The Infinite Machine

by Camila Russo

That week in Miami was one of only a handful of times the early Ethereum team gathered at the same place. The men who came together in that huge house by a stream of water didn’t quite fit in. They all had a rough edge that meant they had to be jammed into the puzzle of society, or rebel and break free. Their chosen mode of expression, their vehicle to embark on that journey, would be this new protocol.

Gavin was very still, sitting near his gate at the airport, staring into the distance. His thoughts came in and out of focus, a product of his excitement and also his lack of sleep. He felt a surge of adrenaline as the images, dialogues, and feelings of the past few days replayed on the back of his eyes. Outside, the sun had started to set. There was just one possible conclusion. “Fuck. This is like, big. This is really big,” he was thinking. “Bloody hell. This is it.”

he wanted to dedicate all his time to Ethereum. A few days later he would tell a friend, “I don’t know precisely what this is, but I do know that this is the very best chance we will ever get at success.”

Vitalik wasn’t thinking about impressing VCs. He wasn’t thinking about company equity, either. In this brave new world of token sales, Ethereum could ditch startups’ mandatory trek to Silicon Valley’s Sand Hill Road. Ethereum didn’t need VC money because they could access investors from all over the world without them. Vitalik didn’t want VC money because, to him, Ethereum should be free and open for anyone to use, not owned by anyone.

Switzerland had low tax rates and agreeable regulation; it was a major financial hub in the center of Europe, not to mention the gorgeous mountains and lakes everywhere.

Mihai wore the one tie he had to register Ethereum Switzerland Gmbh, a limited liability company, and tried to not give away that he was couch surfing and using up the last of his savings to be there.

Taylor Gerring was trying to build applications on top of Bitcoin in Chicago but he quit that, gave away his dog, broke up with his girlfriend, and bought a one-way ticket to Switzerland. It was a similar path for Mathias Groennebaek, who came from Denmark; Stephan Tual, who came from London; Lorenzo Patuzzo, who had rented out the room for Mihai and Vitalik in Barcelona and decided to jump on the blockchain train; and for the rest of the ten or so early team members. They were web and graphic designers and programmers who gambled everything on what was still just an idea in a white paper written by a nineteen-year-old.

They were all working for free on the unwritten promise they’d get some of the cryptocurrency raised in the eventual crowdsale, while Anthony Di Iorio’s, and later Joe Lubin’s, loans paid for major expenses. The big ones were rent and legal fees. Anthony estimated that, between the two of them, they had lent Ethereum about $800,000, though Joe said it was less than $500,000, without providing a more accurate estimate. The rest of the team also contributed as much as they could, working with no salary, depleting their savings, and using their credit cards to pay for daily expenses.

Lorenzo was designing the Ethereum logo. Before they all arrived in Switzerland, Anthony D’Onofrio, aka Texture, had redesigned the Ethereum website and created a logo that combined two sigma symbols and looked somewhat like a diamond. Lorenzo took that as a starting point but wanted to create an image that better represented what he understood Ethereum was: an inclusive platform to be used by all humanity. It had to signal strength, but at the same time flexibility and transparency. The image of a pyramid started to form under his pencil and that evolved into an octahedron, which is two square pyramids joined at the base. The many facets of the shape suggested endless possibilities in the platform. The team later submitted the octahedron to their own logo competition, and it won the online vote.

Bitcoin: A Primer for Policymakers, by Andrea Castillo and Jerry Brito,

About halfway through the process Charles woke up in a cold sweat in the middle of the night. It dawned on him that they had spent dozens and dozens of hours with a senior partner at a law firm. “How much are the billable hours going to be!” he thought. Luka said the research part of the process would be on him.

People were going off on strange tangents and on moon-shot projects before the platform was even running, in some cases because they were naive, and in others because they needed to feed their egos.

His idea was to create a system that could process investment ideas and decide whether it was worth putting the money in or not. By the end of the exercise, it was clear to Mathias this was probably something that wouldn’t be relevant for several months, probably even for years, if at all. “Fucking mental masturbation,” he thought.

