Ethereum Classic: crypto failure or the free market at work?

Wednesday 10 August 2016

There’s been a lot of talk about the ideologies of Ethereum and Ethereum Classic. But maybe it’s much simpler than it seems.

The failure of The DAO casts a long shadow on Ethereum. The massive hack of the smart contracts application was the direct reason Ethereum miners agreed to fork the underlying protocol. But rectifying the theft - an ostensibly sensible thing to do - had serious implications.

You can read former Ethereum CEO Charles Hoskinson’s eloquent blog post about his return to Ethereum, to support Classic, here. The issue he pinpoints is this: ‘The leadership of the ethereum project have made a decision to fork the protocol to eliminate the social contract of computational apathy. This fork is not about returning stolen money. It’s not about protecting the interests of the Foundation from a legal or regulatory perspective. It’s simply about changing the code is law paradigm to code is usually law until it’s not.’

On the surface or it, the fork was not particularly controversial - at least within the Ethereum mining community. Miners voted overwhelmingly to fork; of those who indicated a preference, some 95% were in favour. That’s as near to unanimous as it’s reasonable to expect. The fork duly went ahead.

And yet, subsequent events suggest that things weren’t that cut and dried. At the time of writing, Ethereum Classic has around 20% of both the network hashrate and market cap of Ethereum. What happened? Did a silent minority, who hadn’t chosen to vote, come out of the woodwork? Did a proportion of miners change their minds?

Fork roads

Ethereum's community has diverged - but the question is why?

Money talks, loud

It’s possible that partly explains things, but in my mind something simpler is going on. The Ethereum chain was duplicated. With the exception of the funds held in the DAO hacker’s address, balances on one blockchain were instantly created on the other. Ethereum Classic (ETC) soon began trading on exchanges. The result: free money. If you had Ethereum (ETH), you now had ETC. And money is a powerful incentive.

Miners soon realised there was money to be made mining ETC rather than ETH. If the price of ETC rose ahead of the hashrate applied to the network, there was incentive to shift and mine that instead of ETH. Peak hashrate for ETH was on 23 July, after which there was a noticeable drop-off. It seems too much of a coincidence that ETC started trading on Poloniex on 24 July. Its trading volume is currently around 3 times that of ETH.

Classic has a different philosophy, which goes beyond the immutability of the blockchain. It’s interesting that Hoskinson supports a continued proof-of-work model, whereas Ethereum will move to proof-of-stake in due course. ‘When ETH takes the leap to [PoS] Casper, the miners have somewhere to go.’

Is the Ethereum fork really about ‘returning stolen money… [or] protecting the interests of the Foundation from a legal or regulatory perspective.. [or even] about changing the code is law paradigm to code is usually law until it’s not’?

Cynically, none of the above. It’s about money. Ethereum’s divergence is the result, or victim, of the free market.

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