Ethereum and Ethereum Classic
Attack of the clone
Poloniex has done it, they have managed to create an official market for the buying and selling of Ethereum (ETH) and its pre-hardfork shadow Ethereum Classic (ETC). Do not let the name fool you; unlike a classic car or a classic movie, this is one cryptocurrency that is not going to get better with time. ETC is a narrative written by ideological die-hards who have the belief that a cryptocurrency could exist in a vacuum and not change on the basis of what moves the entire endeavour forwards. In other words, it exists because some people strongly believe in the vision of a truly immutable, Turing complete, blockchain. With the addition of a Bitcoin to Ethereum Classic exchange, Poloniex has just buoyed those few faithful with an indeterminate number of speculators looking to cash in on the next Ethereum, or rather the old one now made even more of an alt-coin (the name given to alternative digital currencies to Bitcoin) than Ethereum was previously.
The pro versus anti hard fork debate had raged ever since the DAO attack and right up until when the miners making up the Ethereum network voted in favour of a hard fork. The argument put forward by those against a hard fork revolved around the concept of maintaining Ethereum’s original premise: A truly Turing complete, fully decentralised protocol to build applications on. By allowing for a hard fork so as to return the ETH of the DAO’s investors, the Ethereum Foundation were essentially conducting a bailout. This, as ETC’s proponents put forward, was all the more egregious as it was a faulty smart contract, and not the protocol that led to the loss in the first place. Changing the protocol then to fix a poorly designed smart contract was like changing internet standards were Gmail to lose everyone’s passwords. No matter the potential losses or the risk having one person hold so much Eth in the one account due to a successful DAO attack, for the anti hard forkers, the short term was worth sacrificing for the benefit of the long term vision.
One should not be too quick to cast derision towards Poloniex then. For them, as a business decision, it made sense to list Ethereum Classic. There was enough noise both on Reddit and on the Ethereum Slack channel — the two biggest places to discuss Ethereum and its future — that it looked like a market for BTC/ETC and ETH/ETC pairings could feasibly work. More importantly, it would be the first major cryptocurrency exchange to make that move. By allowing those who wanted to continue on the old Ethereum blockchain after the hard fork to put their money where their mouths were, Poloniex could create more opportunities to take in exchange fees. It looks like the plan worked. Since BTC/ETC trading began at 4:45am GMT, volume has hit 17,657 BTC or USD$11.6 M. The second largest cryptocurrency pair trading by volume after Bitcoin and Ethereum…is Bitcoin and Ethereum.
One reason for this huge volume on the first day of trading for a new digital currency is the peculiar nature of Ethereum Classic. As it is the product of a forking of Ethereum’s blockchain, everyone who held Ethereum prior to the fork, also hold an equivalent number of Ethereum Classic. In simple terms, if you held 10 ETH prior to the hardfork, post hardfork you now hold 10 ETH, and 10 ETC. If people were willing to buy ETC, then one could profit by selling all the ETC they now held, whilst still being able to hang onto their ETH. The rush for free money meant that the price of ETC has dropped, at the time of writing this article, 85% to 90 US cents per ETC. Still, 90 cents for something you received for free is still a good deal, and the rush of speculators has been the reason for the dramatic volume currently being seen on Poloniex. Whilst there is no such thing as a free lunch, this has been as close to it as a situation has ever been.
For the trader interested in ETC, risks do exist. The biggest one raised by the Ethereum Foundation is that of the Replay attack. The flipside of now holding two separate currencies where there once only existed one is that each now shadows the other as far as transactions are concerned. If one makes a payment from a wallet that existed before the hard fork, then the transaction from that public address gets recorded on both the Ethereum blockchain and on the Ethereum Classic blockchain. Therefore, if one were not careful, then selling any Ethereum would give the buyer access to the seller’s Ethereum Classic and vice-versa. The implication then is that the recipient can spend coin that they do not own. The only way to prevent such an attack is to strip the associations via the usage of a smart contract explicitly recording on the respective blockchains that they now exist at separate public addresses. So whilst a very real issue, it is one that can be solved with some time and effort.
Other issues include how viable the old Ethereum blockchain is without the support of the Ethereum Foundation as well as how likely miners will continue validating transactions on a blockchain they overwhelmingly voted to fork from. However, a team called Ethereum Core (who have existed well before the hard fork) have taken it upon themselves to be the custodians of the Ethereum Classic blockchain in place of the Ethereum Foundation. After all it is the same code as Ethereum and so any changes made to Ethereum could in theory be made to Ethereum Classic. Further, so long as it is profitable to do so, which it currently is due to the much lower hashing difficulty (in simple terms calculating the correct value of the answer to complex mathematical problems) of the Ethereum Classic blockchain, miners will continue to validate transactions and add blocks. Such a situation points to a cryptocurrency that is likely to survive and potentially even thrive.
What of the DAO attacker though? Was not the fact he held a substantial sum of Ethereum the reason for the hardfork in the first place? The short answer is that he does have access to the Ethereum, or rather Ethereum Classic, he obtained from taking advantage of flaws in the DAO code. There is a very real risk then of him dumping his ETC onto the market and thereby crashing the value of ETC to nothing. But why would he? For one, crashing the value of his holdings would bring him no monetary benefit. Further, his public address is easily traceable and so the market could easily refuse to trade with him should it want to do so. In all likelihood he will make some big movements, and those movements will put a downwards pressure on the ETC price. The risk posed by the DAO attacker though, so far, appears to be overstated.
A lot remains to be seen as to the future of Ethereum Classic. All that is known at this point is that a number of the other major exchanges, such as Bitfenix, are looking at introducing ETC markets. Further, at least one threat of overwhelming the ETC mining pool through a 51% attack has already been made. Whether the value of ETC will hold, or continue to fall into the next couple of days depends solely on how confident those against the hard fork are in the old blockchain, and how much speculators are willing to give credence to their views. At the same time, Ethereum itself has fallen 10% since the introduction of Ethereum Classic trading on Poloniex. Therefore, for those who have Ethereum Classic, may as well start trading whilst the value is there. After all, who does not like a free lunch?
Matthew Mills researches cryptocurrencies and blockchain based applications at the University of Sydney. He is also a director at Liberté & Co and holds investments in Bitcoin and Ethereum. If you have any questions, or would like to get in touch, email him at mm@theliberte.co
