As the Miami Bitcoin conference wound to a close, one of the final tasks the cofounders had set for themselves concerned how the ether they were going to create out of thin air would be distributed.
The plan, as established in the white paper, involved creating a certain amount of ether that would be distributed in two ways. The first pot of ether was simply conjured out of nothing. Known as a pre-mined cryptocurrency, this ether would be doled out to the founders and other people who helped get the project off the ground. A portion of the pre-mined ether would also be sold directly to people via a crowdsale. Ether would also be created to reward the computers that mine blockchain transactions, just as in the Bitcoin system. But unlike ether, no pre-mined Bitcoins were ever distributed; from its origin, the only way to create new Bitcoin has been to mine it.
So there was a large pile of play money that had to be divided among a diverse group of people who had just met each other – what could go wrong?
Vitalik remembered arguments in Miami centered around this question, and around whether the cofounder's group should be expanded beyond the original five people.
“I kept trying to increase the shares of some people who had less and add other people in,” Vitalik said, referring to the shares of ether to be allotted. “Charles had to fight to get Gavin and Jeff into the leadership team under the same status as the original five,” he said.
That's Jeff Wilcke he's referring to, who in December had contacted Vitalik to point out what he perceived to be an error or two in the white paper, as well as to ask a few questions. Here was another developer who knew how to write code in the Go computer language. It had always been Vitalik's hope that Ethereum would be as diverse as possible. What the dev team set out to do was create what are known as clients. Clients connect to each other in a peer-to-peer system and talk directly to the servers where Ethereum data is stored. Having clients written in different computer languages is a kind of insurance policy: it avoids the possibility of a single point of failure and makes it much harder for developers to centralize around C++, for example.
This might sound super geeky, and you may wonder why anyone would need to know this, but the diversity of Ethereum clients actually prevented the entire network from going down when it was attacked on New Year's Eve in 2019. The clients that run Parity were targeted and so were taken offline, but the attack didn't work on the clients that were running Geth. That meant that Ethereum stayed alive during the 14 hours the Parity team took to release a software patch to fix the bug. The Parity attack is about as good an example as you're going to get of why decentralization is held in such high regard among the people who truly understand blockchain.
So back to 2014. Vitalik wrote the Ethereum client in the Python computer language, Gavin in C++, and Jeff in Go.
It appeared as though the group of five cofounders was about to grow as they prepared to leave Miami. Roles for each were becoming clear too. Vitalik, Gav, and Jeff made up the tech side of the operation. Mihai, Amir, and Anthony would help with business development. Joe and Charles would straddle both worlds: each had technical acumen to offer along with an eye for how Ethereum would stay on the good side of regulators while at the same time appealing to the wider world they'd need to ensure that the project ultimately succeeded.
Yet defining roles and job descriptions creates an environment where factions can form. And form they did. More people also meant less money per person, or at least that's how some of them saw it. Tension would soon start to surface, alliances would be tested, and the true personalities of the men building Ethereum would reveal themselves.
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One thing is constant in the ever-changing and chaotic world of blockchain – there is always another conference. The joke that the one true use for the technology is that it enables conferences to be held whenever and wherever is only half funny.
As the cofounders left Miami this was indeed the case: there would be another conference in April in Toronto. But this was no run-of-the-mill event; this would be the first gathering Anthony Di Iorio sponsored through the group he created, the Bitcoin Alliance of Canada. There were three main jobs to accomplish now – find a permanent headquarters, try to rustle up some outside money, and start creating a working version of Ethereum. As for the working version, at this early stage all that meant was setting up a small network among a handful of nodes so that they could start sending ether to each other. The cofounders would split up to go about their tasks, then all meet back in Toronto for Bitcoin Expo 2014 in mid-April to report on their progress.
Charles had claimed the de facto title of chief executive officer by this point, never mind that not many in the rest of the group were big on titles. He traveled to Switzerland to join Mihai as the search for where to base the Ethereum Foundation began. The three candidate locations had been whittled down to Switzerland, Hong Kong, and Singapore, due to their relative ease with regulations and the fact that they were respectable locales in a Western-business sense. (Charles said that early on Amsterdam had also been considered for the headquarters.)
Switzerland soon became the front-runner for the base of operations, both because of its tax treatment and because it was closer to those who lived in North America and Europe than either location in Asia. Mihai Alisie and Roxana Sureanu settled in Zürich first, where they couch surfed and started getting the lay of the land. An important early contact they made was Herbert Sterchi, a whiz at setting up companies in the Alpine country who knew many of the Swiss regulators personally. To establish a company in Switzerland, the board of directors must include at least one Swiss citizen, and here too Herbert came in handy. The group had grown to about seven or eight Ethereum people now helping to set up shop in or around Zug, a small city on the shores of the lake of the same name. When they were in between Airbnb rentals, Herbert let Mihai, Roxanna, and the others stay at his apartment. Mihai continued to meet with lawyers and other officials necessary to establish the Ethereum Foundation as a Swiss entity.
