Sale of the Century: The Inside Story of Ethereum’s 2014 Premine

The following is excerpted from Camila Russo’s “The Infinite Machine,” an in-depth history of Ethereum, which goes on sale July 14.

The sale started on July 22 at midnight in Switzerland. The website they put together for the sale had a real-time counter of the amount of ether sold, and the team watched with relief as the numbers ticked up. More than 7 million ether, or about $2.2 million, were sold just in the first 12 hours. It had been a long, hard wait since December and January, when most of them started working for the project. Everyone was worn out, and most were broke.

“We have been promising that the sale would arise in two weeks for six months, and many team members have endured substantial hardships because of expectations that we set regarding when we would be able to provide funding,” Vitalik [Buterin, Ethereum’s co-founder] wrote in a blog post announcing the sale. “We certainly miscalculated the sheer difficulty of navigating the relevant legal processes in the United States and Switzerland, as well as the surprisingly intricate technical issues surrounding setting up a secure sale website and cold wallet system.”

At the start of the sale and for fourteen days the price was set so that one bitcoin bought 2,000 ether. At the end of the 14-day period the amount would decline linearly to a final rate of 1,337 ether, which meant that one ether was worth 0.0007479 bitcoin or about 30 cents at bitcoin prices in September 2014.

While prices for the sale were fixed, the amount that would be issued was not, so purchasers could buy as much ether as they wanted to. When investors sent their bitcoin to the EthSuisse wallet address, though, they didn’t immediately get ether in return. They got an Ethereum wallet and password that would allow them to access their ether when the platform launched. It was a way to reduce the speculative nature of the sale, and have the token be traded only once it could be actually used.

The Ethereum network launch was targeted for the (Northern Hemisphere) winter of 2014-15. The Ethereum team would create ether according to the amount raised in the sale when the first block in the Ethereum blockchain was mined. There was a second pool of ether that would be issued for the cofounders and other early team members, which would be 9.9 percent of the amount raised, and a third pool of ether of the same size would be created for the Ethereum Foundation.

This type of cryptocurrency issuance is known as a “premine,” as the coins are created before the network is generating tokens on its own, like Bitcoin does to reward its miners. The concept is controversial, as some enthusiasts will argue Satoshi Nakamoto gave anyone who was interested the same opportunity to gain bitcoin when the network was launched, as he announced when mining would begin and published the software beforehand. In the case of Bitcoin, the total supply of coins is created by miners. Ethereum and other projects that premine their coins are criticized because control of the cryptocurrency’s supply is potentially more centralized among “insiders” who participated in the presale and could manipulate the price or influence governance decisions. Before Ethereum, almost any cryptocurrency project that had a premine would be quickly written off as a scam. Ethereum didn’t entirely change that, and it’s still criticized because of it, but it did help legitimize the concept.

Podcast host and Bitcoin enthusiast Matt Odell brought up these criticisms in October 2018 and Vitalik responded on Twitter, “I personally am really proud to have helped set the precedent of small premines being legitimate. It’s an appalling idea that people operating boxes burning huge piles of electricity are somehow the only ones who should be allowed to gain from crypto seignorage revenue.”

The sale documents said that once the Ethereum blockchain launched and the premined ether was issued, miners would generate new ether initially at an annual rate of 26% of the amount of ether issued in the crowdsale – the issuance rate isn’t fixed and is capped at 18 million ETH minted per year. That means the supply of ether would grow over time but at a decreasing rate. The increasing supply means that large holders’ stakes will gradually decline relative to the total supply and ownership will tend to be more decentralized, while a declining growth rate avoids flooding the market with ether and pushing down its price. An uncapped supply for Ethereum also ensures that those supporting the network will always be rewarded with new ether. That’s another difference with Bitcoin, which is designed to have a fixed supply of 21 million.

The Ethereum documents and Vitalik’s blog posts said they give no guarantees of ether’s future value but the chart they showed in the terms-and-conditions document, with a downward sloping line to represent the ether supply growth rate, surely gave prospective buyers reason to be hopeful.

Bitcoin continued to trickle in, and on the seventh day of the crowdsale, Tuesday, July 29, Ken decided to make the plunge. He had moved back to New York from San Francisco just four days earlier. He and his wife were staying at the Ludlow Hotel in the East Village while the moving trucks were on their way from the West Coast with their belongings, and their children were staying at their grandparents’ in Florida to avoid the majority of the move.

He was working at one of his venture fund’s investor’s offices until he got his own place. It had been a fairly typical day. He had been in meetings with investors and portfolio companies since the early morning and had come back to his borrowed desk in the evening to return calls and get to his outstanding emails.

