on the same page in terms of developing some of the higher level stuff that people have started doing without us already.

DeMartino: Proof-of-stake still has its critics, some people say that it can’t work. Do you want to take some time to answer those critics?

Buterin: Yeah. I think they are wrong and I think that a lot of them are just blinded by scope and sensitivity along with a whole different set of biases.

So to go over the general arguments quickly, and I actually have an upcoming blog post that will go into this in much more detail, but I am holding off on that until we do a bit of mathematical work first on Casper and just basically just show we have an [Minimal viable product] and it works.

If you think about the general principal behind proof-of-work, you have money in the real world, you take it and use it to buy miners and then miners produce blocks basically in proportion to how much money you have. If the algorithm manages to be ASIC resistant for a long time then it could be a bit more democratic than that but ASIC resistant proof-of-work is even more controversial than proof-of-stake which is where we are at now.

The idea with proof-of-stake is that you have virtual money inside the system in order to buy virtual miners and the system basically simulates the mining. It simulates the fact that if you have five virtual miners and there are 500 total you are going to get 1% of the blocks. In reality, proof-of-stake systems don’t quite work that way but from an economic perspective, it kind of works like that.

So, the basic principal is that in proof-of-stake, because everything is virtual and simulated, you basically control the laws of physics of the system and because of that, you can set the laws of physics to be whatever you want. So you can make sure it provides an optimal level of security. That is kind of the 101 theoretical and philosophical argument for it.

More concretely, it is kind of obvious that simulated miners don’t burn any actual electricity and there are definitely some capital lock up costs for people who are participating in the system by purchasing these virtual miners. There are basically opportunity costs, because if you have 10,000 ether and you lock up 3,000 of them in order to do proof-of-stake voting, for that particular period of time, you won’t be able to use that 3,000 ether. But if you do the economic math, even though those effects are real, they are much less than the effects of actually spending 3,000 on a physical miner. Second of all, there are less risk that you’ll run into problems that prevent the miner from actually producing value.

Third, there is an interesting argument that if you take half of the supply of money and get rid of it, the remaining half should theoretically become worth twice as much. What that means is that if I have a $100 bill and I actually burn it, inflation should go slightly down and everyone’s money should be worth very slightly more and in an economic equilibrium, the increase should be equal to $100 spread across the remaining economy.

In a proof-of-stake context, if people lock up half of the ether, even though that is an inconvenience to them, at the same time it will make everyone else’s ether more valuable so [the effect of the opportunity cost and the deflation] might cancel each other out.

Since proof-of-stake is a closed system, you have all these opportunities to control costs and as new ways are discovered, you can adopt them. My estimate is that you can get the same security as proof-of-work with a thousand times less cost.

DeMartino: Where do you see Ethereum in two years and where do you see cryptocurrencies in general?

Buterin: I’m hoping that we get proof-of-stake out the door and start getting good scalability alphas and things of that nature. Scalability is a really important piece. Basically with its blockchain right now, Bitcoin can support seven transactions a second, whoop-di-doo, there is no way that will support national volumes. Ethereum can support up to 25 transactiosn a second but even still, that isn’t going to support global trade volumes. There are tricks, like lightening networks, there are some being worked on for bitcoin and there similar things in the works ontop of Ethereum.

In general, I think it would be ideal if we made the underlying blockchain layer itself more scalable. That means a combination of different things but the general principal is to come up with a ledger where you don’t have every node processing every transaction. The idea would be that transactions would be put into groups and each group would be confirmed by a random set of validators. So lets say there were 10,000 verifiers, maybe 100 of them would verify any particular group of transactions.

With that kind of model, you could potentially increase scalability drastically. One of my models have it going up to 100,000 transactions a second. Importantly, that is 100,000 transactions a second with the entire network still running on laptops. So we will still have some kind of quasi-decentralized system compared to current systems where every node needs to a data center.

If scalability gets properly implemented, then hopefully we will see blockchains actually become this worldwide ledger or database or whatever you want to call them and people are using it for a large portion of their everyday activity.

I want to make sure transactions costs remain at this variable level of under 0.01 cent a transaction. At those levels, people don’t really distinguish it much from being free. At that level they are comfortable being lazy and just doing things like email on the blockchain.

Once the blockchain becomes a kind of default application development paradigm just because you are lazy, that is when we will see a lot of progress.

DeMartino: Anything else you wanted to add?

Buterin: From an Ethereum Foundation and ecosystem perspective, I think one of the really positive things that I’ve been impressed by is the large number of applications we are seeing already. I thought that it would take three to six months to get from Ponzi schemes to mainstream artists releasing their stuff on the blockchain, but it has been much quicker. Imogen Heap just released her new song on the Ethereum blockchain just a few days ago [at the time of this interview]. We managed to pass through that particular phase rather quickly and that is something I am really impressed by.

Devcon 1 will be a very important milestone for Ethereum, we already announced it but it should launch in the next few days, and get the Ethereum community get together and talk and figure out how we can move everything forward. That will definitely be one of the biggest challenges [moving forward]. Aside from that, development is generally going well, we already have people on our team starting work on light clients. Generally, I think there is a lot to be optimistic about.

We would like to thank Vitalik Buterin for taking the time to talk to us. As always, you can learn more about Ethereum and the foundation at the Ethereum Foundation website.

Oliver The Robot

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  • KLmoney

    "There would still be the group in China, there would still be consensus (ConsenSys?)…"