By this point Roxana knew the group would need to rent a house. They would probably have up to a dozen people who needed a place to live and work; skipping around between Airbnb rentals wouldn't do. After a lot of looking they settled on a new house on Greinbachstrasse, what would become known as the Spaceship House for its luxury and modern architecture. An elevator shuttled people between its three levels, and there were four bedrooms, a large open kitchen, and a living room that connected to a terrace. The home is one of three identical houses on an idyllic street; a small stream runs nearby, with sloping fields giving way to towering mountains all around. On March 4, 2014, it became home to the Ethereum Foundation as the group, which now included Mihai, Roxana, Charles Hoskinson, Mathias Grønnebæk, Taylor Gerring, Richard Stark, Lorenzo Patuzzo, and a few others, moved in. Roxana organized most everything to turn the vacant house into habitable space, like buying furniture and mattresses and dishes and everything else. She now held the title of executive assistant and office manager. “I can say I was officially the first woman in Ethereum,” she said.
Mathias Grønnebæk found his way to the Spaceship House in a roundabout fashion. Until he was 18, he hadn't thought much about the financial world. But the year was 2008 and Mathias watched as his grandfather, an entrepreneur and investor, started to lose money in the stock market crash. “It was quite fascinating, seeing that much wealth being wiped out,” he said. He began to wonder how wealth was created and how it was destroyed. “That's when my fascination with finance really started.” By 2012, he'd read the Bitcoin white paper and linked it to the financial crisis. “I wouldn't say I was a fully formed anarchist or anything like that at the time,” he said. “When I saw Bitcoin, what it meant to me was – because of the context of 2008 – it was the fall of the state and the large financial institutions that are sanctioned by the state.” He loved that Bitcoin took the power out of the hands of intermediaries.
But what truly captured his imagination came from a thread on BitcoinTalk where someone posted a challenge to create a stock market without a central authority involved. The New York Stock Exchange without any of the middlemen and executives and compliance officers, in other words: just a peer-to-peer market. This idea, which the person on BitcoinTalk dubbed the “Holy Grail,” was being proposed in the Bitcoin-only era of mid-2013. So Bitcoin could be not just the basis for sending money from A to B – it could be used for trade. Mathias's eyes lit up.
“That idea was just stuck in my mind and I couldn't stop thinking about it,” he said. This made him jump in completely to try to build on Bitcoin, but he didn't have the resources to create the kind of decentralized stock market of his dreams. So he traveled from his home in Aalborg, Denmark, to Copenhagen, to grow his contacts in the blockchain world. When he discovered the crowdfunding effort for Amir Taaki's and Cody Wilson's Dark Wallet project, he donated a few thousand dollars. That enabled him to attend a dinner in Milan in November 2013 where he met a bunch of big names in the Bitcoin developer world. Among them was Mihai Alisie, who had come to Milan from Calafou with Roxana.
While Vitalik had left Calafou in the summer to continue his travels, Mihai and Roxana had stayed on until November. The weather changed from being too hot all the time to being too cold. The showers only got more frigid, and they had to sleep under their clothes and towels for a time as there was no heat in their apartment. Then they made the bold move to buy a big blanket. “Oh my god, that was like the best investment ever,” Roxana said.
The hardship of Calafou had left its mark on the couple. Mihai found a deepness within himself and had a new appreciation for the small things. Roxana came away knowing that material things don't mean happiness, and that she would do it all over again.
For Matias Grønnebæk's part, he now had a great connection to Ethereum in Mihai and Roxana. From Milan, Mathias went home to Denmark, shut down his business, and asked to join Ethereum. Mihai and Roxana visited him around Christmas, and soon Mathias was all in on Ethereum. It was good timing for Mathias, as he'd reached the limits of what Bitcoin could do for his dream of a decentralized stock exchange.
“Bitcoin fucking sucks for developing a financial system on top of, it's really terrible,” Mathias said. When he read Vitalik's white paper and understood the idea of smart contracts, the whole world opened up to him. To put it simply, smart contracts allow for many different transactions to whiz around at the same time, much like the trading on a stock market. Some of them will fail, some will succeed. The trading paths connect dot A to dot B to F to G back to A and so forth. At the time Bitcoin couldn't handle this type of trading; it was much too frenzied. So Mathias knew he would need to use Ethereum for a decentralized stock market to become reality.
Still, that's a tall order and not something Ethereum can handle in 2020, let alone in 2014. In a basic sense, what Mathias wants to do is take the centralized authority out of the stock market equation. All exchanges use software known as a matching engine to connect buyers to sellers. Everyone on the New York Stock Exchange is known to the exchange, and it sits in the middle to facilitate trading. What Mathias wants to do is make that trading happen between two people only – the buyer and the seller – without an entity like the NYSE as the matching engine. A smart contract could bring about the peer-to-peer connection and be customized to enhance privacy between parties, for example. This is another application that illustrates the potential of Ethereum, but it isn't reality yet. Whether it ever will be is still an open question, but Mathias is a believer.
“That's why smart contracts made sense to me, and that's also why I asked to join the project,” he said. Mathias also had a weird habit of reading tax regulations and financial rules for fun, and he strongly suggested Switzerland to the cofounders as the place to set up shop. Switzerland is made up of 26 federal states known as cantons. All of Europe operates under the same set of rules, but the Swiss canton system sets it apart, as Mathias knew. “You can actually go to one of the tax authorities in the canton and negotiate a tax ruling,” he said. “You can't do that in the UK.”
