Ethereum founder Vitalik Buterin: The emergence of ETC was anticipated long ago, and he supports the development of "letting a hundred flowers bloom"

Chapter 0 Introduction

Ethereum created two chains through a controversial hard fork, and now the tokens on both chains have very good prices, without the expected crash. I was puzzled and looked through my economics study notes but couldn't find the logic and evidence, but suddenly the answer seemed to jump into my head. Ethereum's hard fork into two chains is not an inflationary stock issuance at all, but rather a corporate asset divestiture.

Chapter 1 IPO and stock issuance

The listing of a company, i.e. the initial public offering of shares, is actually the process of issuing additional shares. Let us use an example to illustrate:

1) A and B each invested 500,000 yuan to establish a limited liability company. The company has 1 million shares, the total assets at the beginning of its establishment are 1 million, and the share price is 1 yuan per share. A and B each hold 50%.

2) The company is doing well and is going public. The company plans to issue 1 million shares. If the company is successfully listed, the total number of shares will become 2 million, right? This is an additional issuance.

3) The company's valuation before going public was 10 million yuan. What was the issue price of the listed shares? 10 million yuan/1 million shares = 10 yuan/share. This is a key point. The share price of the additional issue is the company's valuation divided by the shares before the additional issue. Only in this way will the interests of the original shareholders not be harmed. Otherwise, which shareholder would be stupid enough to go public?

4) The company will issue 1 million shares when it goes public, and will raise 1 million*10 yuan=10 million yuan.

5) After the company successfully went public, its total assets became 20 million, of which 10 million was the pre-IPO valuation and 10 million was newly raised funds.

6) After the company was successfully listed, shareholders A and B still only held 500,000 shares each, and their shareholding ratio dropped to 25%. That is, their equity was diluted. However, they did not take advantage nor suffer any loss, because the net assets calculated by multiplying their shares by the stock price have nothing to do with whether the company is listed or not, and are the same.

Let’s summarize the impact of a company’s stock issuance process on its stock price and shareholders.

After a company successfully goes public, if it wants to issue additional shares, it is actually the same as an IPO, except that the number of shareholders has changed, but the calculation method of shares and stock prices is the same as an IPO. In the process of issuing additional shares, all original shareholders will not suffer any loss or take advantage. The prerequisite is that the company's valuation is accurate.

You see, going public actually has no impact on the total value of shareholders' stocks, but the benefit comes from the increased liquidity of stocks, and shareholders can sell their stocks and cash out.

Chapter 2 Corporate Divestiture

We all use Sina Weibo, right? But there is one thing I want to talk about today. Sina as a company went public on NASDAQ in 2001, but strangely, Sina Weibo also went public on NASDAQ in 2014. Weibo was originally a subsidiary of Sina. The parent company went public, and the subsidiary went public again.

What is happening more often in the market is another kind of corporate behavior, called asset divestiture, which means that the company sells off part of its business and no longer needs it. Many asset divestitures are divestitures of non-performing assets, of course, there are also divestitures of good assets, such as Sina's Weibo, or conversely, Weibo divested Sina.

It is easy to understand that a company sells off a part of its business and then the shareholders share the money, right? The shareholders' shares will not change, neither the amount nor the percentage. With the divestiture of assets, shareholders will receive dividends from the funds obtained from the sale of assets. As for whether the stock price will rise or not, it still depends on the market's valuation of the company. If it is judged that this asset divestiture is beneficial, then the stock price will tend to rise, otherwise it will fall.

There are many benefits to asset divestiture, such as revitalizing resources, improving corporate capital liquidity, concentrating energy and resources on core business, etc.

Chapter 3 Ethereum IPO and Additional Issuance

Ethereum is a project that was successfully formed through crowdfunding on the Bitcoin blockchain. Let’s analyze the Ethereum IPO process as if it were a listing on the Nasdaq.

The valuation of the company Ethereum was not audited by the China Securities Regulatory Commission or accounting firms, but was calculated by the Ethereum team itself. We can directly look at the results of the crowdfunding.

Ether is equivalent to the stock of the company Ethereum, and the listing process is the process of investors using Bitcoin to purchase Ether.

Ethereum crowdfunding received a total of 31,529 BTC, and investors purchased a total of 72 million ETH. The price of a single ETH is 31,529/7200=4.379 BTC/10,000 ETH. This is the price of the IPO.

Ethereum started its business after a successful crowdfunding, but unlike companies listed on NASDAQ, Ethereum is constantly issuing new shares through mining. As of now, the total amount of Ethereum has reached 82.37 million ETH, and all newly issued Ethereum is freely circulated in the secondary market. The current price of Ethereum is 0.018 BTC/ETH, far exceeding the IPO price.

Below is the price curve of Ethereum in the past year

Remember that the IPO price of Ethereum is 0.0004 BTC/ETH, and Ethereum is issued every tens of seconds on average, with more than 15 million ETH issued each year. However, as can be seen from the chart, the price of Ethereum has been very strong. It can be seen that the market value of Ethereum has been increasing, and the market has supported its continued issuance of shares by raising prices.

Ethereum mining actually increases the issuance of Ether, but the market has not given a strong depreciation. Instead, it has supported its issuance by increasing prices.

Chapter 3 Ethereum Asset Divestiture

A month ago, a hacker stole about $60 million worth of Ethereum from a smart contract called Dao on the Ethereum platform. Ethereum launched a hard fork to get back the stolen Ethereum from the hacker. But someone copied all the data before the Ethereum hard fork and ran a project called ETH Classic without the hard fork code. We can call its stock ETHc. After 7 days of market selection, ETH and ETHc coexist in the market, but the prices are different, and yesterday's trading volume was very large, and it was not clear which one was going to die.

Before the hard fork, ETH and ETHc were exactly the same. People who held ETH before the hard fork had an extra ETHc for no reason. They say there is no free lunch in the world, but these ETHcs are indeed free. This is similar to Ethereum shareholders having an extra share of stock for no reason.

This is similar to the asset divestiture of a company. Ethereum has a subsidiary called Dao, which was not doing well and had a lot of money stolen. Ethereum said, I don’t want you anymore, I will sell you, and sell you together with the money (liabilities) stolen by hackers, and what all Ethereum shareholders receive is called ETHc. As for how much profit shareholders can get back, it depends on the price they sell ETHc at in the market.

The IPO and additional stock issuance of a company is the process of inflating the stock according to the valuation and then selling it to the market to obtain additional funds. The divestiture of assets is the process of selling the assets to be divested to the market without changing the shares to obtain additional funds. Ethereum mining is similar to the former, and the hard fork of ETHc is similar to the latter.

The part of the business that Ethereum sold is now in great demand, and ETHc is rising. Ethereum's parent company has not been abandoned by the market, and the price of ETH is still very strong. For now, this is a successful asset divestiture.

Chapter 4 What will happen to Ethereum in the future?

The functions of the two chains, ETH and ETH Classic, are almost the same. In the long run, the market is unlikely to need a blockchain with completely duplicate functions. The price fluctuations in the short term mainly depend on everyone's short-term speculative expectations. If you want to have value in the market in the long run, you still have to provide users with more practical functions in addition to speculative price expectations. I think ETH and ETHc will inevitably decide the winner, and I personally think that ETH Classic will slowly disappear.

Chapter 5 Conclusion

The emergence of two chains in the Ethereum hard fork does not mean an increase in the issuance of Ether, but is just a process of Ethereum divesting its assets.

Companies listed on the blockchain do not need to be audited by accounting firms or supervised by the China Securities Regulatory Commission. Everything is open and transparent. This is an extreme way to explore the free market.