Hi, and welcome to this guide on one of the most important yet less understood cryptocurrencies- Ethereum Classic. You probably know a bit about Ethereum (ETH) and have interacted with a few puzzling vocabularies in the course of your reading.
The DAO is among those vocabularies that you may have come across. Luckily, in this summarized guide, we’ll break it down and also explain the Ethereum split that happened because of it.
In this Ethereum Classic guide, I’ll share the following: The DAO and how it is associated with the Ethereum Classic Fork, different ways of upgrading a blockchain (soft and hard forks), and how Ethereum and Ethereum Classic compare in their market performances today.
Finally, I will share on ETH VS ETC in terms of their specific disadvantages and advantages.
After reading this guide, you should be able to explain how Ethereum Classic came to be, and how both ETC and ETH compare in terms of their current market performance.
Oh, and by the way- if, after engaging with the content in this article, you’ll discover you’ve developed a desire to purchase and hold some ETC, we will be glad to guide you on how you can do that.
When the two communities of ETC and ETH split from each other, it arouse bitter and divided opinions. Some individuals felt it was right to split the Ethereum blockchain to sustain confidence in it, while some felt that blockchain does not have to be changed to fit the desires of investors of developers. Well, we will be covering all this in a short while. Let’s begin.
- The Decentralized Autonomous Organization- The DAO
- What Could Possibly Go Wrong? The DAO Hack
- What Could be Done About The DAO Hack?
- The Ethereum Split and its Controversy
- What is Ethereum Classic?
- Ethereum (ETH)
- Advantages and Disadvantages of Ethereum and Ethereum Classic
The Decentralized Autonomous Organization- The DAO
The Ethereum blockchain is built around the use of smart contracts. If you are not familiar with smart contracts, they are simply programable agreements between two or more entities. This implies that money can be transferred from one entity to another without needing a trusted middleman. In this case, both entities verify or trust that the code is authentic, and the code releases the money once certain terms have been met.
The DAO (pronounced “dow”) or The Decentralized Autonomous Organization was a very sophisticated smart contract. Nonetheless, it had a very good purpose. The intention was that it would provide a reserve of money to compensate for the designing of decentralized applications being developed on the Ethereum network in the future.
The idea sounded simple, but designing it, as you are about to discover, was not. To gain voting rights in the DAO, you would have to purchase special tokens. These “DAO Tokens” would be purchased using Ethereum’s original cryptocurrency Ether. Owning DAO Tokens implied that you were a member of the decision-making team that decided which dApps received compensation and which didn’t.
To have a dApp (decentralized application) approved the one who developed it would first need it greenlighted by a team of known experts and developers on the Ethereum network. This would then be submitted undervote. If the dApp received more than 20% of the votes cast by contributors to the DAO, the cash would be allocated, and tasks on the project would proceed.
The DAO was a revolutionary concept that caught the attention of many investors. Almost everyone who had an idea about Ethereum wanted to purchase the right to vote on the network. They were attracted by the transparency and flexibility that characterized the system.
In the first month when DAO Tokens were made available for sale, the project collected a significant number of Ether coins. The projected value of the coins at the time of contribution was $150 million. This was 15% of all Ether in existence.
Those behind The DAO’s program were keen to craft an exit option. It would be of no benefit, once you were in, to be trapped there! What if crazy projects that you had no intention of being part of are given a green light by the community?
A door out of The DAO was hence crafted. It was named “Split Function”. This would give investors an option of reclaiming the Ether that they had invested. The “Split Function” could also allow users to design what was known as a “Child DAO”. In case multiple DAO members opt to join you, you could even begin accepting other ideas for dApps and invest money to develop them.
The only condition that needed to be observed in the whole smart contract was that in case members left the DAO, they would not be allowed to spend their Ether before a lapse of 28 days. Nonetheless, many developers pointed this out as a potential gap and quickly raised the issue. Unfortunately, their disapproval wasn’t considered as serious by the designers of the DAO.
What Could Possibly Go Wrong? The DAO Hack
On one fateful day in mid-June 2016, the gaps that some of the developers had disapproved of were exploited. Some managed to make away with an estimated one-third of all the money that had been stored in The DAO smart contract. For this enterprising hacker, it could have been such an amazing payday! They almost managed to steal Ether that was valued at around $50 million at that time!
Let’s have a closer look at how the hacker was able to exploit the gap.