The Ethereum folks had also gotten indications that ether would not be considered a security by Switzerland. That means it would face far less stringent rules and requirements about how ether was sold, whom it was marketed to, and what kind of disclosures they would have to make. It would be a huge headache avoided. The Swiss financial regulator viewed ether “as a software product,” Mathias said. “So at that point we can go and negotiate with the tax authorities, and that's when we came up with the whole utility token framework. I was part of the team that negotiated that.”
The idea of a utility token would become key to how ether was eventually treated by lawyers at the SEC. In a nutshell, crypto teams want regulators to think of their new digital coins as utilities, as cogs in a bigger machine that are necessary for that machine to run. If Ethereum won't work without ether, then ether is a utility token. And that means it's not a security token, which would trigger the reporting and disclosure requirements of a company issuing new shares of a stock.
Herbert Sterchi proved pivotal in this discussion. “He was like – I don't know what you'd call it, the fixer, or whatever,” Mathias said. “The guy who knows all the people in Switzerland who you need to talk to.” Mihai, Herbert, and Mathias were working on the tax, regulation, and headquarter projects, with Charles joining them for the latter stages. The team shopped the idea of ether and Ethereum to many different cantons but ended up choosing Zug. “They treated it in terms of taxation as an investment vehicle, which doesn't count as being a security,” Mathias said. “That means effectively the money you raise is 0 percent taxed.”
This would have been music to Charles's ears. When the gang had been in Miami and Bitcoin was near $1,000, the MasterCoin project had been valued at somewhere between $50 million and $100 million. “People knew that that market was sexy, and we were thinking, ‘God, we could easily get to $100 million,’” Charles said.
Yet only a few months into the project, tensions in the leadership group were beginning to show. On a call with the cofounders in February, Anthony Di Iorio and Charles Hoskinson got into a heated argument about who was in charge. Toward the end of the call, Charles blew up at Anthony and cussed him out in front of the others: just because Anthony had money didn't mean he had ideas, and Charles would lead them with his ideas. Steve Jobs, after all, wouldn't let anyone treat him this way – Charles idolized the founder of Apple and wanted to take the cofounders and whip them into shape like Jobs would. They weren't working from a garage in Cupertino, but an Airbnb in Zürich didn't feel that much different.
Anthony's point of view was that he'd brought Charles into the mix in the first place – if it hadn't been for him showing Charles the white paper, Charles would be looking at this project from the outside. Who did this kid think he was? While he acted like he was a tenured professor, Charles was only 24. Now he wanted to take the leadership role that clearly belonged to Anthony?
While Mihai, Charles, Roxana, and Mathias worked to set up the foundation's headquarters in what would come to be known as Crypto Valley, Vitalik, Gavin Wood, and Amir Chetrit headed out to another valley in search of investors.
They soon hooked up with Richard Burton, a computer programmer and designer who found himself nodding along when he heard Vitalik speak on a podcast about his idea of creating a programmable blockchain.
“It made a lot of sense to me because it's so hard to develop on top on Bitcoin,” he said. Burton went to a talk given by Gavin at the Negev, the infamous shared house near San Francisco's Sixth Street known for its tech-friendly residents and fraternity-like method of inducting new tenants. Burton introduced himself and told Gav he'd like to help make Ethereum user friendly by designing things people want to use, like a wallet and a decentralized browser and a chat application. They hit it off and soon Vitalik and Gav were staying for a few nights with Burton at the Rainbow Mansion south of the city in Cupertino.
Billing itself as “an intentional community of people working to optimize the galaxy,” the Rainbow Mansion is meant to bring brilliant but broke people together. It's close to Palo Alto, the mecca of venture capital, where a number of hugely successful and prominent firms are located along Sand Hill Road. After meeting with venture capitalists during the day, Vitalik and Gav would return to the mansion.
“They would come back feeling pretty despondent from Sand Hill Road. It wasn't really working out,” Burton said. At the same time, a bit of rejection or indifference didn't seem to dissuade them. “They didn't really seem to give a fuck, I mean, these people just did not care,” Burton said. “It was kind of like, ‘fine, they don't want to buy the tokens, whatever, we can carry on.’”
No matter what they were doing, Vitalik and Gav stayed focused on the project, Burton said. They didn't go out for beers at night or veer from what they wanted to do. “Everyone was on a bit of a mission,” he said. “The world computer was the idea. It was like, wouldn't it be useful if we had a global computer?” Vitalik's backpack, where he kept his precious computer and other essentials, had started to disintegrate and was full of holes, so Burton gave him his own backpack and told him, “look after that little laptop, dude, I think you're going to need it.” He was also struck by the integrity Vitalik showed as a 20-year-old.
“The character of open-source movements requires some sort of thought leader or some person who really spearheads it,” Burton said. “You can see it with Linux and Linus Torvalds and the way he led it with force and an iron fist. Vitalik was totally different. He was very open and very collaborative,” Burton said. “I remember being in the car and he was switching from learning Mandarin to talking to me about design to discussing mechanisms with other people in the car and debating the crowdsale. His context switching is phenomenal.”
