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When the Ethereum system first launched, people had to pay money for ethers in order to request work for a contract. Where did they go to buy ethers and who sold ethers to them? Were those individuals that were selling ethers allowed to create new ethers out of the blue, and are they still able to do so now?

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The initial funds, paid via Bitcoin, were sent to accounts controlled by Ethereum Switzerland GmbH. This company was then liquidated, according to plans provided, in order to provide fiat currency to those involved. The funds were/are used for guiding the Ethereum platform towards maturity. The number of tokens to be created at start depended on the amount of Bitcoin received. The initial token creation allocated a portion to the people who bought into the sale (60M eth, ~83%) and a portion to the Ethereum Foundation (12M eth, ~17%); the Foundation used some of its funds to pay bounties for people finding bugs and stress testing the protocol during early testing. If treated as an IPO, the Ethereum foundation raised USD 18M at 83% for a total valuation of USD 21M and sold all of its control over Ethereum (by making it open source). Thus, nominally, the Ethereum Foundation has no more control over Ethereum than Linus Torvalds has over Linux. In practice, the Ethereum Foundation being the Ethereum Foundation, things it says are taken more seriously than the things you and I say, when it comes to Ethereum.

Even at genesis, the terms of how many ethers would be created and to whom they would be distributed were clearly laid out. The Ethereum protocol hardcodes the amount distributed at creation and does not allow the Foundation (or anyone else) to create ethers on the main chain through processes other than mining (presently) and, possibly in the future, staking. In both cases, these aren't "out of the blue" -- they're playing by the pre-established rules. This is like how a fractional-reserve-governed commercial bank can't create money whenever it wants to, but it can increase the M1 money supply by issuing loans.

  • When you mine blocks, who pays you coins? The Ethereum Foundation? – Alexandru Jul 28 '17 at 19:42
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    Those coins are paid out of the protocol itself; in effect, they're created out of thin air, but the release rate is controlled by the protocol itself. It's like the game Monopoly: the amount of money the players hold in total increases only when they pass Go (or draw a few special cards), as described in the rules; players can't decide to give themselves more money; the remainder comes from a bank with infinite money (in Monopoly). – lungj Jul 28 '17 at 19:52
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    And, just like Monopoly, the speed at which you pass Go/mine a block is somewhat random. Similarly, monetary inflation (as opposed to price inflation) decreases with time in Monopoly and Ethereum: the rate of Go-passing/mining* is fixed, but since the ever-enlarging supply of money is increasing, the nominal % increase drops. * The Ethereum difficulty bomb/the proposed reduction in block mining rewards change this rate, but it is well-documented. I think under Casper, the proposed monetary inflation rate can change, but it depends on validators' risk profiles; there is a game-theoretic max. – lungj Jul 28 '17 at 19:58
  • Perfect! That explains everything. – Alexandru Jul 28 '17 at 20:09
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