To Charles, though, figuring out the crowdsale was mainly a way to get leverage. He wanted to have this alternative way of raising money, which didn’t give away any equity, in his back pocket and use it to get better terms from Silicon Valley investors. He wanted to build Ethereum as a for-profit entity with what some call “smart money” behind it—that is, conventional investors with experience and connections that could help the startup flourish.

Charles didn’t hide his ambition about becoming the crypto Google or his predilection for VC funding, and why should he? In his view, they were creating what would become the biggest company in a new, blockchain-based future. Corporations rule the world for a reason. They’re the most efficient way of turning an idea into a reality because the people who make up that company, from the owners to the managers to the employees, have direct incentives to see it thrive and have clear roles to fulfill. To Charles, incentives and responsibilities in nonprofits are murky and because of that, they can never achieve greatness. He wanted Ethereum to achieve greatness, and he knew it could. He was sure Ethereum could become the first trillion-dollar company.

But all this corporate talk made some of the guys in the house nervous. This wasn’t what they signed up for. They wanted a new, decentralized world, where they didn’t need to ask Silicon Valley investors or Wall Street bankers for permission. They started to escalate these concerns to Vitalik, who started to become concerned that Charles was losing the team’s trust. Most of all, he was just frustrated that these internal power struggles were taking away time and energy from work on Ethereum.

For someone in crypto, Charles might as well had been saying he was the messiah.

Back at the Ethereum house, Mathias saw that Charles had opened Satoshi’s message in his laptop and showed it to Richard Wild, one of the designers, with a sly smile on his face and wink in his eye. It may have been an innocent enough act, but to Mathias it was charged with all the hints he had been dropping. There are cryptographic ways to prove whether someone is Satoshi Nakamoto. The Bitcoin creator should have access to the keys that control the first Bitcoins ever mined. Those coins are stored in a few Bitcoin addresses and have never moved, even as the digital currency’s price increase has made them worth hundreds of millions of dollars. If someone wanted to prove they were Satoshi, they could sign a message with the key associated with Bitcoin’s genesis block and move some of those early coins around.

“Just sign something and fuck off,” he said. Mathias, Taylor, Stephan, and Mihai all picked up on these hints and were irritated that Charles seemed to imply, without actually saying it, that he was Satoshi.

Meanwhile, MME was finally ready to draft the final structure of the deal. A company would be set up to manage the token sale, which would be considered to be the same as the sale of software. Funds raised would be later controlled by a foundation, which would be created to support an open source platform. A difference between US and Swiss foundations is that in Switzerland, foundations don’t have beneficiaries they can transfer funds to. They can only spend donations according to the purpose defined in the foundation deed. Federal authorities make sure these conditions are being met with mandatory audits. In this structure, tokens wouldn’t be considered securities and the foundation would pay no taxes for the cryptocurrency it received.

Soon after, the SEC issued an alert, warning investors that “a new product, technology, or innovation—such as Bitcoin—has the potential to give rise both to frauds and high-risk investment opportunities.” There was little precedent for what they were trying to do, and regulators were already keeping their eye on these sales.

That time in Toronto was when everyone met Steven Nerayoff for the first time. Steven is an attorney who quit his job at a fancy New York law firm during the dot-com boom of the late 1990s. He dropped everything and moved to Silicon Valley, where he founded two internet companies to compete with eBay. After the internet bubble burst, Steven needed a break from Silicon Valley, so he moved back to New York in 2002 and started a third company, this time in the health care industry. The firm, Freedom Eldercare, was acquired by a private equity fund in 2008. Nerayoff continued on his founding spree and created an artificial intelligence company,

Steven also traded gold futures in his spare time and thought “fiat money” was bound to collapse eventually. He says he had half his assets in cash and the other half in gold when the 2008 financial crisis hit, as he had listened to his libertarian friends’ warnings that a recession was coming.