While Anthony Di Iorio had stayed in Toronto to help line up lawyers and prepare for the upcoming conference in April, he did take time out to meet Gavin, Vitalik, and Amir in San Francisco for investor meetings. Among the VC firms the cofounders met with were Andreessen Horowitz and Union Square Ventures. “We were trying to see what we were going to do,” Anthony said. “Seeing what options were out there.” Gav and Anthony met in person with Balaji Gopinath at Kubera Venture Capital; for the Union Square Ventures meeting they used Skype, and they held an in-person meeting with Andreessen Horowitz. (Gavin didn't recall much of the meeting, just “sitting around in some VC office for an afternoon on their Wi-Fi.”)
The way VC works involves a bit of a devil's bargain. For the blessing of early investment that so often means life or death for a startup, the partners at a VC fund become involved in the project and seek to direct it in ways they think will make it possible to come to market. Sometimes this is great, sometimes it's an unmitigated disaster – it just depends on the people and the ideas involved. But the business model makes sense: for the money VCs provide they get some say in how things are done and they can make a ton of money if they're right.
Blockchain as a business was still relatively new in Silicon Valley at this time. There was already quite a bit of money backing Bitcoin ventures, like the San Francisco exchange Coinbase. Andreessen Horowitz had been early to that game. And Dan Larimer's BitShares had made the rounds on Sand Hill Road. Yet the debate over “blockchain not Bitcoin” was only just beginning: the idea that while Bitcoin is great, the underlying blockchain technology is the real breakthrough that would enable entire industries to modernize and achieve unheard-of levels of efficiency. The debate enraged many on the Bitcoin side, who bristled at the idea that Bitcoin was some secondary product. On the blockchain side of the argument stood people like Vitalik, who in the first line of his white paper and during his talk in Miami made the case. “In the last few months, there has been a great amount of interest into the area of using Bitcoin-like blockchains, the mechanism that allows for the entire world to agree on the state of a public ownership database, for more than just money,” he wrote in his paper. Ethereum sprang entirely from this belief, but in February 2014 it was still too early for the moneybags in Silicon Valley to have caught on.
It wasn't a surprise that Gav and Vitalik discovered that VC wasn't the way to go. Anthony shared this view.
“We decided never to take outside capital, because we thought that would give people influence on the project we wouldn't want,” Anthony said. They would keep their internal funding model, with Joe and Anthony contributing the lion's share and Vitalik and a few others making up the rest.
The most important thing that money would fund was the creation of a working version of Ethereum, and that's what Gav, Jeff Wilcke, and Vitalik set out to do. A large part of figuring out the architecture for Ethereum meant Vitalik and Gav taking time to talk things through and hash out ideas. They had a chance to get into that back-and-forth during their time together in San Francisco and Silicon Valley. Beginning in Miami, Gavin had begun to take notes on the particulars of what he and Vitalik and Jeff talked about regarding the details of how Ethereum would work.
“The white paper presented the overall concept of Ethereum in fairly broad terms,” Gavin said. The job now was to begin the formal process of how, exactly, the software would be designed. After a few days in San Francisco, Anthony returned to Toronto and Gav and Vitalik had time to hash out their ideas. “The Ethereum protocol developed substantially during this time,” Gav said.
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The highs reached at the Miami Bitcoin conference were hit with a harsh dose of reality the next month, when Mt. Gox, then the world's biggest Bitcoin exchange, suspended its customers' ability to withdraw cash and coins from its market.
The exchange, which Jed McCaleb had sold to a man named Mark Karpelès in 2011, had suffered previous problems with customer funds being frozen. US authorities had also twice seized the Mt. Gox bank accounts, worth $5 million, because the exchange failed to register as a money transmitter. But the problems at Mt. Gox in 2014 were much bigger than either of those events. At first Karpelès tried to say that the issue was simply technical and that the market would update users in a few days. That sent the price of Bitcoin down 8 percent, to about $720. The problems only grew worse, and within two weeks Mt. Gox customers were offering to sell Bitcoin for $124 because of fears that their coins would never be returned, Bloomberg News reported at the time. (I wasn't yet on the blockchain beat and only have vague recollections of Mt. Gox.) At the same time, Bloomberg said, Bitcoin was trading for $566 on London-based Bitstamp and for $553 on BTC-e in Bulgaria.
Soon the full extent of the disaster at Mt. Gox was revealed. About 850,000 Bitcoin had been stolen or were missing, a loss of $450 million. Security firm WizSec would later conclude that Bitcoins had been stolen from Mt. Gox's account beginning in 2011. That means many of the people partying it up in Miami – and buying Lamborghinis on a whim – were likely being ripped off as they did.
Everyone involved with Ethereum at the time would have been paying close attention to the Mt. Gox drama. In the weeks or months to come, they were planning to sell ether in exchange for Bitcoin for the first time. Learning a lesson about dealing with Bitcoin's wicked volatility would soon become another obstacle for the cofounders to overcome.
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As the winter of 2014 turned to spring, Anthony Di Iorio's Decentral grew into a buzzing hot spot for blockchain startups. Since leaving Miami, part of the Ethereum team had been based out of the Toronto office as the operations in Zug got up and running. There was also a cast of various characters utilizing the Decentral office as the city's blockchain scene expanded. And none of it would've happened if some Canadian Bitcoin enthusiasts had just bought more alcohol.