Bitcoin was about $580 that day, and each bitcoin purchased 2,000 ether, making the cost of 1 ether about $0.29, Ken calculated. Used to thinking in venture capital terms, Ken equated Bitcoin to a later stage, Series D investment, while Ethereum was a seed investment. That meant ether had more room to grow, but also a higher likelihood of failure. Ethereum, with its ability to support all kinds of blockchain applications, also had the potential of being even bigger than Bitcoin, Ken thought.

He had gone through these arguments many times in his head, but he revisited them as he went to the Ethereum.org white and gray website. At the center was the amount of ether sold so far. To the left of that number was the amount of days left in the sale and to the right was the amount of days left at the current price, an interface that not so subtly said “hurry up and give us your bitcoin.” Below those numbers was a black button that said, “Buy Ether,” along with links to the terms and conditions, the purchase agreement, the white paper, and the intended use of revenue. He had already gone over those documents but he skimmed through them once more. “Ownership of ETH carries no rights . . . purchases are non-refundable . . . cryptofuel . . . distributed applications,” he read and took a deep breath. “Okay, let’s do this.”

His heart beat faster, and he had no idea what to expect when he clicked the “Buy Ether” button. A new page with a three-step process appeared. Step 1, the website told him, “Enter the amount to purchase in either Bitcoin or Ether.” The minimum was 0.01 bitcoin and the maximum was 500,000 bitcoin. The cap was in place to prevent buyers from owning a disproportionately large stake of the total ether sold and the terms and conditions said “EthSuisse will restrict any single entity, person, corporation, or group from controlling more than 12.5% of the total ETH sold by the end of the Genesis Sale” – but it’s unclear from the documentation exactly how they’d be able to keep track, since all that was needed to buy ether was an email address. Also, EthSuisse would be dissolved right after the sale.

Ken wasn’t planning on giving up 500,000 bitcoin, but it was a substantial amount of his personal wealth that he had decided to bet on Ethereum. He typed in the amount. Step 2 was to type in his email address, and Step 3 was to create a passphrase that would be used to encrypt and access his wallet. He checked everything a million times and clicked on “Continue.” Step 4 told him to “move his mouse around the screen to generate a random wallet, and once you’re done you will be moved on to the next screen.” “This is so weird,” he thought, as he complied, his anxiety surging when he realized there was no back button. Next, he clicked on a button that downloaded an Ethereum wallet to his computer, and then there was a Bitcoin wallet address and QR code for him to send his bitcoin to. He went to his Bitcoin wallet, copied the address – a jumbled-up string of numbers and letters – and letting out a muffled scream, “Aaaahhh!” he clicked send.

And just like that, he had parted with half of his perfectly good bitcoin, which were now traveling into some cryptographic maze. “Into the ether!” he couldn’t help thinking. This was one of the scariest moments of his life. There were no charge-backs in blockchain. If he copied the wrong address, or messed up one of the steps, there would be no way of getting his bitcoin back. In the world of crypto, there was no arbiter (that was the whole point), and when the roughly 10 minutes it takes to confirm transactions in the Bitcoin network were up, the transfer would be permanent and virtually immutable. He sat back, and just stared at his laptop screen for a while. It was done.

Thousands of other people must have been thinking the same thing as they sent their bitcoin into what seemed like the dark void of the Ethereum sale. It’s hard to say exactly how many, but the blockchain shows more than 6,600 transactions going into EthSuisse’s Bitcoin address. The total number of people who participated is likely much smaller, though, as big buyers probably split their purchases into several different wallets.

By the end of the sale, people behind those jumbled addresses had bought more than 60 million ether, which at around 30 cents per coin amounted to $18.3 million. It was a huge success. There had been only five similar crowdsales done by cryptocurrency projects before Ethereum’s Genesis Sale and the second-largest raise had been by Maidsafe for $6 million. It was also a success compared with crowdsales in general. Seven months later, Mihai would publish a blog post that said, “according to Wikipedia, Ethereum is rated as the second-biggest crowdfunded project in the history of the internet, sitting proudly next to the first occupant that raised over $70 [million], but over the course of years, not 42 days.”

Mihai had turned 27 during the sale on July 25, and the Ethereum team that was still in Zug [Switzerland] decorated the house with colorful banners and took the chance to celebrate both Mihai growing older and the bitcoin that was flowing in. All the laptops in the house had the website permanently open, so that as they had their drinks and ate birthday cake, the big number at the center of the page that showed the pile of ether they had sold was quietly and steadily ticking up.

Now anyone could be an investor in one of the most cutting-edge technology companies out there. All they needed was an internet connection and at least 0.01 bitcoin.

“I have to admit that we all had high hopes, but no one was anticipating that in 24 hours we would surpass any previous initiative in the space. In any case, it was one of the most fulfilling birthday presents ever and proof that we weren’t crazy, or that there are many other crazy people out there and we’d found each other,” Mihai wrote.

