The Ethereum network went live on July 30th in 2015 as a Proof of Work network and has been producing blocks uninterrupted ever since. Once The Merge goes live, Ethereum will immediately cease to be a PoW network and switch over to being a full Proof of Stake one - but I believe this long PoW phase has been critical to ensuring Ethereum’s long-term success as a PoS network.

sassal.eth 🦇🔊🐼 @sassal0x

Ethereum having a 7 year long PoW distribution phase before switching to PoS is something that not a lot of people think about but is critically important for Ethereum's future.

March 29th 2022

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Pretty much every other PoS network in existence has been PoS from its genesis - they did not have a PoW phase at all. Of course, this is by design for these networks, but I think it is strictly an inferior design since the token distributions of these chains is highly concentrated in insider hands at genesis. What makes this a bad thing is that barely any distribution from these genesis holders will take place - they will essentially be perpetual stakers and just sell off their rewards. It becomes even worse if these networks have on-chain governance where token holders are responsible for voting on what changes happen at the protocol level - thankfully Ethereum does not have this under PoW or PoS.

Okay so why is a PoW phase good for distribution? Well, put simply, miners have a lot of on-going costs that they need to cover by selling the asset that they are mining. These costs include maintenance, personnel, storage space, equipment, electricity, taxes and more so by selling the ETH that they mine to cover these costs it works to distribute it back into the wider market rather than concentrate it among the miners themselves. Now, this shouldn’t be taken as an argument against PoS because stakers have costs too, but stakers will sell far less of their rewards than miners will over their lifetimes.

It’s not just the PoW phase that has helped to distribute ETH either - it’s the multiple market cycles that ETH has experienced. I mean, since the original Ethereum ICO ETH has gone from $0.30 to $15 to $5 to $400 to $130 to $1420 to $80 and then to $4000+ with lots of extreme volatility in between. This price action has worked to healthily distribute ETH into a wide set of participants and also get more ETH into the hands of long-term investors rather than short-term speculators. Many of these long-term investors then go on to stake their ETH which adds more validators to the Beacon Chain and increases the overall decentralization and security of the chain.

One thing that gets discussed from time to time is wealth concentration and how it seems like that it’s always going to be a big issue in the crypto ecosystem. Unfortunately, I don’t think there’s much we can do to change wealth concentration in crypto (nor do I believe that crypto was created to fix it). I mean, the crypto markets are probably the most capitalist-like markets in existence and as we all know, in a capitalist system the more money you have the easier it is to make more money. Though one positive about crypto is that it has been and will continue to be a massive transfer of wealth and has already minted a lot of “new money millionaires” that very much reinvest that money into the crypto ecosystem itself.

I could write a lot more about this topic but I’ll digress for today’s piece - hopefully I’ve been able to get you all thinking a bit more about layer 1 token distributions - especially around PoS-first networks. Obviously ETH’s distribution is far from perfect, but I think it is much, much better than other networks that start off as PoS from day 1 and basically become a perpetual insiders game - we’re very lucky to have had such a long PoW phase for Ethereum.

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.