What’s at Stake: Will the Merge Turn Ether Into a Security?
Levitin’s validation
Once a security, always a security?
Ethereum was funded by an $18 million initial coin offering (ICO). Hinman implied in his 2018 remarks that ether may have been a security at its debut but by then had become sufficiently decentralized to where it was unlikely an investment contract anymore.
“Putting aside the fundraising that accompanied the creation of ether, based on my understanding … current offers and sales of ether are not securities transactions,” Hinman said.
Read more: Ethereum Launches Long-Awaited Decentralized App Network
If indeed ether was originally a security, couldn’t one make the argument that factors such as the extent of decentralization and the type of consensus mechanism are dials that move ether along a security-commodity continuum?
That would potentially strengthen Levitin’s argument that, although ether has achieved sufficient decentralization to be conferred commodity status, the switch to proof-of-stake could pull it back into the security zone.
Does the Ethereum Foundation operate like a software company?
A popular Twitter account recently posted a thread on how the Ethereum Foundation uses a so-called difficulty bomb to “coerce” developers into accepting hard forks initiated by the foundation. The “bomb” is a function that makes it exponentially harder to successfully mine ether on the original chain until mining becomes practically impossible.
Hard forks are network upgrades that are not backwards-compatible (you either accept the changes or split off onto a separate blockchain). Soft forks are changes to a blockchain that are backwards-compatible (you can continue using the network whether or not you accept the changes).
With a difficulty bomb hanging over their heads, miners have two choices – go along with the foundation’s proposed hard fork or start a new project (which also requires a hard fork).
Read more: Ethereum’s Gray Glacier (or How I Learned to Stop Worrying and Love the Difficulty Bomb)
This suggests the Ethereum Foundation is controlling the direction of the network. If so, the foundation could potentially be seen as a third-party promoter under the Howey Test, supporting Levitin’s argument.