What began as an attempt to save investor money in a high profile project has resulted in a schism that has effectively split the community on the second largest public blockchain.
The breakup is not just psychological. It’s also technical, thanks to the design of public blockchain systems, with competing visions manifesting in two very real blockchains or versions of the project’s transaction history.
Starting this weekend, two groups will be working on two competing versions of a project called ethereum, a blockchain-based platform designed to enable decentralized application development.
When Bitcoin envisioned how a distributed group of users could create and manage a currency, ethereum wanted to enable a distributed group of users to create and manage a decentralized, uncensored app store. (For more information, see our latest CoinDesk research report.)
However, there are now two slightly different versions of this platform available to users: Ethereum, the “official” version of the blockchain managed by the original developers, and Ethereum Classic, an “alternative” blockchain managed by an entirely new team .
Both offer the same technology platforms and, according to developers, have agreed on a formal roadmap for further progress. The small differences, however, have created two markets totaling around $ 1.2 billion.
How did we get here?
Let’s start with the DAO.
The DAO, short for distributed autonomous organization, has long been the most notable Ethereum project and raised $ 150 million in ether – the cryptocurrency of the Ethereum network – during a public crowdsale earlier this year. Anyone who had ether could participate online. The idea was simple in theory. Investors would send money to the DAO and receive ballots, and then those who invested (and voted) would democratically decide how the DAO should distribute those funds.
Just as the voting began, the DAO was hacked, attacked, or otherwise compromised, depending on your opinion. To some in the academic community, the early problems were evident and debates about their severity had already begun.
However, this all came to a standstill when a person or individuals used a valid action in the code to withdraw the funds to another DAO that they or he controlled. The promotion was valid for the Ethereum platform insofar as it could be carried out in accordance with the contractual conditions. For others who invested, it was a much more controversial move.
The Ethereum community eventually held a vote, with the majority of attendees agreeing that they wanted to change the Ethereum code to return the funds to investors – and away from the attacker.
Enter Ethereum Classic
What happened next was that a small minority disagreed with this election and then took action.
While the majority argued that blockchains can and should be changed if enough people agree, other developers claimed that a blockchain must be censorship-resistant and tamper-free in order to provide a solid history.
Instead of making the switch when Ethereum created an entirely new blockchain, the vocal minority continued to tear down the old version of the blockchain. In fact, ‘ethereum classic’ is a parallel version of the blockchain where funds were never returned to ether owners who lost funds when The DAO died. In contrast, Ethereum is a blockchain that has moved those funds to another address.
This seemingly minor disagreement, however, had an overwhelming impact.
“The Ethereum Foundation reacted as badly as possible to the DAO debacle,” it says on the classic ethereum website and continues:
“We believe in the original vision of Ethereum as a world computer that cannot be shut down and that makes irreversible smart contracts.”
Project organizers followed up with a crypto manifesto setting out the rules that blockchains should follow in their eyes, including openness and, perhaps more importantly, immutability – the idea that transactions, in this case a hack, should no longer be reversed.
“Not all blockchains are created equal,” they say.
And by sticking to the unchanged version of Ethereum, they are preserving those values.
Who is involved in the Ethereum Classic?
The Ethereum Classic team currently has four developers, according to the main organizer Arvicco (he won’t reveal his identity), but in theory anyone can join. Just like Ethereum itself, Ethereum Classic is supported by an open source community.
A number of well-known developers have also expressed an interest in supporting the classic Ethereum project, including the former CEO of Ethereum, Charles Hoskinson (who left the team in 2014 because of the differences described here).
It is important, however, that the blockchain is not only supported for ideological reasons. A growing number of miners in Ethereum have apparently devoted computing power to classic blockchain because they see value in securing their transactions and gaining the associated rewards for mining.
At the time of going to press, the hash rate for the network was 544 GH / s, or about 13% of the hashing power of the Ethereum network. This is an impressive number as the blockchain has only been available for a few days.
Why is it profitable?
The question of what gives classical ethers (ETC) value is still up for debate, but in short, it has value because people believe in the project and those who are interested in supporting it (or speculating in the market) ), now that it is listed on stock exchanges.
