What’s the difference between Ethereum and Ethereum Classic — and how did we end up with two cryptocurrencies with a similar name? Is there a divided community of bitter rivals out there throwing chairs at each other after violently disagreeing on the future of blockchain?
Well, it’s a complex tale — a story that shows code isn’t necessarily “law,” and human will can still play a significant role in the future of any platform…even in a decentralized space.
As you would suspect, there was a time when only one Ethereum ecosystem existed. After one of the most significant events in cryptocurrency history, a hard fork took place — creating two different versions of the blockchain network.
Ethereum vs Ethereum Classic
The history of the original Ethereum network began back in 2013, when Vitalik Buterin’s idea for a new programming language didn’t gain much traction within the Bitcoin community.
Buterin made a case for Bitcoin to create a new programming language that could automate tasks and allow apps to be built on top of its blockchain.
As there wasn’t much interest in his idea, he decided to raise funds via a crowdsale. In July 2014, one of the largest crypto fundraising efforts took place — amassing 25,000 BTC with a market capitalization of $17 million at the time.
Ethereum — a global, open-source software platform — was born.
The platform would allow the creation of decentralized smart contracts, which are essentially agreements between two parties that are written in code. The contract gets processed automatically by the blockchain once the conditions in the agreement are met. The combination of blockchain’s immutability, teamed with its open-source functionality, make smart contracts very appealing to many businesses.
So far, so good. But fast forward to summer 2016, and one of the most dramatic crypto attacks in history would unfold — changing the course of Ethereum forever. A hard fork was deemed the most appropriate course of action, with most developers choosing to upgrade to Ethereum. This left the original blockchain, now known as Ethereum Classic, out in the cold to forge its own path. What caused all of this mayhem? The DAO.
The DAO: Decentralized Autonomous Organization
In its essence, the DAO (which stood for decentralized, autonomous organization) was a hugely promising idea, allowing many would-be investors and entrepreneurs a chance to pitch and back ideas, with all parties reaping the rewards if they were successful.
It was essentially a decentralized Kickstarter that used the Ethereum blockchain and operated via a set of smart contracts. It raised over $150 million or 12.7 million Ether in April 2016, making it one of the largest crowdfunding campaigns in history.
To get involved, you needed to buy DAO tokens using Ether. You could then use your tokens to vote on which decentralized applications (DApps) to support. Projects that got more than 20% of the community’s support would be awarded a share of the investment funds from the DAO.
While the DAO was a great way to encourage decentralized investment — stopping management types from having a final say on who got funding — there were some significant weaknesses which would eventually lead to its demise.
A major flaw was the “Split Function,” which was created as a way to allow an investor to withdraw their support from a project. Once you decided to withdraw your investment, you would get your Ether back and have the option to create a “Child DAO.” The only rule was that your funds couldn’t be accessed for 28 days. Meanwhile, the public ledger would be updated, and everyone was happy. Until...
The DAO Exploit
On June 17, 2016, the DAO was taken advantage of. To explain what happened, let’s circle back to the splitting function, which was triggered repeatedly to drain the DAO of 11.5 million ETH worth $50 million at the time. The amount taken represented about a third of the DAO’s Ether.
The exploiters found a loophole in the blockchain code that meant the network repeatedly refunded the same DAO tokens — without the transactions being registered on the public ledger.
So how did this happen? Well, one big problem was that the coders of the DAO smart contract didn’t account for the possibility of a recursive call. The smart contract was also set up so that ETH would be refunded prior to the internal token balance being updated.
The person or persons responsible didn’t manage to run off into the sunset laden with virtual assets. The 28-day rule of not being able to access your funds came into play, which meant that the Ether wasn’t lost completely. The community was left trying to pick up the pieces and assess the damage. The person or persons also eventually stopped draining the DAO, even though they could have continued.
To explain further, the problem itself didn’t come from Ethereum. Instead, it was a vulnerability that was exploited from within the code of the DAO, which was built on the Ethereum blockchain network. In spite of this, it was hugely reputationally damaging for Ethereum — and it meant that the team had to act quickly to redeem itself.
Here’s the problem: there was bitter disagreement over how best to rectify the situation. Many argued that blockchain was supposed to be immutable, and therefore nothing should be done. Attacks had happened in the past to other virtual assets, without the need to hard fork in order to refund those licking their wounds.
After much deliberation within the community over the taken Ether, a vote was taken — and it was concluded that the best course of action was to hard fork and refund all affected token holders. The hard fork allowed the stolen funds to be sent to an account that the original owners were able to access.
This left Ethereum Classic as the original chain, with the tokens unexpectedly taken from the DAO left untouched with the exploiter. Ethereum, on the other hand, was the chain that returned the tokens.
ETH vs ETC
So… which digital asset is best: Ether or Ethereum Classic?
When comparing the two, it’s worth remembering that the hard fork was seen as extremely controversial and was hotly debated at the time. For many, it was the only option to save Ethereum’s reputation. But for others, it was a betrayal of what blockchain technology set out to do: stop things from being manipulated based on a human whim.
As a result, the ETC community argues that they have stayed loyal to the notion that the blockchain should never be changed. Their network contains the original blockchain showing every transaction, including the exploit. Critics of ETH argue that future forks could end up taking place for any reason deemed worthy enough to break the rules.
In comparison, the Ethereum community felt they had to take drastic action because so much investor money had been taken, and confidence in Ether was plummeting. ETH benefited from the backing and support of co-founder Vitalik Buterin, who is highly regarded and influential within the community.
Today, ETH remains more popular than ETC and has the business backing of the Enterprise Ethereum Alliance, which has more than 200 members including financial heavyweights such as JPMorgan and Citigroup. It was home to a flurry of ICOs in 2017, is supported by practically all cryptocurrency exchanges, has a bigger development team through the Ethereum Foundation, and this version of Ethereum is now at the beating heart of decentralized finance.
As of February 2021, the Ethereum Classic network has a market cap of about $890 million — a tiny fraction of Ethereum’s $164 billion valuation. This is partly down to how ETC decided to follow in the footsteps of Bitcoin by capping the supply of coins at about 210 million. To compare, Ethereum creates Ether at steady rates with no hard limit as to how much digital currency can be mined.
Another difference between the two is that the Ethereum chain will soon update from a proof-of-work (PoW) consensus mechanism to adopt proof-of-stake (PoS) algorithm, in an upgrade known as Ethereum 2.0. This should mean that the Ethereum network will be faster, more efficient and will be able to significantly scale transactions. As the fork meant that the new blockchain isn’t backwards compatible, many in the Ethereum Classic camp are waiting to see if they will also follow in the same direction.
What’s Next for Ethereum and Ethereum Classic?
In December 2020, the Chicago Mercantile Exchange (CME) — the world's largest derivatives platform — publicly announced that it would launch Ethereum futures in February 2021. If everything gets signed off by the U.S Commodity Futures Trading Commission (CFTC,) the future could look even more promising for Ethereum. The derivatives will allow investors to bet on the future price of an underlying asset without actually having to own it.
The future for Ethereum Classic isn’t so clear, and looks less promising than Ethereum’s. Following a series of 51% attacks, many developers have lost confidence in the network and analysts have stated that ETC needs to change to a PoS consensus mechanism in order to avoid future hacks.