After organizing Toronto's first Bitcoin meetup at Pauper's Pub in late 2012, Anthony moved the meetups to a bar called the Charlotte Room. The weekly Bitcoin meetups at the Charlotte Room proved to be popular, but not everyone who came would buy a beer. They'd show up, learn about Bitcoin, and leave. This didn't sit well with the owners of the Charlotte Room, so they wanted to start charging Anthony to hold the events at their bar. But meetups are free – they are always free, no matter where in the world you attend – so Anthony knew they couldn't start asking for a few bucks at the door. This led him to realize that a dedicated place was needed for like-minded people in the world of Bitcoin and blockchain to meet, work, and collaborate. Thus, Decentral was born.
The building was tall, narrow, and deep, like a lot of housing in Toronto, and had been converted to the coworking space from a private house. The unfinished basement had cinderblock walls and a musty feel. On the upper floors whiteboards were stuck onto walls, sometimes to hide the cracks. A nice roof terrace was rarely used after the landlord said that if too many people went out there, they might all come crashing through the floor. The third story was a warren of many small rooms where people often slept on the floor in sleeping bags. It had a do-it-yourself vibe that fit the blockchain ethos at the time.
Among the first people to hang around Decentral was Gerald Cotten. He was building a Bitcoin exchange, QuadrigaCX, which would go on to be another example of the wild fraud and fantastic stories of the early Bitcoin world.
Cotten founded Quadriga in 2013 and had offices in Toronto and Vancouver, according to a 2019 story in the Globe and Mail. According to the newspaper story it was slow going for several years, years that included net losses far outstripping revenue and a botched attempt to take the company public on a Canadian stock exchange. Soon Cotten found himself the only one left at the company after his chief financial officer and directors resigned. Then the price of Bitcoin went on a tear in 2017, peaking at nearly $20,000, and Quadriga handled $1.2 billion worth of trades that year, the Globe and Mail said. By this time, Cotten was basically running Quadriga on his own, using only his laptop. Like many cryptocurrency exchanges, Quadriga couldn't obtain bank accounts for customers to deposit and withdraw money for use on the exchange. In 2018, significant delays and miscommunications began affecting Quadriga customers, who wanted to get their money off the exchange.
In December 2018, Cotten went to India, reportedly to found an orphanage. But he died there on December 12 of complications from Crohn's disease, according to a Bloomberg News story. He'd signed a will only 12 days prior to his death. After his death, Quadriga customers were told they couldn't access their money or cryptocurrencies on Quadriga because Cotten was the only person to have the private keys to the accounts where the money and crypto was stored. They were kept on his laptop, and no one besides Cotten knew how to access the private keys. About 76,000 Quadriga customers lost Bitcoin that was worth about $163 million in the fiasco, Bloomberg reported. In December 2019, lawyers for Quadriga customers asked for Cotten's body to be exhumed to address theories that he'd faked his death. The law firms asked that the process be done quickly “given decomposition concerns,” Bloomberg said.
In 2018, I'd traded emails with Cotten. I was working on a story about the refusal of many banks to work with crypto exchanges. “The situation here in Canada is such that it is very difficult to obtain a bank account for cryptocurrency exchanges,” Cotten wrote to me in response to questions. “All five of Canada's big-five banks (we have a bit of an oligopoly here on banking) will not permit a cryptocurrency exchange (or any business related to cryptocurrency for that matter) to have an account.” That meant Quadriga had to use a series of payment-processing companies to move customer money in and out of the market. One of these was called Crypto Capital Corp., which also processed money for the controversial exchange Bitfinex and its related entity Tether.
“Companies such as Crypto Capital have proven useful in the sense that they operate as a payment processor that is able to receive transfers from clients, store funds, and then process outgoing transactions as well,” Cotten wrote. “A similar comparison would be a payment company such as PayPal.”
In 2019, New York's attorney general brought a civil case against Bitfinex and Tether, accusing the firms of hiding the loss of $851 million in customer money from its use of Crypto Capital Corp. Bitfinex and Tether executives have said they did nothing wrong and were victims of mismanagement at Crypto Capital Corp.
Meanwhile, in 2018 Cotten told me that the payment-processing setup had its plusses and minuses. “In general, it works well, though there are occasionally hiccups,” he wrote.
One of the first tenants at Decentral was Michael Perklin, who set up the headquarters of his blockchain security consultancy there. He knew Cotten well and never would have imagined how things would end for him.
“He was a thoughtful, intelligent person who seemed to get along with everybody,” Perklin said. “He was as much a fixture in that coworking space that year as Vitalik and myself.” Cotten was always willing to lend a hand, be it answering questions from people who walked in off the street to sharing technical details he'd picked up as he built Quadriga. He'd involve himself in the anarcho-political debates about the benefits of Bitcoin and always had a warm and friendly personality, Perklin said. He has a hard time reconciling what happened to his friend, but after reading the exhaustive report on the history of mismanagement and fraud at Quadriga done by Ernst & Young, Perklin has a very different view of Cotten.