Steven explained to the group, some of them reflexively skeptical about newcomers, that if they didn’t do the sale correctly there would be legal consequences. He went over some of the basics with them about the different kinds of exemptions the SEC gave for listing securities, basically, procedures that companies and issuers could follow to raise money lawfully. Charles and Joe seemed well versed in the concepts, Steven thought, but the rest of the guys didn’t understand a word he was saying. They had no reason to. “Can you figure out how to do this?” Charles asked. “Absolutely.” “How?” “I have no fucking idea.” They all looked at him like he was crazy. “Maybe I should say, I have no idea, but I’ll figure it out. I just need some time,” he said, and looked specifically at Vitalik and Charles. “I need you guys to tell me you’re going to give me time. If you give me time, I’ll figure this out.” They agreed.

white-shoe law firms.

But Alberts worked on white-collar defenses so he knew how the SEC tended to see things, and that’s exactly what the Ethereum team needed.

Next, he started thinking he could maybe make an analogy to something in the “real world.” Something that worked like ether did, that could help him understand where this digital token fit. One key characteristic about ether is that it’s not just a digital currency used to transfer value. Ether is also used to pay for that transfer, and for any other operation performed by the Ethereum Virtual Machine using the unit called “gas.” To Steven, ether was much like a stamp needed to send a letter, or like the name “gas” suggests, like gasoline needed to fuel a car. He was thinking about these things one day walking along the leafy roads in his Long Island neighborhood when an idea started to form: Nobody would ever think of stamps or gasoline as securities. They’re goods, which have market prices, and can be bought and sold. Ether is pretty much the same. It’s a good that can be bought and sold. It’s made to serve a function on the Ethereum platform, not to be an investment, even if it’s sold in a process that may look a lot like an offering.

Instead, Joe agreed. Ether must have utility in the network to steer it further away from the securities definition.

Grundfest said he ultimately gave the Ethereum team two pieces of advice. The first was to try to make ether immediately useful. It had to be code that would be used in a functional environment as quickly as possible. The second was to avoid the United States, because there was the risk that ether would be viewed as a security.

they established interoperability between Jeff’s implementation in Google’s Go language and Gavin’s in C++. It meant that both versions could get the same outcomes from a given data set.

In April 2014, after building the Ethereum proof of concept with Jeff, Gavin published the Ethereum Yellow Paper, a technical specification of Vitalik’s white paper. While the white paper described the concept of Ethereum for the first time and included the basics on how it would work, the Yellow Paper dove into the exact details, the nuts and bolts of the Ethereum Virtual Machine, and served as a guide for any developer who wanted to build a software implementation. In Bitcoin, one of these software implementations is the reference for all the rest, while in Ethereum, Gavin’s Yellow Paper is the reference.

Gavin also put into writing what he had been thinking the bigger picture for blockchain technology should be. He saw decentralized networks as a tool to build the next version of the internet, or Web 3. Web 1 is the internet of the 1990s, before user-generated content, indexed search, and social media platforms. It lived exclusively in desktop computers. Web 2 is the internet as we know it today, with user-generated content, streaming video and music, and location-based services. It thrives on mobile devices.

third-generation internet. This new internet is made up of concepts including the “semantic web,” or a web of data that can be processed by machines, artificial intelligence, machine learning, and data mining. When algorithms decide what to recommend someone should purchase on Amazon, that’s a glimpse of Web 3.

As they got closer to the crowdsale, Gavin was anxious for the team to focus on delivering the platform, and he identified Berlin as the perfect place to set up a development hub. It was an up-and-coming city, with lots of technical talent, and lower labor and housing costs than other big cities.

In a supporting document listing the firm’s facts and assumptions, the lawyers wrote that they expected that the Ethereum Foundation “will promote the exchange of ether in a manner consistent with the distribution of a product, and not as a speculative investment,” and that it won’t make any commitments to potential presale participants to continue developing or maintaining the Ethereum platform after the creation of the genesis block.

The letter gave them enough protection, or at least perceived protection, to raise the money that would allow them to build the project they were dreaming of.

The framing in that letter, that ether was a product with a specific functionality, opened the door for a whole new way of raising money. Now startups would be able to get funding from anyone who wanted to contribute, all over the world, under what seemed like a safe haven. They weren’t selling securities. These weren’t shares in any company. They didn’t give out dividends that depended on the company’s revenue and investors didn’t have any rights. They were selling digital tokens, made to be used inside these platforms. They were selling utility tokens.

