It has just come to my attention that there is a new cryptocurrency trading on exchanges. Ok, I learned about it a few weeks ago, and I have since followed it closely.
It turns out that within hours of it coming into existence, on July 20, 2016, its global market cap was hovering close to the $170 million mark. To give you a context, that makes it the sixth largest cryptocurrency in a list of 100.
However, it isn’t this impressive and fast market performance that is the news. The news is how this cryptocurrency came into being. Indeed, that will remain a subject of study for many years to come.
Most importantly, though, we can interpret its emergence as a foreshadowing of what might happen to Bitcoin if the community around it finally agreed to increase the network’s capacity so that it can process more than the seven transactions per second it currently does.
The new cryptocurrency I am talking about is Ethereum Classic or ETC as it has come to be popularly known. And the event that led to its emergence is the Ethereum hard fork (keep reading; I will explain what that is further down).
At first, major exchanges like Coinbase disowned ETC and even made it hard for those who had the old coins with them to get them out. However, a few fringe exchanges like Poloniex began to support it.
Finally, on 4th August Coinbase gave in to pressure from the Ethereum Classic enthusiasts and announced it would support the buying and selling of the new cryptocurrency.
Currently, the total value of ETC is about 10% of that of the Ethereum Ether.
ETC isn’t really new
I know this might sound confusing, but ETC isn’t really a new cryptocurrency. It is the old Ethereum ether. It so happened that the community abandoned it for a newer version of the Ethereum blockchain.
The community had agreed before the hard fork that the new Ethereum would be the only version. After the hard fork, however, a few nodes in the Ethereum network chose to stick with the old version and continued powering it.
Thus the new version became Ethereum and the old one Ethereum Classic. But since the community had agreed that the new version is the real Ethereum blockchain, we ended up treating the old one as a new cryptocurrency.
To understand how the Ethereum community found itself splitting its blockchain into two independent ones, we need to back up a bit.
As we were ushering in 2016, two German brothers, Simon Jentzsch and Christoph Jentzsch, alongside their partner, Stephan Tual, were working on a new platform for managing and funding projects.
They called it Decentralized Anonymous Organization (DAO) and it was one of the many projects their blockchain startup, Slock.it, was working on.
A new business formation
In late March 2016, they released the DAO whitepaper. The DAO was to function as a company. It would design and produce products through subcontracted service providers. It would then sell these products to the general public and make a profit for its investors.
However, unlike conventional companies, all of the DAO’s processes would be smart contracts on the Ethereum platform. There wouldn’t be a chief executive officer or a board of directors to make decisions and oversee projects. All decisions would be made through voting by all shareholders.
This new way of managing and funding projects stoked the Ethereum and the wider crypto community. So much so that when the DAO launched its crowdfunding, many couldn’t resist backing it.
By the end of the crowdfunding period on the 28th May 2016, DAO had raised about $160 million in ether (ETH). That was close to 16% of all ETH in circulation.
But a few weeks later, disaster struck. Someone had taken the time to study the DAO code and was able find a loophole. The anonymous attacker initiated a process to cash out close to $60 million of the raised funds.
Not just the backers of DAO but the entire Ethereum community was in a panic mode. If the hacker succeeded, that would taint not only the DAO but also the whole Ethereum ecosystem.
Struggling to beat the hacker
Efforts were put in place to take back the funds. One of these was what came to be known as the White Hat initiative. A few developers were trying to find a way to not only seal the loophole but also wrestle the money back by tweaking the code.
Unfortunately, that wasn’t yielding much even as the day when the attacker could cash out was fast approaching.
In the end, the community was left with one option. That is to change the Ethereum blockchain software and thus make the attacker’s transaction on the DAO invalid. Many couldn’t imagine the consensus to do a hard fork a few weeks before. In the end, it did happen.
But what is a hard fork?
This just means a peer-to-peer network, like that of Ethereum, adopting a new software version where nodes that don’t upgrade are excluded from the network. It is the opposite of a soft fork. In the latter nodes that don’t update continue to communicate effectively with the rest of the network.
Now back to the DAO caused Ethereum hard fork. Even before it happened, it was controversial. This is especially because the hacker didn’t really break any code. The attacker just spotted a loophole in the DAO code and executed a smart contract as it was designed to work.
Blockchain enthusiasts have always explained smart contracts are agreements that hardly anyone can tamper with. And some like Emin Gün Sirer, a professor of computer science at Cornell University, saw changing the code to make a smart contract invalid as overruling this position.
“If contracts can be reverted,” he wondered in one of his blog posts, “then how exactly are smart contracts any better than regular old paper contracts?”
Weeks after the hard fork, the debate is slowly shifting to what it means to Bitcoin. This is especially given that hard forking is an option the Bitcoin community is seriously considering as a way to upgrade the Bitcoin network.
What are the takeaways from the Ethereum hard fork?
With bitcoin community still struggling to agree on how to go about a hard fork, the success of the Ethereum one tells the Bitcoin community that yes it is possible.
Further, however, the rise of Ethereum classic (ETC) lets the Bitcoin community know that it is highly likely that in the case of a successful hard fork, it should prepare to accommodate a new coin. Not everyone is going to jump to the new blockchain.
Nevertheless, with exchanges like Poloniex and Coinbase supporting the buying and selling of ECT, it is apparent that money will be made anyway.
So the Ethereum hard fork is both an inspiration and a caution to the bitcoin community. It says that it is doable and at the same time warns of a possible split of the blockchain into two independent blockchains.