Risks abound with Ethereum and its application developers

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Ethereum is a public, peer-to-peer network with its own unique digital currency called Ether. It was created by Vitalik Buterin in 2014 and it aimed to be a platform on which smart contracts can be built and executed. The Ethereum blockchain is modeled in a way that would enable it to store different categories of data. The computer programs operating on the Ethereum blockchain accesses and uses this data. These computer programs are called decentralized apps, or “Dapps”.

Figure 1: Understanding Dapps

Applications of Ethereum

Several innovative applications are being developed using the Ethereum blockchain. These are:

  1. Improving the quality of web
  2. Establishment of virtual web
  3. Managing unique identity
  4. Shaping business models
  5. Micro-blogging
  6. Empowering artists
  7. Crowdfunding

Risks being faced by Ethereum and its applications

Even though the blockchain technology has earned a significant amount of popularity in recent times, there are several issues that it has been facing:

Infectious licensing:

One of the major issues that application developers face while using Ethereum is that of open-source licensing. Most of these developers do not pay heed to the risks of using open-source software. This particular risk of open-source licensing is unique to Ethereum as it is non-existent in the case of Bitcoin. Utilizations of Ethereum entail a number of business and legal issues. One of the most pivotal issues that an Ethereum based app developer is likely to face is that of the right to own and use Ethereum. The Ethereum Foundation declares that Ethereum is both open-source and free after the definition of the Free Software Foundation. This implies that the application developers will be granted the licenses to operate, copy, distribute and upgrade the software. After this point, however, uncertainty arises. That is because “free” software does not necessarily mean that the software would be free of cost. These restrictions are particularly disruptive and complicated in the case of the business model of Ethereum.

Open source software is divided into two broad categories namely permissive and restrictive. Unlike the permissive licenses which have minimal restrictions imposed on them, the restrictive licenses limit a licensee’s ability to distribute modified versions of the works under commercial or non-open source terms. Restrictive licenses also termed as copyleft licenses or “viral licenses” as these have the potential to “infect” a software product with the terms of the open-source software of the underlying copyleft programs. This leaves a licensee unable to distribute a modified or derivative version of the works. Hence the use of open-source software is laden with risks which need to be mitigated before the licensing any open-source product. The gravest form of risk that may arise out of the use of open source software is that an application developer may put the entire proprietary value of a project in jeopardy.

Conflicting views:

The Ethereum foundation currently uses a wide range of open source licenses, each of which corresponds to different components of Ethereum. The foundation has not yet decided on one definite open-source license which will be used to design the core of the Ethereum in the future. The Ethereum Foundation has stated that the core of Ethereum will be released under the three most liberal licenses namely Mit License, Mozilla Public Licence, and LGPL. However, the latter two are actually weak copyleft licenses. Currently, cpp – Ethereum’s core libraries are licensed under GPL which is a strong copyleft license.  This results in a conflict with the foundation’s indication that the license of the final core of Ethereum has not yet been finalized. The uncertainty regarding the finalization of the licensing scheme poses significant threats to the developers.

Technical risks:

  • Grayscale Investments report that there is no guarantee that the Ethereum Foundation’s proof-of-stake model named Casper will match up to the security and scalability level of the verified proof-of-work models.
  • Long-term security loopholes and some fundamental flaws are likely to be discovered in its applications.

Resource and cash flow risks:

  • The scarcity of funds is likely to be a limitation for Ethereum.
  • It has not succeeded in attracting sufficient VC investment.

Competition risks:

  • The existing market share and future business prospects of Bitcoin poses a major threat to Ethereum. Bitcoin already has established a strong foothold in China. And then you have NEO.
  • The threat of a potential new entrant in the market is another risk that Ethereum faces.

Regulatory risks:

  • Governments could restrict the market of cryptocurrencies.
  • Governments could demand permission system or provide institutional support to a rival system.
  • Governments could intervene in the issuance of assets, initial public offerings or crowd shares.

Barriers to adoption:

  • The PR mechanism of Ethereum is inefficient.
  • A large section of the general population is not familiar or interested in the concept of Dapps.
  • Ethereum still has not earned a place on any major stock listing.

A few other risks are:

  • The irreversible transaction of cash makes it a risky venture.
  • Ethereum is not accredited to any entity. Hence if somebody loses their Ethereum, the service provider can do nothing to refund him.
  • Finally, the size of its customer base determines its valuation. That means, if demand for Ethereum is generated from only a few people and businesses, its valuation will be diminished significantly.
  • Ethereum does not have a fixed supply cap. It is more volatile than other currencies as its valuation can move both up or down in a very short span of time. The 24-hour variance of Ether has been reported to be 11 percent.
  • A report from Grayscale Investments highlights that there are risks associated with large quantities of ETH being held by entities like the Ethereum foundation and the DAO hacker. The report has also cited issues with the fact that since a concentrated group of developers purchased 72 million of the 89.4 million ETH outstanding during the 2014 pre-sale, any fall in the ETH’s supply rate could result in concerns about the issue of centralization.

There are several risks abound with Ethereum.


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