Ethereum (ETH) is one of the most popular blockchain projects in the industry today but very few know the origin of the project. On the other side of the spectrum is Ethereum Classic (ETC), a blockchain that has looked on with envy as Ethereum takes the spotlight as the top smart contract blockchain. However, this only reveals half the story of the two blockchains and how they shaped the most important moment in cryptocurrency history since the development of Bitcoin.

Ethereum and Ethereum Classic were part of the original Ethereum blockchain before the DAO hack happened. The DAO hack as explained in an earlier article caused over $50 million worth of losses to investors as a bug in the system created a loophole to siphon out ETH. The hack was the start of the Ethereum Divide that has had massive effects on the cryptocurrency world today.

The Decentralized Autonomous Organization (DAO)

The DAO official logo

The “Ethereum Divide” began with the collapse of The Decentralized Autonomous Organization (DAO) which played a major role in the formation of the two Ethereum blockchains. The DAO was simply an organization that allowed decentralized applications to raise capital through the platform. Unlike traditional VC and hedge funds, the DAO allowed developers to raise the capital on a decentralized network.

 

How the DAO works

“The DAO” (the company) was built on a smart contract that executes once the funders vote on which dApp should get funding. The dApps are selected by curators who are mostly made up of top personalities in the Ethereum community. The funders need to purchase DAO tokens using Ether to be able to vote for and fund the dApps.

Once voting begins and the project gets at least 20% of the voting, a share of the DAO tokens needed to start the venture is released to the dApp development team. This offered an efficient and easy method for startups to raise cash, with investors also having a direct say in the project they prefer. The platform became an instant hit as over $150 million USD in ETH was raised in the first month of operation.

DAO further introduced an exit mechanism to the smart contract allowing dApps that were no longer interested in the DAO to create their own “child DAO”. The Split Function as it was termed was to end up being the most costly mistake the DAO ever introduced.  

On June 17th 2016 as the world went on with its business, a hacker was able to steal $50 million USD in ETH from the DAO by exposing the loophole in the Split Function. The contract further required the exit companies to wait at least 28 days before they could access their funds upon leaving the DAO.

 

The Hard Fork: Creation of Ethereum and Ethereum Classic

The ETHEREUM hard fork happened forming ETH and ETC

The so-called hack on DAO, which was very closely related to Ethereum, brought about a split in the Ethereum community on how they were to solve the issue. The hacker made a recursive function exploiting the loophole made by the Split Function to allow him to take out as much ETH as possible before being discovered. A couple of suggestions were brought as solutions to the hack whereby part of the Ethereum community suggested no action should be taken, others fought for a soft fork to make the blockchain backward compatible and the rest were in for a hard fork.

 

The Hard Fork

While the soft fork was the ideal option at the time allowing users with the updated version and not updated version to interact, a problem surfaced – the Denial of Service (DoS) attack. Having a soft fork would allow attackers to place malicious or useless computational problems for miners to solve for little or no gas. The attacker, in essence, would not use any gas fees as the DoS attack allows it to happen. This meant only one option was remaining after most of the community members demanded action – The Hard Fork.

The hard fork is quite different to the soft fork as it does not allow backward compatibility (users with the update cannot interact with those without the update).

Illustration of how a hard fork functions

Ethereum hard fork occurred on block 1,920,000 (just before the DAO hack) on the Ethereum blockchain forming a new blockchain that is today known as Ethereum. While the majority of the community followed the new chain, around 10% of the community decided to stick with the original blockchain and renamed it Ethereum Classic to distinguish it from Ethereum. The new chain was able to retrieve the $50 million stolen from the hacker’s child DAO.

 

Conclusion

The original Ethereum blockchain has suffered in development of the platform as most of the top developers jumped ship during the fork to the new chain. Furthermore, ETC is majorly viewed by investors as an ‘extra’ Ethereum platform which affects the adoption process of the platform. Currently, ETC is a mere shadow to ETH dominance with a total market capitalization of $475,493,306 USD. Ethereum in comparison is currently the second largest cryptocurrency with a total of $14,622,667,940 USD in market capitalization.

ETC/ETH charts for the past 1 year (Image: Poloniex)

Another hard fork is facing the Ethereum blockchain on February 28th – March 1st 2019 at block number 7,280,000. The Constantinople hard fork is set to reduce the block rewards to miners from 3 ETH to 2 ETH. This is one of the effects that the loyal ETC community members feared would happen on Ethereum – a slippery slope of hard forks. Other critics have stated that the platform’s power by the top developers is likely to be misused to pass updates that are individualistic and selfish in nature.

 

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