Since Ethereum Classic is essentially a clone of digital currency, Ether holders can now make money by creating an account on the Ethereum Classic version of the blockchain and duplicating their balance.
Since Ethereum Classic is a replica of the original blockchain, with the exception of a few key changes related to DAO transaction reversal, anyone who had tokens on Ethereum at the time of the diversion will now have the same number of tokens on Ethereum Classic. For traders, this is essentially free money.
If you owned $ 100 of ether at the time of the fork (when it was worth about $ 12) you would have had about 8 ETH, which means you now have 8 ETC, or an additional $ 16. Those who had more Aether now have a lot more free money.
This has since caused problems for the exchange, as even if they don’t want to list any classic ether tokens, they probably hold customer funds anyway by simply owning ether at the time of the split. But major exchanges have taken up the alternative Ethereum coin, so it is now possible to swap ETH for ETC.
Poloniex, an Ethereum exchange, was the first. Kraken, Shapeshift and Bitfinex followed shortly after, meaning that most exchanges that support Ethereum now support Ethereum Classic.
There was also an opportunity to profit by switching between currencies, and a founder of a startup even wondered if this was a new way to double-spend the currency, a problem that should be resolved with the Bitcoin blockchain since no central authority is required.
Who is affected?
Holders of Ethereum tokens on both blockchains can be affected by “repeat attacks” if they fail to properly “separate” their addresses to differentiate them on each blockchain. This seems like a complicated process that every single user has to follow.
Again, since much of the Ethereum classic is identical to the old network, most users with a credit on one of them can use it on the other. However, this could theoretically lead to some funny mistakes such as: B. accidentally moving funds on one of the networks other networks.
Poloniex has decided to automatically take precautionary measures for its users and the Ethereum developer Vitalik Buterin suggested that Ethereum Classic update its code to solve the problem.
What does this have to do with Bitcoin?
Speaking of important takeaways, whatever happens to classic is a new insight that could be used in Bitcoin.
The debate about expanding Bitcoin’s block size, a technical upward move in terms of the size of the transactions the network can support, doesn’t seem relevant to the breakdown, but it is.
One point Bitcoin Core developers continued to argue throughout the longstanding debate was that controversial hard forks are dangerous and can have unexpected consequences, such as splitting a blockchain into two competing blockchains.
Many in the community, for example BitPay co-founder and CEO Stephen Pair, believe the sudden popularity of Ethereum Classic shows that these were legitimate concerns.
Add to the debate that Ethereum’s hard fork was instantly rated a success by many Ethereum developers and others in the Bitcoin industry. For example, Coinbase CEO Brian Armstrong tweeted that they are “nothing to fear leading to multiple coins”.
But that analysis may have been premature, and he stated it in a new blog post.
In a strange twist, some Bitcoin developers seem to be supporting Ethereum Classic for precisely this reason, also to demonstrate the potential risks of switching to a new blockchain to update the code base without consensus.
What does this mean for Ethereum?
The attention currently being paid to Ethereum Classic may or may not be fading. Using the example of Bitcoin Classic, the subreddit Bitcoin Classic is still active, even if it never replaced Bitcoin as intended by its engineers.
There could be two Ethereums evolving into the future in different ways.
Currently, one of them has the same functionality that Ethereum is supposed to offer, mainly through smart contracts that can be used to create versions of Twitter protected from censorship and decentralized autonomous organizations. But it’s both cheaper and more tedious to use without an ecosystem of developer tools built on it.
Ethereum itself is also affected as some users and miners stay on the old chain, reducing the total number of users and network security.
Now that it has happened and there’s an Ethereum classic out there, the community has tons of questions. That includes whether it’s worth the risk of forking the blockchain hard or rewriting the code to roll back transactions without near-unanimous consensus.
In either case, it’s not clear whether the rise of Ethereum Classic is a bad thing for technology.
The protest blockchain gave the minority the opportunity to build their own system and some people think it’s an exciting development.
What do you think? Share your thoughts below.
Correction: An earlier version of this article stated that Bitcoin Core member BTCDrak contributed to Ethereum Classic.
Disclosure: CoinDesk is a subsidiary of the Digital Currency Group that manages an investment vehicle for Ethereum Classic.
Pete Rizzo was the co-author of this report.
Baby picture via Shutterstock