Dislike for Charles and his management style had morphed into outright distrust. Some of the hackers, with their inherent suspicion of the established financial system, came to see Charles as the figurehead of an evil corporate mind-set that would corrupt Ethereum’s soul. They suspected that Charles wanted to partner with Wall Street banks and Silicon Valley funds instead of using Ethereum to create better versions of those aging institutions.

One night they were all sitting on the floor, some of them smoking weed, and watching Enter the Void, an art movie about a French drug dealer living in Tokyo and his DMT-induced hallucinations.

“There’s clearly some tension in the team,” Vitalik said to the assembled group. “Why don’t we go around the table and air our grievances.” Gavin described what followed as the tensest moment in his life. Jeff said he was high on adrenaline, thinking this is the most important thing he had to do—making sure Ethereum didn’t become yet another corporation. To Amir, those hours around the table were like the Red Wedding scene in Game of Thrones, where the victims had been lured into the enemies’ castle to be slaughtered by the hosts. Charles said there was no dignity in that day. Anthony refused to take part in the painful exercise. “The only reason I’m here is to sign documents. I don’t even know these people and they’re going to air their grievances about me and the team? This is just not fair, it’s not right to blindside us like this,” he said.

Like children in a playroom, they started grabbing pieces of the clay for themselves.

But few people his age ever have to face what he did that day. He was now responsible for deciding the fates of the men who had left everything to make his idea a reality, and the future of a tech project that was set on raising millions in a legally uncertain sale. He worried about them, but, most of all, he thought about what was best for Ethereum. Stephan saw Vitalik hug a soft, red ball the team kept outside as he sat on the balcony, softly rocking back and forth, as he thought about what to do next.

“Ethereum will be a nonprofit and open source project” is the first thing Vitalik announced. “The eight founders will always stay founders and they’ll get everything that’s due. All your back wages, and all your ether. Going forward there will still be a leadership team of eight. This leadership team will be: Gavin, Jeff, Mihai, Joe, Anthony, Stephan, Taylor, and myself.” With that, he had effectively removed Charles and Amir, and promoted Stephan and Taylor. Amir was out because the team didn’t think he had enough commitment to the project—he had also resigned himself. And Charles? Well, even if he ultimately wanted the best for Ethereum, he’d lost the support and trust of the rest of the team. Anthony stayed on but his vision for how Ethereum should be developed was crushed. Joe was already thinking about leaving Ethereum to run the for-profit company building the application layer that he envisioned.

Their answers to his questions were so deep and nuanced, he couldn’t help but admire their special kind of genius.

It was Ethereum that spearheaded the idea that the digital tokens sold were nothing like securities. They were meant to be assets that had a utility in the blockchain platform; they were not investment instruments.

Ken’s bank said it couldn’t help, but that didn’t dissuade him. He spent the next four to five months bugging the Ethereum team to get updates on the timing of the “presale”—Ethereum’s plan to sell digital tokens before they were actually issued, tradeable, and usable. For the first time ever, he was willing to hand a check to a startup and they weren’t chasing him down for it. He started to realize it was part of their philosophy. It wasn’t about the establishment. This was about making the world decentralized, removing power from governments, Silicon Valley, Wall Street, and putting it back in the hands of people. And that made him even more eager to hand them his money.

The crowdsale was the Ethereum team’s biggest focus. With the legal questions out of the way, and the decision to be a nonprofit made, they were finally ready. In July 2014, they incorporated a Swiss limited liability company, or Gmbh, called EthSuisse and created the Ethereum Foundation. The company would be dissolved right after the sale and the foundation would then continue managing the funds to support development of the platform and build basic infrastructure. All the code would be open source and free, so developers anywhere would be able to contribute to the platform and build applications on top of it.

The legal hand waving revealed just how much the team was aware that they were stepping into a regulatory minefield. It also showed how much confidence they had in themselves. They had gone to such lengths because they imagined that, if they got very big, this first sale of more than $10 million dollars of crypto would be heavily scrutinized. It turned out they were right.

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 twelve 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.

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 fourteen-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.