Ethercoin Raises Fundamental Questions about Trust In Altcoin Developers

Journalist:
October 15, 2014
Ethercoin is an asset backed by ether, which does not exist yet itself.

If you have ever wished cryptocurrency operated more like central banks, you’re not alone. Well, you probably are, but that has not discouraged the developers of Ethercoin from introducing a currency that would make the central bankers proud. By creating a coin that operates completely on trust and gives developers nearly complete control of the network, the Ethercoin developers are proving they could have what it takes to one day run a national government’s central bank.

Also Read: USDcoin May Become Reality, Says Cryptolina Bitcoin Regulation Panel

Ethercoin

Ethereum’s much-hyped ether pre-sale gave enthusiasts the opportunity to pre-order ether months before Ethereum’s anticipated winter release. Although the customer purchase agreement included a clause stating customers were not buying ethers as investments, there is no doubt that many (if not most) people who purchased ether did so as a speculative investment. Apparently, some investors could not wait until Ethereum’s release to begin turning a profit on their investments.

An anonymous group of ether investors created Ethercoin to enable people to buy and sell ethers before the Ethereum Genesis block. The Ethercoin developers–who are in no way affiliated with the official Ethereum project—have set aside 1,000,000 of their future ethers to distribute to ethercoin holders at a 1:1 ratio. Customers can purchase ethercoins at a price of 1,000 ETC for 1 bitcoin.

Assuming they pre-ordered ether toward the beginning of the pre-sale–when the price was 2,000 ether for 1 bitcoin–the developers stand to double the bitcoin-value of their investment on any coins they sell. At first glance, this would seem like a terrible deal for investors. However, the Bitcoin price has declined from ~$620 to $400 since the pre-sale. Consequently, investors can acquire 2,134 ethercoins for the USD value of a bitcoin when the presale began, which is more than the 1,337 ethers a bitcoin could buy toward the end of the pre-sale.

Ethercoin ICO Raises Questions

Ethercoin’s ICO raises a number of troubling questions. Do the developers actually have access to the 1,000,000 ethers? Can investors trust them to send the purchased ethercoins? Most importantly, will they fulfill their promise to redeem ethercoins for ethers at a 1:1 ratio once Ethereum launches?

Thus far, the Ethercoin developers have lived up to their end of the bargain. Developers confirmed they purchased the ether by publishing signed transactions from the addresses used to purchase them. Moreover, Ethercoin customers are reporting on Bitcointalk that they have received their purchased ethercoins. Granted, this does not prove anything, but there’s little reason to doubt the Ethercoin developers are sending customers ethercoins as promised (they are also offering to work out escrow services if customers are wary).

However, demonstrating they will have the ethers and sending ethercoins to customers does not prove the Ethercoin developers will distribute the ethers to Ethercoin holders once Ethereum launches. Ethercoins have no inherent value–their worth is derived from the ethers users can redeem them for. Thus, the most important question remains unanswered–will developers honor their commitment to allow ethercoin holders to redeem their coins for ethers?

Developers attempt to assuage this concern by suggesting that if they scammed Ethercoin holders it would reflect badly on Ethereum, which they remain heavily invested in.

We are large ether holders (aside from what we are offering for ethercoin) and want to help stabilize the ether market and provide price discovery for the benefit of all ether holders. We are strong believers in the Ethereum vision and hope to see it succeed. Failing to redeem would not be in our interest as it would hurt the Ethereum economy which we are heavily invested in.

Elsewhere in the thread, the developers add the following:

If we disappeared it would mean that all our buyers wouldn’t be part of the community that we are invested in and incentivized to grow. We’d be hurting ourselves and our other ether holdings which are much larger then what we have for sale right now.

This logic seems somewhat shaky. Since they are not affiliated with Ethereum, it is unclear how Ethercoin would reflect badly on Ethereum—much less alter the price of ether–if Ethercoin proves to be an elaborate scam. The truth is there is no guarantee Ethercoin will live up to their end of the bargain, which only adds to the incredible risk investors take by investing in this coin.

Ethercoin Developers Control the Network

Investors should also question the unprecedented amount of control the Ethercoin developers will have over the coin’s network. Rather than build an asset atop a crypto 2.0 platform such as Counterparty of Nxt, Ethercoin developers built a separate, proof-of-stake blockchain for ethercoin. Of course, this presents a problem. The developers mined every ethercoin in the Genesis block, so ordinary ethercoin holders have little incentive to stake their coins (they only stand to gain the minor ETC transaction fees).

Don’t worry, Ethercoin has it covered. They will “maintain the majority of coins on nodes [they] control.” This means developers will have clear control of the Ethercoin network, and ordinary users will have to trust that the anonymous developers will operate their nodes in an ethical manner.

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Just Wait Until the Ethereum Genesis Block

The genius of cryptocurrency is that it eliminates the need for people to trust one another to conduct commerce. Ethercoin shatters that vision by forcing investors to trust both them and the developers of Ethereum. Many pundits criticized investors for paying bitcoins for the promise of ethers during the Ethereum presale. But Etherecoin is even worse. Ethercoin is little more than the promise of the promised ethers. At least investors could defend buying ethers from Ethereum by saying they wanted to support the developers monetarily, but buying ethercoins will not assist Ethereum developers in any way. Even if Ethercoin does not turn out to be a scam, the entire process is shady and wise investors will steer clear. If you want to invest in Ethereum, wait until the Genesis block.

What do you think? Would you consider investing in Ethercoin?

Images from the Ethercoin website and Shutterstock.

Disclosure: The author is paid in and holds investments in bitcoin. He is not invested in or affiliated with any of the altcoins discussed in this article. Any advice contained in this article is solely the opinion of the author and does not reflect the views of CCN. Neither the author nor CCN is liable for your investing decisions, so do your homework and never invest more than you are willing to lose.

Josiah Wilmoth @Y3llowb1ackbird

Josiah is the US Editor at CCN, where he focuses on financial markets. He has written over 2,000 articles since joining CCN in 2014. His work has also been featured on ZeroHedge, Yahoo Finance, and Investing.com. He lives in rural Virginia. Follow him on Twitter @y3llowb1ackbird or email him directly at josiah.wilmoth(at)ccn.com.