The “deceit and crime” detailed by the report shocked Perklin. “Why would you create these fake accounts to trade fake volume on your exchange? Why would you intermingle your exchange's funds with your users' funds?” he said. “Now I look at these facts and I say, ‘okay, these seem consistent with somebody who is practicing a long con and is now trying to move the money out in a way that makes it very difficult to trace.’”
As of January 28, 2020, the fight to exhume Cotten's body was still ongoing, according to a story on CoinDesk.
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The work at Decentral in early 2014 continued and Bitcoin Expo 2014 rapidly approached. The Ethereum cofounders made their way to Toronto in mid-April, having made some significant advances on the project. The headquarters in Zug was up and running, with only some paperwork needed to finalize the creation and structure of Ethereum as a Swiss entity. The tax and regulatory situation in Switzerland could hardly be better for the group as they got closer to raising money through the ether crowdsale. And they now knew firsthand that raising outside money from VC firms wasn't the way to go.
Yet there was still a lot to decide, and what can be thought of as the second official meeting of the cofounders, at Decentral, would see plenty of action.
The group decided to continue with the development of Ethereum on three different codebases: C++, Python, and Go. Gav continued working on the technical specs for Ethereum, which he was calling his yellow paper. Anthony, Joe, and Charles continued to work with lawyers on the intricacies of selling ether to US participants. They voted to make Charles Hoskinson CEO. Then there was the matter of how the group would accept and safely store the Bitcoin it received from the crowdsale. For that Charles turned to Michael Perklin, who specialized in exactly that type of blockchain architecture.
When Bitcoin users want to send the digital currency in their wallets to someone they must use a private key. Without the key, the Bitcoin doesn't move. This may seem like a small problem, but it isn't. According to a 2017 study by blockchain forensics firm Chainalysis, as reported by Fortune magazine, 17–23 percent of all existing Bitcoin has been lost because the owners lost their private key. That's amounts to 2.8–3.8 million Bitcoin, in other words, worth $20.1–27.4 billion in April 2020 prices.
But back to wallets. What if you have a group of people, like a company or the Ethereum cofounders, who want to manage a cryptocurrency account? You don't want to entrust all of your Bitcoin or ether or other digital currency to a single person; that's too risky. So what's needed is a way for the wallet to be controlled by a group of people. This is known as a multi-signature wallet, or multisig for short. The thing is, in April 2014 there were hardly any multisig wallets in existence. According to a story on CoinDesk, the first multisig Bitcoin wallet was created by BitGo in August 2013. The article went on to say that as of the beginning of 2014, only 0.002 percent of all Bitcoin was held in a multisig wallet.
Perklin knew that the cofounders would need to have exceptional security and that to provide that he'd have to build them a multisig wallet from scratch. His idea, though, was a sort of multisig of multisigs. The keys would be based in three cities – Toronto, London, and Berlin – and held in “footballs” – a nod to the cache of nuclear codes carried in a briefcase by a government agent who's always near the president of the United States. The Ethereum footballs would be laptops that had never been connected to the Internet and that had had all of their networking gear, like Wi-Fi and Bluetooth, ripped out. The speakers and microphones would be removed. There would be three people in each of the three cities who would have access to that city's football, and two of them would be needed to sign off on any movement of Bitcoin from the Ethereum multisig wallet.
“It was very complicated at the time,” Perklin said. He had to write long and detailed instruction manuals for how to use the wallet, but in the end it all paid off. “I'm happy to say not a single satoshi went missing as a result of a failure of the wallet.”
Perklin had been around the crypto world long enough to know that Vitalik and the foundation needed bulletproof security. “I wanted to make sure that people didn't take advantage of Vitalik,” he said. “I strongly recommended this multi-signature setup to protect Vitalik and his vision.” While there was a lot of optimism and enthusiasm around Ethereum, Perklin also saw a lot of politics already in play and that certain founders were jockeying for control.
Vitalik “had an amazing idea that had incredible potential for the world,” Perklin said. “A whole lot of people who were interested in this distributed technology and understood Bitcoin under the hood – they would look at this and say, ‘yes this is a great idea on its merits,’” he said. “Other people who didn't necessarily have that kind of a viewpoint looked at this and just saw dollar signs. They said, ‘hey, if I can attach my name to this project somehow, some way, then I'm going to get my fair share of those millions that are going to be raised.’ They didn't care about it working as much as they cared about lining their own pockets.”
“A lot of people called themselves cofounders in that project,” Perklin said. “In my mind, there is only one founder of Ethereum: the guy who came up with the idea – and he deserves all the credit.”
Mathias Grønnebæk manned the Ethereum booth at the conference, which was front and center as you walked into the Metro Toronto Convention Centre hall.
“There were already factions,” Grønnebæk said. “There was always a very deep split between the Europeans and the North Americans. Anthony is very territorial about the way that he runs a business. He viewed himself as in charge of the Canada branch and he almost viewed the North American branch as almost separate to Europe. So it was like two businesses that had to work together.”
Anthony Di Iorio had always had a maverick streak in him. His father worked for IBM and the kids in his family were expected to be normal, but Anthony never wanted to be normal, he wanted to be different. “Throughout my life I never liked being told what to do,” he said. “I never liked school.” Working for others had never really been his thing, and he was on the older side compared to most of the other cofounders: he would turn 39 in 2014. When I first met Anthony in 2019, he struck me much more like a New Yorker than someone from the polite circles of Canada's largest city. He has a grittiness to him that had started to rub some of his cofounders the wrong way.
