A hard fork refers to a change in blockchain rules that results in the creation of two separate branches of the blockchain. In one branch (or fork), the chain’s nodes (or miners) validate transactions and produce blocks while maintaining the old rules. In the other branch, nodes upgrade their software and operate by the new set of rules.
Early in the history of the Ethereum blockchain, a decentralized autonomous organization (DAO) called “The DAO” raised millions of dollars to create an opportunity for crypto-based investments. The DAO was based on a set of smart contracts which ended up being hacked and resulted in many Ethereum users losing their valuable cryptocurrency. This ultimately led to the hard fork that created Ethereum, where the funds were restored, and renamed the old chain Ethereum Classic.
Hard forks have also occurred several times in Bitcoin’s history, resulting in the Bitcoin Cash and Bitcoin Gold forks. Hard forks are also the process by which Ethereum continues to undergo upgrades, including its switch to Proof of Stake.
ETHEREUM CLASSIC ESSENTIALS
- Ethereum Classic is a hard fork of the Ethereum blockchain that uses a Proof of Work consensus mechanism and whose native coin is the ETC cryptocurrency.
- The hard fork that created Ethereum Classic was implemented due to a large exploit of the smart contracts belonging to a decentralized autonomous organization called “The DAO” in 2016.
- A few differences between Ethereum and Ethereum Classic include the latter’s dedication to Proof of Work, its decision to implement a capped supply with a fixed emissions curve, and its smaller (but dedicated) community.
How was Ethereum Classic created?
The DAO was launched in April 2016 through a crowdsale that raised over $150 million and distributed its DAO token to investors. As a result of its popularity and massive early investment, The DAO controlled about 14% of all ETH tokens. This became problematic when several security flaws were discovered in its smart contracts, which were ultimately exploited for $50 million worth of ETH—fewer than 2 months after the crowdsale began.
Although attempts were made to recover the funds from the hacker, The Ethereum Foundation ultimately set a vote for a hard fork, creating a new chain that would formally move on as “Ethereum.” This allowed the stolen funds to be reallocated to a smart contract called WithdrawDAO, where original owners of stolen ETH could recover their funds.
Ethereum Classic continues to exist as a blockchain that operates the Ethereum Virtual Machine (EVM), supporting smart contracts, decentralized applications (dapps), and its own cryptocurrency, ETC.
However, not all miners agreed with the decision to make this change and chose to maintain the original chain, dubbed Ethereum Classic.
How does Ethereum Classic work?
Proof of Work vs Proof of Stake
While Ethereum moved to a Proof of Stake (PoS) model in September 2022, Ethereum Classic chose to remain Proof of Work (PoW) as the consensus mechanism to validate transactions in an effort to ensure maximum decentralization and censorship resistance.
One criticism of PoS networks is that centralization and inequity are natural consequences of their structure, and the Ethereum Classic community hopes to avoid these pitfalls, such as 33% attacks. 33% attacks happen when one user (or pool of users) controls more than a third of all coins (like ETH), enabling them to potentially halt the production of new blocks.
Attackers of PoW networks, however, require 51% of coins to trigger this same effect, also known as double spending their assets. Ethereum Classic has seen multiple 51% attacks, including three over the course of one month in 2020. In one of these, about $5.6 million worth of ETH was stolen.
Despite its woes, Ethereum Classic formally solidified its dedication to PoW in 2018 by defusing Ethereum’s built-in difficulty bomb, a coded increase in mining difficulty meant to incentivize a network transition to PoS model.
Ethereum vs. Ethereum Classic
Both Ethereum and Ethereum Classic are founded on the same whitepaper proposed by Vitalik Buterin in 2014 and are powered by similar computer code through smart contracts. They can both run the EVM, support dapps, and facilitate secure transactions of crypto assets.
One main difference between Ethereum and Ethereum Classic is the use of PoW versus PoS as a consensus mechanism. Whereas Ethereum Classic defused its difficulty bomb, Ethereum underwent The Merge in September 2022, formally transitioning to a PoS network. In fact, Ethereum nodes who wanted to continue generating profits through PoW processing began mining ETC soon after The Merge.
Another difference is that ETC is intended to represent sound money. Although this term has many implications, in this case it means that ETC has a fixed emissions curve for the creation (or minting) of new ETC tokens, which is not the case for ETH. In other words, the introduction of new ETC to the supply—much like Bitcoin’s BTC—is predictable and decreases over time until the maximum amount of 210,700,000 ETC is mined.
Finally, it is important to note that while ETH is widely used and traded, Ethereum Classic has experienced significantly less adoption and liquidity for its ETC.
How is the ETC token used?
ETC is the native cryptocurrency of the Ethereum Classic blockchain. It is used to pay for gas fees on the network and transact between individual users. Mining rewards are also paid out in ETC.
Prior to the hard fork that resulted from the hack of The DAO, Ethereum Classic’s native token (ETC) and Ethereum’s token (ETH) were one in the same. In fact, when the hard fork occurred, everyone who owned ETH was given an equivalent amount of ETC.
Since the hard fork of Ethereum, different development decisions and monetary policies have caused certain aspects of ETH and ETC to diverge.
The total supply of ETC was capped at 210,700,000 via an upgrade that occurred in December 2017. The creation of new ETC coins is reduced by 20% every 5 million blocks, which creates a deflationary pressure on the supply. This is similar to Bitcoin’s tokenomics, with the caveat that halvings (reductions of mining rewards by half) occur about every 2.5 years for ETC, instead of every 4 years with BTC.