Consensys explains to the SEC from a technical perspective why an Ethereum ETF should be approved.

The Ethereum infrastructure development company ConsenSys has sent a comment letter to the SEC regarding concerns about an Ethereum ETF. They explain from a technical perspective that SEC's concerns about fraud and manipulation are unnecessary, implying that an ETH ETF should be approved and may be more appropriate than a Bitcoin spot ETF.

SEC Seeks Public Opinion on Ethereum ETF Application

On March 8, 2024, the SEC sought public opinion on the approval of an Ethereum spot ETF application, seeking information on the evaluation of potential fraud and manipulation risks related to Ethereum's Proof of Stake (PoS) mechanism.

The SEC posed six questions seeking feedback, including concerns about whether Ethereum and its ecosystem may raise worries of being susceptible to fraud and manipulation.

Consensys Responds to SEC Concerns

Consensys submitted a public comment letter in response to the SEC's concerns, explaining from a technical standpoint why Ethereum's PoS mechanism has robust anti-fraud and anti-manipulation designs, and why the SEC's concerns are unfounded.

Consensys stated that Ethereum's design includes advanced security measures. It explained features supporting its argument about the PoS consensus mechanism of Ethereum surpassing the security of Bitcoin's Proof of Work (PoW), which is one of the bases for approving Bitcoin's ETF. The letter pointed out several features that support its argument:

Faster Block Finality

With Ethereum transitioning to a PoS consensus mechanism, it relies on a provable transaction finality model that finalizes transactions in a much shorter time compared to PoW, making transaction contents harder to reverse.

Validator Separation of Duties

The decentralized, random verification process of Ethereum prevents large stakeholders from controlling the network. In Ethereum's PoS consensus mechanism, block validators' duties are separated into proposers and attesters, where a validator is randomly selected as a proposer for each slot based on the staked token ratio, while other validators assist in verification.

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This division of labor design can counterbalance the potential for fraud and manipulation, preventing attackers from predicting the abilities of proposers and attestors for new blocks.

Even if such scenarios are unlikely, in the event of a consensus attack, potential damage is limited to a few blocks that have not been finally confirmed.

High Cost of Attacks

In blockchain consensus mechanisms, Byzantine Fault Tolerance (BFT) ensures system integrity by requiring a minimum proportion of honest validators. Researchers found that the cost of attacking the Ethereum network by disrupting BFT is significantly higher than that of Bitcoin, reducing the likelihood of network disruption.

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Network Slashing Penalties

Ethereum penalizes protocol violators by slashing the ETH of validators, a process known as slashing. Slashing serves as both a punitive and deterrent measure, different from the proof-of-work consensus mechanism that relies primarily on costly equipment and power to prevent attacks.

PoS combines upfront staking costs with ongoing economic penalty risks.

Environmental Benefits

Ethereum's PoS consensus mechanism is more environmentally friendly than Bitcoin's PoW consensus mechanism. Current data estimates that Bitcoin's annual energy consumption is 30,000 times that of Ethereum.

Ethereum's Decentralized and Transparent Ecosystem

Ethereum further enhances its decentralization and security through:

• Decentralized Community: Ethereum has a large and active developer community compared to Bitcoin, and the diversity of clients makes the network less vulnerable to attacks.
• Transparency: Anyone can participate in Ethereum's development, and the development work is entirely open, allowing for comprehensive monitoring of network activities to protect the protocol from malicious actors.

Consensys Suggests Ethereum ETF Should Be Approved

Consensys hopes the SEC recognizes the inherent advanced protective measures in Ethereum's design, which not only meet but exceed the security and flexibility protections of a Bitcoin ETF, and looks forward to continuing constructive dialogue with the SEC.

However, readers should note that the approval of an Ethereum spot ETF involves more than just these technical issues mentioned above.