If an owner of DAO Tokens wanted to opt-out of the contract, all they had to do is a request for them to be removed. The process was twofold. First, the user would get back the ETH coin they had given to The DAO at the beginning. Second, the transaction would update the ledger, and the total number of Ether in the contract would be updated as well.
Nonetheless, the hacker was able to come up with a function that made the process be on repeating mode before the ledger could be updated. This caused them to be paid several times the amount of Ether that they had originally invested.
The process was on repeat mode until almost a third of the total Ether coins that had been kept on the smart contract were transferred to the attacker’s “Child DAO” contract. This raised an uproar amongst enthusiasts of The DAO’s development.
At this instance, if you have a few Ether coins under your name, you might be worried. You might think that the entire system is not reliable. Don’t panic. It’s not. As Ethereum co-founder, who is also one of the developers, stated at that time: blaming the Ethereum network’s fault for the hacking on the DAO would be equal to blaming “the internet” every other time a website faces issues that cause it to malfunction.
What Could be Done About The DAO Hack?
Though irrational but understandable, some of the early investors who did not know blockchain coding or development rushed to sell their coins when they heard about the DAO hacking and thought Ethereum was broken. This caused the price to dip from $20 to around $13. Many thought this was the end of Ethereum.
Be as it may, because of the 28-day clause in the smart contract, there was nothing that the attacker could do with his $50 million until that time lapsed. This offered the Ethereum community time to discuss and finalize any potential solution. They came up with the following three ideas:
- The do-nothing approach. This is the “survival of the fittest” approach.
- Soft fork (more on this in a short while)
- A hard fork (also more in a short while)
I will cover the pros and cons of each below.
1. Do Nothing
The “survival of the fittest” approach is founded on the ideology that code is the law. It holds that if you make a bad code, you should be penalized. Because you are willing to put at risk hundreds of millions of dollars with an untested code, you should be punished. Since early crypto communities had such a strong inclination towards this ideology, it wasn’t a surprise that it found much support.
2. Soft Fork: What is a Soft Fork?
Because this is a beginner’s guide in trying to grasp the Ethereum Classic currency, it will only be fair if I explain what is meant by a soft fork.
Blockchains can be altered in one of two ways: with a soft fork or a hard fork. A soft fork refers to a change in the rules of the network that is backward compatible. Don’t be troubled if that sounds complicated, it’s not!
Think of it like Microsoft excel. If you have the latest version of MS Excel and save a spreadsheet document to a USB drive, it will still work fine when you take it over to your friend’s house who might have MS Excel 2018. This is what I refer to as backward compatibility. It is that simple.
Just like in the MS Excel example, the alterations in the guidelines of blockchain that are attributes of the newer chain won’t function in the older version of the chain. For instance, words added to the MS Excel spell checker will show up as errors on the outdated version of the software, but not on the updated one.
The soft fork concept, when used to sort out the mess created by The DAO, would imply that it was the choice of the user whether they wanted to run the new code or not. Nonetheless, whether they ran it or not, they would still have the ability to community amongst themselves. In theory, the proposal would completely restrict usage of the Ether that the attacker had stolen. The soft fork would then imply that any blocks that had a transaction involving stolen Ether would be ignored.
On paper, the idea seemed fantastic and received a lot of backing. Nonetheless, it took a short time for a community member to identify another potential challenge. The soft fork would expose the network to another potential hazard- a “Denial of Service” attack.
What Risks did a Soft Fork Denial of Service (DoS) Attack Pose?
Miners confirming transactions on the Ethereum blockchain are rewarded with “gas”. This reward also shields them from DoS attacks. A hacker would have to add a lot of “gas” for every “counterfeit” transaction they created for them to spam the network with transactions.
This makes attacking the network in such a way to be prohibitively expensive. The challenge with the soft fork concept is that hackers could spam the DAO smart contract itself with transactions. This would compel the miners to work out pointless algorithms and receive practically no financial reward for doing them.
This implied that the soft fork concept was scrapped. It also capped the number of potential answers to The DAO attack to just two: Hard fork or Do nothing.
3. Hard Fork: What is a Hard Fork?
While a soft fork is backward compatible, a hard fork is not. This is a major difference between the two methods of upgrading any blockchain.
Once a hard fork is completed, it cannot be changed. If you, as a miner, fail to implement the new rules or code yourself, you may fail to use the updated version of the software and also be blocked from interacting with the new network or blockchain.