“Anthony's perspective was less philosophical, where he could opportunistically jump on a philosophy for his own personal interest,” Joe Lubin said. “He just wanted to make sure that he was not being left out [and was able to] take advantage of whatever developments were going on. He added lots of value to the project at different points in time, certainly early and the first six of nine months. But it was pretty much all about Anthony.”
An example: During the Toronto Bitcoin conference Joe went to lunch with Russell Verbeeten, a startup investor who had joined the Ethereum project in February and worked from the Decentral office. Anthony hadn't been invited, and when Russell and Joe returned Anthony tore into Russell for having the audacity to go to lunch with another Ethereum cofounder and not include him. Michael Perklin witnessed the interaction.
“Anthony was angry that topics were discussed, decisions might have been made, with him being out of the loop. It was kind of a ‘how dare you do that, don't you know that I'm in charge’ kind of discussion,” Perklin said. Anthony said he didn't remember this happening.
Charles Hoskinson would prove to be much more problematic for the group, however. He was described to me by the people he worked with at the time as a pathological liar, a sociopath, and as someone to not trust in the company of your girlfriend. In his early 20s in 2014, he was one of the youngest cofounders. He wore a thick beard and glasses and dressed in a way that could make you think he was much older than he was. For the first several months that Joe Lubin knew Charles he assumed that he was in his mid-30s. Charles would talk about Creedence Clearwater Revival concerts in the 1970s as though he'd been there. But it went much further than that. To convince people that he was Satoshi Nakamoto, he'd show emails that he claimed proved he'd invented Bitcoin, and a few of the people around became convinced.
He told more offbeat stories, too; like how he got his limp by mistiming a jump out of an Apache helicopter in Afghanistan. He claimed to be associated with the Central Intelligence Agency, or sometimes he hinted of his links to DARPA, the supersecret US government weapons development agency. He often kept his passport in the front pocket of his shirt.
It soon became clear to Vitalik that Charles was a liability. “I was kind of caught off guard by this, because Charles was always nice to me,” Vitalik said. “But Charles seems to be one of these people that seem to be pretty common in the world, who know to be nice to their superiors, but abuse their subordinates.” When Vitalik spoke to people who worked for Charles, like Mathias Grønnebæk and Taylor Gerring, he heard a litany of complaints.
Gerring found his way into the early Ethereum inner circle in a similar fashion as Mathias Grønnebæk. Taylor had also attended the Dark Wallet event in the squat in Milan in late November 2013 where he met Mihai Alisie.
Up to that point Taylor had been working on a Bitcoin wallet project, but he soon realized Ethereum was much more exciting. He hadn't known what to expect in Milan, and although he found an eclectic and inspiring gathering of hackers and coders there, he felt frustrated at the amount of actual progress being made. The squat had a glass ceiling with several broken panes that let the cold air in; they used wood-burning stoves for heat; and while there were bathrooms, there were also holes in the bathroom floors where some guys relieved themselves. When Taylor returned to Chicago he got in touch with Mihai to offer his help on the Ethereum web site. Soon he was in the mix full time, crashing at the Miami house, then going off to Switzerland. Charles first struck an odd chord with Taylor when he watched Charles being interviewed for a podcast about Ethereum at the Miami house. Taylor thought, shouldn't that be Vitalik doing the talking? “It felt weird,” he said. It would soon get weirder.
“In the very early days he tried to convince us he was Satoshi Nakamoto,” Taylor said. “Stories and information never seemed to line up with him.” It must have been odd for many of the people surrounding Ethereum at this time to have this amazing idea before them, the chance to help Vitalik make this thing they all desperately wanted, and then to realize that the mix of people attached to the project was rather strange. In the augmented words of former secretary of defense Donald Rumsfeld, Ethereum was going to war with the army it had, not the one it might wish to have.
Joe Lubin liked Charles and wanted to help him. “I had a few conversations with him about his style of communication,” Lubin said. “He got it. He could see himself and how it would affect people, but it wouldn't stick for more than a day or two.” After working with Charles closely, Joe thought he “was a really bright guy.” Homeschooled until early in his teens, Charles studied math and cryptography at the University of Colorado before dropping out after two years.
By April, Charles had hurt his credibility with several cofounders and people who were helping to build Ethereum. Mathias had been working closely with him in Zug on the business plan. Mathias did a lot of the plan writing, and Charles would give him feedback. As they got to know each other, Mathias developed conflicting feelings toward him: on the one hand he liked Charles, but on the other he couldn't get past his major flaw.
“The problem with Charles is that he's very manipulative,” Mathias said. “He's very charming, he can spin you around his finger.” Charles wasn't exactly shy about it, either. “He was telling me exactly how he was manipulating people,” Mathias said.
A split was also developing between the technical side of the project and everyone else. There were far too few tech-savvy people with power within Ethereum's inner circle for Gavin Wood's taste. He didn't understand why the business development people were in line to get a share of the profits similar to that of the coders, without whom none of this would be possible. Too many hangers-on, Gav thought.
