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Let’s set the scene: It’s 2017, and you’re sitting at your desk with an open trade on Ethereum. Everyone’s looking to short, but you’re certain it’s going up!
Out of nowhere, your position is wiped out. You’re horrified, what just happened?
You open Twitter and see the unthinkable – Vitalik Buterin, the mastermind co-founder of Ethereum, has died!
Thankfully, our good friend Vitalik was alive and well, and the news was nothing but a ”harmless” joke.
But it wasn’t harmless. Over $4B in market value melted away through the rumour, positions were wiped out, and thousands of investors lost money.
The question this begged was “Is the value of $ETH tied to Vitalik?” The post-fake obituary numbers would say yes.
Five years on, Ethereum has come a long way but the question remains – how much of an influence does a founder have over the price of the token?
Let’s find out.
TLDR
- The influence of founders on crypto projects is critical, but as projects grow, their impact tends to decrease.
- In a recent interview, Buterin said his role had diminished significantly over time.
- Meanwhile, smaller crypto projects that rely on their founders can be extremely vulnerable, as demonstrated by the rise and fall of Wonderland DAO.
- When investing in a project, do your due diligence by looking into its founders and team.
- Review Cryptonary’s Ratings Guide, where we review the teams behind the world’s top cryptocurrencies.
Disclaimer: Not financial or investment advice. Any capital-related decisions you make are your full responsibility.
Are Ethereum bulls still just investing in Vitalik?
In a recent interview, Vitalik explained that while his role was crucial in Ethereum’s early days, his involvement in research and coding isn’t what it once was.
“In 2015, I was practically doing 80% of the ‘research’ in Ethereum, and I was even doing a large chunk of the Python coding. In 2017, I was doing much less of the coding, and maybe 70% of the research. By 2020, I was doing perhaps only a third of the research and very little coding. But I was still doing most of the ‘high-level theorizing’. But over the last two years, even the high-level theorizing is something that has been slowly but surely slipping away from me.”
This shift was also apparent when a large number of Ethereum Improvement Proposals (EIPs) authored by Vitalik were rejected by the Ethereum community.
It’s clear that as Ethereum continues to grow, Vitalik’s influence will continue to wane.
This is comparable to the loss of power experienced by monarchs and nobility when civilian governments were established in many countries. The more democratic a country became, the weaker the influence held by the monarchy.
Vitalik’s role may change to that of a figurehead. He may be invited to cut ribbons and deliver speeches at events, but he won’t have much of an effect on the overall network.
So to answer our primary question, while his death would undoubtedly shock investors, Ethereum has grown beyond the individual, and its decentralized governance structure should ensure that it’ll continue driving towards its goal.
This, however, is not always the case…
The danger of relying on founders
Ethereum has successfully transitioned away from relying on its co-founder. However, not all projects are as decentralized. The earlier you invest, the more important it is to know who is behind the project.
The rise and fall of Wonderland DAO serves as a cautionary tale for investors who may overlook the importance of researching the founders behind smaller cryptocurrency projects.
In January 2022, Wonderland had a market cap of around $300 million and was operated by its founders, including an anonymous co-founder known as Sifu. It was later revealed that Sifu was Michael Patryn, the co-founder of QuadrigaCX, a Canadian exchange that collapsed in 2019 after its founder (Gerald Cotten) disappeared with $169 million.
1/ This needs to be shared @0xSifu is the Co-founder of QuadrigaCX, Michael Patryn. If you are unfamiliar that is the Canadian exchange that collapsed in 2019 after the founder Gerald Cotten disappeared with $169m
I have confirmed this with Daniele over messages. pic.twitter.com/qSfWNnQPhr
— ZachXBT (@zachxbt) January 27, 2022
When the identity of its CEO (Patryn) was revealed, Wonderland’s $TIME tokens fell 32% in just one day. The project has since been abandoned and is now down more than 99% from its peak.
The collapse of Terra (LUNA), the once-popular stablecoin pegged to the US dollar, further highlights the pitfalls of over-centralization in crypto projects. Do Kwon, the founder, and CEO of Terraform Labs was previously involved in a failed project called Basis Cash (BAC).
Terra’s collapse cannot be attributed to a single cause, but a combination of factors. One factor was its excessively centralized structure. Do Kwon was the project’s public face and had unlimited authority over decision-making, with minimal transparency or accountability.
This made it difficult for anyone to hold him responsible for his actions. Unfortunately, because of its highly centralised design, Terra’s mistakes were only revealed after its demise.
Ethereum has successfully managed to transition away from relying on its co-founder, demonstrating the importance of decentralization in crypto projects. However, not all projects are as decentralized. In the case of Wonderland, the lack of transparency around its founder’s identity made it vulnerable. And Terra’s centralized control led to a lack of governance structures and transparency, allowing mistakes to go unnoticed until it was too late.
Cryptonary’s take
The influence of founders in crypto projects cannot be underestimated, as demonstrated by Ethereum’s early reliance on Vitalik Buterin. While decentralized governance can reduce this influence over time, the importance of the founder’s role is significant in the early stages of development.
It’s essential to consider factors such as the founder’s ability to make changes to the protocol, the number of tokens they hold, and whether the project is designed around the founder. (In some cases, actions or decisions must be made by the founder for the project to function. This might mean that the founder has access to the treasury.)
You don’t want to put money into a project only to discover later that the founder wasn’t who they claimed to be, or that the project would be impossible to run without that individual (or individuals).
Action Points
- Check out our Crypto Ratings Guide, where we outline the potential risks of investing in 100+ projects and indicate whether or not they’re decentralized.
- It’s crucial to research the team behind a new crypto project if you’re considering investing in it. Get to know the people you’re entrusting with your money. Look at their LinkedIn profile, their Github, or even set up a meeting with them.
- When investing in a project, look beyond the founder and consider the overall decentralized governance structure of the project. While founders can play a critical role in the early stages of development, a strong and decentralized governance structure can ensure the project’s long-term success.
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