The Ethereum team had actually written down what those high hopes were. In a document called “Intended Use of Revenue,” they included three scenarios: one in case they got $9 million or less in the sale, $9 million to $22.5 million was the second one, and more than $22.5 million was the third. The very worst case for them already meant beating all other previous cryptocurrency crowdsales. In all cases, $1.8 million was allocated to expenses incurred before the sale and $1 million was to be set aside for a legal contingency fund. Of the rest, 76.5 percent went to the developers, 13.5 percent went to communications and community outreach, and 10 percent went to research.

The total supply of ETH started out at 72 million as 5.9 million (the stipulated 9.9 percent of the 60 million raised) was created for 83 early contributors and an equal amount was issued for the foundation. Vitalik got the biggest share of the contributors’ endowment at about 553,000 ether. Stephan Tual, who was leading communications in London, would later make a big stink with an angry post on Reddit, leaking information about how much specific people had gotten, especially when he didn’t think they’d contributed much to the effort.

Vitalik had designed a whole system for calculating allocations based on the date individuals had joined the project and the hours they contributed to it. The foundation wasn’t allowed to invest in the crowdsale, so that it wouldn’t get a disproportionate stake and raise the centralization red flag, and it could only withdraw 5,000 bitcoin while the presale was running to speed up development. The limit was put in place to avoid any suggestion that the foundation was reinvesting the bitcoin it got to inflate volume.

But there was no rule about the endowment recipients buying up more ETH in the sale, as long as they didn’t break the rule of owning more than 12.5 percent of the total supply. Still, there was no way of enforcing that limit. There was a big incentive for cofounders to buy more in the sale, as the amount they would get as part of the endowment depended on the total raised. Put simply, whatever money they put in they’d essentially get more free money back. Those who had lent money to Ethereum also got paid back their loans plus 25 to 50 percent of interest, depending on when they were made. Vitalik had lent more than half the money he had to the foundation and didn’t have many funds left to put in. Joe Lubin is rumored to be the biggest holder of ETH to come out of the crowdsale, though he says that’s not the case.

Critics in the BitcoinTalk forum and elsewhere didn’t go quiet when they saw Ethereum’s success. With no proof to support their claims, they posited that volume was being manipulated by the foundation and the Ethereum team to draw in more buyers. How else to explain why Ethereum’s volume was so much higher than other crowdsales?

Preston Byrne, an attorney focusing on early-stage companies and cryptocurrency businesses, published an April 2018 blog post stating that “most of the ether sold in the 2014 token pre-sale in exchange for bitcoin may have been paid out to one person or, more likely, a handful of close associates working in concert,” because the chart showing the flow of bitcoin was unnaturally even, and almost exactly the same as the chart of a mathematical power function. Something so perfect, he suggested, signaled the work of a bot. Byrne said it was highly suspicious that “the initial two week-period of the Ethereum pre-sale looks more than merely typical, there’s very little randomness in it – it looks perfect,” and, “unless Vitalik subtly managed to telepathically hack everyone’s brains so buyers would participate in the pre-sale in an organized fashion,” it’s likely that enough ether to move markets is concentrated in not a lot of people. Research firm Chainalysis later confirmed the suspicion that ether distribution is concentrated. Only 376 holders control 33 percent of the circulating ether supply, a May 2019 report found.

One anonymous cryptocurrency researcher who goes by the online name of Hasu did further analysis of the sale after Byrne’s post. He found the two bumps in demand during the sale, one at the beginning and one at the end of the 42-week period, are an expected consequence of people buying right before the ether price increased. Still, like Byrne, he didn’t find an explanation for “why the graph looks so damn smooth.”

While Vitalik hopes there was no manipulation by insiders, and says he didn’t engage in such practices, he says ultimately he has no way of knowing whether some may have done it. As for himself, he barely had enough money to invest as he had spent most of it bootstrapping Ethereum.

Incentives for early contributors to participate in the sale and get others to do so, and the unnaturally even chart patterns, point to possible manipulation during the ether sale. But the amount of money raised was also a reflection of an intensely anticipated project led by a teenager hailed as a genius coder, building the next-generation blockchain.

A whole new financing model had been tested. One where a ragtag group of feuding hackers with no business plan and no live product, let alone users or revenue, could raise millions of dollars from thousands of people from all over the world. Before, anyone who wanted to buy stock in big tech firms like Facebook or Google would need a U.S. bank account; things got even more complicated for those who wanted to invest in startups that hadn’t gone to the public markets to raise funds. Now anyone could be an investor in one of the most cutting-edge technology companies out there. All they needed was an internet connection and at least 0.01 bitcoin.

Ken followed up with Gavin in January to see how the launch was coming along. They had promised the platform (and therefore Ken’s ether) would be live around that time.

On January 3, 2015, Ken Seiff <[redacted]> wrote:

On January 6, 2015, Gav Wood <[redacted]> wrote:

On January 6, 2015, Ken Seiff <[redacted]> wrote: