Explosive Allegations Against Ethereum's Leadership Surface in Exposé

Steven Nerayoff believes that Etheruem’s alleged fraudulent activities could be even worse than those of FTX.

The Ethereum blockchain has been embroiled in controversy after allegations by former advisor Steven Nerayoff, accusing founders Vitalik Buterin and Joseph Lubin of fraud and collusion with U.S. officials. Ethereum's shift from proof of work to proof of stake has also raised some serious concerns about increased centralization and compromised integrity. In contrast, the ecosystem is still showing signs of growth with big funding rounds for security enhancements, like Aligned Layer's $2.6 million seed funding to develop a decentralized ZK Proof verification layer. Moreover, Ethereum is preparing for the Pectra hard fork, which includes the introduction of EIP-3074, promising enhanced wallet security and functionality through a new "social recovery" feature, set to greatly improve user experience by eliminating the need for seed phrases for asset recovery.

Ethereum's Integrity Questioned

James O’Keefe, an investigative journalist, released an explosive exposé via a YouTube video produced by Bitcoin media firm Simply Bitcoin, targeting the Ethereum blockchain and its founders, Vitalik Buterin and Joseph Lubin. The allegations were brought forward by Steven Nerayoff, a former advisor to Ethereum. In his claims, Nerayoff accuses Ethereum's founders of engaging in fraud and collusion with corrupt U.S. government officials, specifically pointing out unethical interactions with the Securities and Exchange Commission (SEC).

Nerayoff's allegations describe a scenario that not only matches but potentially exceeds the infamy of the FTX scandal, with billions in financial losses purportedly orchestrated by Buterin and Lubin through manipulation of blockchain activities for personal gain. He shared some accounts of coercion and threats from federal agencies, including an intimidating encounter with the FBI, which he believes highlights how dangerous it really is to expose such high-level corruption within Ethereum.

Central to the controversy is the accusation that Ethereum has betrayed its foundational principle of decentralization. The shift from proof of work to proof of stake has been criticized, with claims of increased centralization. A Morgan Stanley report cited by Simply Bitcoin notes that just four companies now control 60% of the validation process. This shift, according to critics, compromises the integrity of Ethereum, making it vulnerable to manipulation and representative of broader security violations in the cryptocurrency sphere.

Ethereum Faces Record Liquidations

The crypto market experienced a big shakeup, but there is a recovery in prices after the sharp selloff over the weekend. Despite this recovery, Ethereum lending markets are witnessing a dramatic increase in liquidations, reaching the highest monthly total in years, even as the month of April is only half-way done. According to data from The Block, the lending protocols Aave and Compound have seen nearly $130 million in combined liquidations, a big spike in forced closures of leveraged positions.

This surge in liquidations is the highest since June of 2022, which came after the collapse of the Terra ecosystem—a $40 billion debacle that rattled the crypto world. Notably, the recent drop in the price of CRV (Curve DAO Token) nearly led to the liquidation of a substantial loan held by Curve founder Michael Egorov. While Egorov managed to avoid liquidation, he has voiced his intentions to decrease his exposure.

The overall crypto market is also feeling the pressure, with traders and lenders alike facing increased risks. The recent downturn in Bitcoin exacerbated the situation, leading to nearly $1.7 billion in liquidations over the past three days, according to data from CoinGlass.

Aligned Layer Raises Millions to Enhance Ethereum Security

However, institutional investors still seem rather bullish on Ethereum projects. Aligned Layer, an emerging startup known as the "universal verification layer for Ethereum," announced a successful $2.6 million seed funding round on Apr. 14. The round was led by Lemniscap, a firm experienced in the crypto blockchain arena, which also led a similar initiative for web3 startup Safary earlier in January. Joining Lemniscap were Bankless Ventures, Paper Ventures, StarkWare, O(1)Labs, and Ingonyama with CEO Omer Shlomovits among the supporters.

The startup, which is pioneering the first decentralized ZK Proof verification layer powered by Eigen Layer for Ethereum, plans to use these funds to accelerate its mainnet launch targeted for the second quarter of 2024. Eigen Layer enhances security for various protocols by allowing ETH stakers to reallocate their staked ETH and Liquid Staking Tokens (LSTs).

Roberto José Catalán, the co-founder of Aligned Layer, pointed out the company’s commitment to making Ethereum a much more cost-effective and efficient platform for ZK verification. He also highlighted the flexibility their system offers to developers, allowing them to choose the proof system that best suits their needs without limitations imposed by the settlement layer.

This investment comes during a period of robust investment activity in the crypto sector, evident by Monad Labs and Mezo's huge funding rounds, as well as a total of $2.5 billion poured into crypto startups in the first quarter of 2024 alone.

Despite the overall bullish sentiment in the crypto investment landscape, blockchain-related gaming companies have experienced a bit of a downturn, securing much lower funding in the early months of 2024 compared to the end of 2023.

Ethereum's Pectra Hard Fork

Additionally, Ethereum’s next hard fork could spell some good news for the ecosystem. Ethereum is set to introduce a major update through the Pectra hard fork, which includes a new "social recovery" feature as part of Ethereum Improvement Proposal (EIP) 3074. This upgrade, which was confirmed by Ethereum core developer Tim Beiko, is designed to enhance the security and functionality of Ethereum wallets by allowing users to recover their assets without needing their seed phrases.

The new features revolve around the introduction of "AUTH" and "AUTHCALL" opcodes, which work together to authenticate a user's actions and execute transactions, respectively. Users will need to transfer ownership of their assets to an invoker contract, which will manage transactions on their behalf. If a user loses their seed phrase, they can retrieve their assets through a digital signature linked to the invoker contract.

While this system potentially increases convenience, it also poses risks if users delegate control to malicious contracts. Despite these concerns, Ethereum Foundation researcher Domothy anticipates the availability of secure and audited invoker contracts post-upgrade.

EIP-3074 also offers practical benefits like eliminating the need for Ether in users' wallets to send transactions since the invoker contract can handle costs. This could lower the barrier for entry and promote broader adoption of Ethereum. Additionally, the proposal will allow for multiple actions to be executed in a single transaction, streamlining processes like token swaps on platforms such as Uniswap.

The Pectra hard fork is expected to take place between late 2024 and early 2025.

What is a Hard Fork?

A hard fork in blockchain technology is a major modification to the protocol that validates previously invalid transactions or blocks and vice versa, necessitating all users or nodes to adopt the new protocol version. This type of fork may be initiated by developers or community members who want to enhance the functionality of the existing blockchain or to fund new tech projects through cryptocurrencies.

Hard forks contrast with soft forks in that while both involve changes to the blockchain's code, a hard fork results in two parallel blockchains—both the old and the new—coexisting, which requires users to update their software to the new protocol. In contrast, a soft fork aims to maintain only one valid blockchain as users gradually adopt the update. Hard forks have been used to address big issues like security vulnerabilities or to reverse transactions after major hacks, like the Ethereum DAO incident, where a hard fork was implemented to reverse illicit transactions and refund the affected people.

Despite the complexities and potential for creating entirely new cryptocurrencies (as seen with bitcoin splits like Bitcoin Cash and Bitcoin Gold), hard forks are generally preferred for their ability to decisively enhance security and add new functionalities to the blockchain.