The recommended hard fork in the Ethereum blockchain would divide the network at a certain point. The proposed point was right before The DAO attack. The concept is that until the point is selected, the old network and the new network (developed by hard work) would be identical. After the fork, the network would divide, and each new network would become independent from the other.
The concept behind the hard work is that it would reimburse all the missing funds to individuals who lost as a result of The DAO attack. A refund smart contract was meant to be available that would allow users to get their money.
The Ethereum Split and its Controversy
The idea of splitting Ethereum was met with high controversy among members of the Ethereum community. One group took the “code is law” stand and maintained that the whole idea behind blockchain is to deny a single authority the opportunity to control it. On the other side, many just wanted to receive their money back.
The ones who were convinced that the “code is a law” decided to stick with running the old version of the software that was developed before the Ethereum Classic fork and maintained the old chain intact, even with The DAO attack. In the meantime, those who were pro-refund started mining the new chain, causing the creation of two currencies where initially there had been only one.
The unchanged version of the network is now known as “Ethereum Classic” (ETC), and the new one, with The DAO attack refund, is known as Ethereum or just ETH. This second network has the majority of the community’s support as well as most of the lead developers on the project. This can be seen in the current disparity in market capitalization between Ethereum Classic and Ethereum after the split.
What is Ethereum Classic?
As I have stated earlier, the Ethereum classic was the native chain. There was no alteration to allow The DAO attack refund.
As of 16/10/2021, each Ethereum Classic coin was priced at $54.04. Its market capitalization stands at $7.021 Billion. In terms of total network value, it currently sits at position 26.
As much as Ethereum Classic is generally the same cryptocurrency like Ethereum (ETH), it has one big difference – most of the founding developers no longer work on it. Founders Gavin Wood and Vitalik Buterin both left it in favor of the new network. With such household names vouching for it, it probably seems curious that one would still want to be associated with Ethereum Classic.
To comprehend why they did that, it is crucial to first comprehend blockchains properly. The most important and potential block-buster feature of blockchains is that they work autonomously without necessarily needing control by any force within or without the project.
For those who stuck with ETC, the hard fork was a convenient fix to secure rich investors. It represented the exact opposite of what blockchain was developed to achieve.
As you can pick from the market capitalization of each currency, the cryptocurrency community considers Ethereum to be the original version of the Ethereum chain. At the time of penning this down, the value of the blockchain is absolutely way above that of Ethereum Classic.
One ETH is currently valued at $3932. The total market capitalization of the network stands at $1.02 trillion. This positions it second in terms of the most valuable cryptocurrency networks only after Bitcoin.
Advantages and Disadvantages of Ethereum and Ethereum Classic
Now, let’s quickly check some of the main advantages and disadvantages of Ethereum Classic and Ethereum.
- Potentially more upside ability for investors. Generally, this is a high-risk investment. However, there are some influential individuals, such as Barry Silbert of the Grayscale Investment Trust, who vouch for the project.
- Remained true to the native vision of what a blockchain is meant to be.
- It no longer has the original developers who conceive the idea of Ethereum in the first place.
- It does not have the EEA that is working on creating decentralized applications for its blockchain.
- Some perceive it to be supported by individuals who are opposed to the entire Ethereum project.
- Has the backing of most of the original developers. They are committed to the original blueprint.
- Its hash rate is higher than that of ETC. This implies that there are more miners approving transactions on the blockchain hence more secure.
- Has Enterprise Ethereum Alliance This is an alliance of some of the world’s largest banks and companies that are conducting trials with the blockchain.
- Can be bought on most of the cryptocurrency exchanges. It can also be kept in the most secure crypto-wallets.
- The Ethereum split broke one of the main rules of the blockchain. Blockchain is meant to be completely immutable. If it was altered once to save people’s cash, then it can theoretically happen again.
So, that’s been my guide to Ethereum Classic. I hope you now know more about the two cryptocurrencies: Ethereum and Ethereum Classic and how they came to be.
I have shared a lot in this guide so let’s summarize. After reading through this guide, you should be able to remember:
- What is The DAO
- Why The DAO failed
- What hard forks and soft forks are
- Why the Ethereum community split
- What is Ethereum Classic (ETC)
- What is Ethereum (ETH)
- The benefits and limitations of both
I hope you have found this guide both useful and enjoyable.