“Everyone who was involved with the project – regardless of their capacity, skill set, talent, commitment, or productivity – was treated equally, to a fault,” Gav said. Referring to Lorenzo Patuzzo, one of the people staying at the Spaceship House in Zug, Gav said, “One guy who put up an interior wall in the house in Zug walked away with quite a decent drop of ether. It might be the most ever paid for a wall of its size.” It grated on Gavin. “I felt quite strongly that this was a suboptimal strategy,” he said.
The emotional and political stew that the cofounders were floating in had the strong flavor of rivalry by April. The trust and excitement and openness Charles and Joe and Anthony D'Onofrio had spoken of in Miami was gone, with agendas now in their place. The presence of personal drama didn't mean the group could avoid making business decisions, however. And a big one loomed. Would Ethereum be a not-for-profit or would it bow to the capitalist masters it was seeking to supplant?
The structure of a business is really one of the first things to decide upon, and yet the topic wasn't coming up in direct conversation too often among the cofounders. Perhaps everyone knew it would lead to trouble. It was in the air, is how Vitalik remembered it. Unlike when they voted to appoint Charles CEO, memories differ as to whether there was a vote to decide on Ethereum's corporate structure.
The debate was being framed as crypto-Google versus crypto-Mozilla. Google, of course, even though its early motto was “Don't be evil,” had become one of the most powerful and wealthy corporations of the Internet age. Google is undoubtedly an amazing company and a key player in unleashing the power of the web; its search engine has changed the world. (And made Sergey Brin and Larry Page billionaires.)
Mozilla is perhaps a bit less well known, at least outside coding circles. It's the nonprofit foundation that maintains the open-source code for the Mozilla project. The browser is probably its best-known product, but the foundation has a set of 10 principles it operates under to help keep the Internet open and free. It's high minded all the way down.
“The biggest and most significant vote was this concept of crypto-Google versus crypto-Mozilla,” Charles said. He'd helped forge the foundation strategy in Switzerland and he said that both paths were open to them at that time. “We had to make a fundamental philosophical decision about what we wanted to be. There were arguments on both sides.” Even though Silicon Valley had left a bad taste in the mouth of Vitalik and Gav, advisors at the time were telling the cofounders they could raise maybe $30 million in VC funding.
“We'd already gone to the valley,” Charles said. “We'd talked to everybody from Kevin Rose at Google Ventures to Naval Ravikant and others.” The paths were clear in Charles's mind, and he said a decision was made.
“We took a vote, and the vote was actually eight to zero; it was unanimous,” he said. “Every single person voted on the crypto-Google.”
Anthony had a slightly foggier recollection of the vote. He said that the group members (minus Mihai) were all in the basement at Decentral and that a vote to appoint Charles CEO took place. “I think it was also the same time that we decided to do the for-profit,” Anthony said. “It was just a majority, and everybody – I don't know if it was everybody – but it was decided to be for-profit, and that's the route we started taking after that conference.”
Another idea floating around was to make it a hybrid, with a for-profit arm that would develop the Ethereum clients and then donate them to the foundation. But that didn't last.
Vitalik remembered getting some contradictory advice at the time. “The thing was originally pitched to me as, like, ‘oh look, making a nonprofit foundation in Switzerland is just too legally complicated, so make it simpler,” Vitalik said. He favored the nonprofit route from the start, but the prospect of a long legal process eventually swayed him. “I eventually, kind of begrudgingly, went along with it,” Vitalik said.
He doesn't recall an actual vote on the nonprofit question. “I remember kind of the wind blowing that way and everyone going along with it,” Vitalik said. It would be possible, of course, to know exactly what happened if the notes from the cofounder meetings were available. Except no one took notes or recorded these proceedings in any way, that's just not how this group operated. So today the exact details of what took place are left to dueling memories.
Joe Lubin played long ball at this point, realizing that the scale of what Ethereum wanted to be meant that entire new computer systems would have to be built to support it. “Crypto-Google wasn't going to happen for a really, really, really long time,” he said. There was a general notion that the group would still head in the for-profit direction, and Lubin wrote a detailed document that included all the things they'd need to create to support Ethereum. “Similar to the 1970s, we'd need math libraries and string manipulation libraries and that sort of thing, but I don't think any of us were under the impression that we would do commercial activities within the next two or three years.”
As is Lubin's wont, he then went a bit sideways. “Crypto-Google was nothing more than two words,” he said. “It's not like we decided not to be crypto-Google, we just kept doing what we were doing.”
By April, it was becoming clear that the willy-nilly way Vitalik had assembled his cofounders was coming back to bite him. He agreed with me when I asked him about this, and about whether he wished he'd done it differently.
“The way I started the project was the first few people who reached out became cofounders, and the set of cofounders grew quickly,” Vitalik said. The venture capitalists they'd visited in California had criticized them for this, which they said was usually a mark of startup failure. While that hadn't happened yet, “there was a lot of pain,” Vitalik said.
Whatever the impression the various cofounders had as they left Toronto, it seemed clear they hadn't rejected the for-profit model. They were headed for profit. As lines continued to be drawn, however, the idea of monetizing Ethereum had opened a rift that would soon blow the group apart.