Our comment letter to the SEC on ETH ETF approval: “We urge the Commission to recognize the advanced safeguards inherent in Ethereum’s design”

TLDR: The SEC recently asked for comments on the potential approval of ether ETF applications, seeking information on whether Ethereum’s Proof of Stake (PoS) raises “unique concerns” of fraud and manipulation that the agency should consider. We filed a comment letter in response explaining why such concerns are wholly without merit. In fact Ethereum’s PoS implementation meets and even exceeds the security of Bitcoin’s Proof of Work (PoW), which underlies bitcoin-based ETFs that have already been approved for trading by the SEC.

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On March 8th, 2024, the Securities and Exchange Commission (SEC) issued a request for public comments on Nasdaq’s pending application for a rule change to permit the trading of iShares Ethereum Trust, which is intended to reflect the price of ether. The SEC sought comments in response to six questions, including the following:

The Exchange raises substantially similar arguments to support the listing and trading of the Shares as those made in proposals to list and trade spot bitcoin exchange-traded products (“Bitcoin ETPs”)... Are there particular features related to ether and its ecosystem, including its proof of stake consensus mechanism and concentration of control or influence by a few individuals or entities, that raise unique concerns about ether’s susceptibility to fraud and manipulation?

Today, we responded to the SEC’s request with a public comment letter explaining that Ethereum PoS has strong built-in anti-fraud and anti-manipulation mechanisms that, if anything, are more resistant to tampering than Bitcoin’s PoW consensus model. Here are some of the highlights:

Faster Block Finality. With its transition to PoS, Ethereum now relies on a model of provable transaction finality, meaning blocks are finalized—effectively set in stone and beyond reversal—within a much shorter time frame than under PoW.
Distributed and Randomized Validation Process Prevents Large Stakeholder Control. Ethereum PoS relies on segregation of duties between two groups of block validators: proposers and attesters. This division of labor serves as a check and balance against error and manipulation. This model prevents bad actors from predicting who the proposer and attesters for a new block will be. And even if such an improbable scenario occurred, the potential resulting damage is limited only to those few blocks that have not yet been finalized.
Total Cost to Attack. In blockchain security, there is a concept known as “Byzantine fault tolerance” (BFT), a metric indicating the minimum proportion of network validators required to function honestly for the system’s integrity. Researchers have found that the cost to attack the network by breaching BFT is significantly higher for Ethereum than for Bitcoin, making network compromise less likely.
Slashing Penalties. Ethereum penalizes validators who violate protocol rules by docking their stakes, a process known as “slashing.”Slashing serves as both a punitive measure and a deterrent. Unlike PoW, which primarily relies on the high costs of equipment and electricity to discourage attacks, PoS integrates this upfront staking cost with the ongoing risk of financial penalty.
Increased Security Alongside Environmental Benefits. Ethereum’s PoS is vastly more environmentally friendly than Bitcoin’s PoW. Bitcoin’s estimated annual energy consumption based on current rates is greater than Ethereum’s by a factor of 30,000.

These security protections afforded by Ethereum’s PoS model are further enhanced by:

Ethereum’s Decentralized Community. Ethereum’s active and sizable developer community, larger than that of Bitcoin, as well as its software client diversity make the network even more impervious to attack.
Ethereum’s Transparency. Anyone can participate in Ethereum development, and development work–like the Ethereum blockchain itself–is fully public. This openness enables comprehensive monitoring of network activities, further safeguarding the protocol from malicious actors.

We urge the SEC to recognize the advanced safeguards inherent in Ethereum’s design, which not only meet but exceed the exemplary security and resilience safeguards underlying Bitcoin-based ETPs that have previously been approved by the SEC.

Our mission is to onboard the next billion users to web3. We are furthering this mission through public advocacy on this important issue. Our comment letter is a step towards driving progress and providing relevant and useful information to the public. As always, we look forward to an ongoing, constructive dialogue with the SEC and its staff.