One of the most difficult aspects of bootstrapping a new cryptocurrency network is moving beyond the early stages of inevitable centralization. To some extent, bitcoin is the only cryptocurrency to gain a noteworthy level of decentralization in terms of entities interested in the protocol, and a recent report from Grayscale Investments outlines the centralization risks associated with the second largest cryptocurrency network, Ethereum.

The purpose of the report from Grayscale Investments was to outline their preference for investment in the Ethereum Classic token as opposed to the ETH token. ETC is the token on the Ethereum Classic network, while ETH is the token on the Ethereum network.

In the report, three main areas of the cryptocurrency networks are covered: governance, economics, and development.

Protocol Governance

In the view of Grayscale Investments, the Ethereum Classic network preserves the “foundational principles of decentralization and immutability,” which were supposedly key components of the original Ethereum vision.

Throughout the report, criticisms are made in relation to the Ethereum Foundation’s perceived control over the protocol. “It is worth noting that holders of less than 6% of the ETH in circulation voted on the matter over a narrow 12-day period, raising questions about whether the decision was truly democratic,” the report states in regard to the vote that took place before a hard fork was implemented to bailout DAO token holders.

“By violating the principles of decentralization and immutability, the Ethereum Foundation has undermined the trustless nature of the Ethereum network, opening the door to entirely new risks associated with threats of interference,” adds the report.

Grayscale Investments is also skeptical of the Ethereum Foundation’s desire to move from proof-of-stake to proof-of-work.

“We are skeptical about the ability of the Ethereum Foundation’s proof-of-stake model, dubbed Casper, to replicate the security and scalability of tested proof-of-work models,” notes the report. “Investors would be prudent to invest in digital asset models with a strong track-record, where the risks are better understood.”

The Ethereum Classic community has no plans to switch to proof-of-stake at this time.

Protocol Economics

In terms of the economics of both platforms, the Ethereum Classic community appears to have a greater focus on making sure ETC is viewed as an investable digital asset. Indeed, the original terms and conditions of the Ethereum presale indicated that the tokens for sale were a software purchase and not an investment.

Ethereum currently has no cap on the supply of ETH.

Ethereum Classic recently introduced plans for a cap of around 210 million ETC. The exact number is an estimate due to variations in the ETC reward rate. The supply will not exceed 230 million ETC.

The report notes that large amounts of ETC being held by specific entities, such as the Ethereum Foundation and the DAO hacker, create risks associated with holding that digital asset.

The report also notes issues with the centralization of ETH holdings as well. “However, given that a concentrated group of developers and contributors (including the Ethereum Foundation) purchased 72 million of the 89.4 million ETH outstanding during the 2014 pre-sale, any slowing of ETH’s supply rate could raise significant concerns about centralization,” notes the report. “This is even more alarming in the context of a proof-of-stake version of the protocol, where large stakeholders can have tremendous influence, potentially at the expense of other network participants.”

Having said that, the distribution of ETH and ETC should be somewhat similar up to a point because both are based on the same initial distribution of ether tokens.

Protocol Development

The report from Grayscale Investments also points out the risks of centralization in terms of Ethereum protocol development. “Although Ethereum claims to be a decentralized platform, it is centrally funded by the Ethereum Foundation,” says the report. “The development funding (and consequently the innovation roadmap) is largely directed by a single entity and a few individuals.”

In Grayscale Investments’s view, the Ethereum Classic roadmap is much more open and transparent.

The Investment Case for ETC is Still Unclear

Grayscale Investments are obviously convinced that their research indicates a stronger investment case for ETC over ETH, but many of the issues found with ETH are also found with ETC.

For example, the centralization issues found in Ethereum are found in essentially every cryptocurrency network besides bitcoin by nature. Small cryptocurrency ecosystems have less users who are likely not diverse, which tends to centralize control in a few of the largest players.

The investment case also relies on Ethereum Classic being useful as a decentralized platform for the execution of smart contracts. Up to this point, there haven’t been any major applications built on top of this sort of network. Whether this kind of network will be useful to anyone is still unknown.

Lastly, there is no mention of RSK, which is an Ethereum-esque sidechain to bitcoin, and other competitors (outside of Ethereum) to Ethereum Classic in the report. The lack of any mention of RSK in the report is particularly puzzling, as Grayscale Investments’s parent company, Digital Currency Group, is an investor in the team behind the bitcoin sidechain.