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What started as an attempt to rescue investor funds in a high-profile project has resulted in a schism that has effectively split the community on the second-largest public blockchain.

The split is not only psychological. Thanks to the design of public blockchain systems, it is also technical, with competing visions manifesting in two very real blockchains, or versions of the project’s transaction history.

As of this weekend, there are now two groups working on two competing versions of a project called ethereum, a blockchain-based platform designed to enable decentralized application development.

If bitcoin envisioned how a distributed group of users could create and manage a currency, ethereum sought to allow a distributed group of users to create and manage a decentralized, uncensorable app store. (You can learn more in our latest CoinDesk Research report).

However, there are now two slightly different versions of this platform available to users – ethereum, the 'official' version of the blockchain maintained by its original developers, and ethereum classic, an 'alternative' blockchain maintained by a wholly new team.

Both offer the same technology platforms, and according to developers, they're in agreement on a formal roadmap for steps forward. But, the small differences have created two markets, both with a combined value of roughly $1.2bn.

How did we get here?

Let’s start with The DAO.

Long the most notable ethereum project, The DAO, short for distributed autonomous organization, raised $150m in ether – the cryptocurrency of the ethereum network – earlier this year during a public crowdsale. Held online, anyone who had ether could participate. The idea was simple, in theory. Investors would send money to The DAO and receive voting tokens, and then those who invested (and voted) would decide democratically how The DAO should disperse those funds.

Just as votes were starting to be held, however, The DAO was hacked, attacked or otherwise compromised, depending on your point of view. To some in the academic community, the early problems were obvious, and debates about their severity had already begun.

But, this all came to a halt when an individual or individuals used a valid action in the code to withdraw the funds to another DAO he or she controlled. To the ethereum platform, the action was valid to the extent it was able to be executed according to contract terms; to others who invested, it was a much more contentious action.

Skipping ahead, the ethereum community eventually held a vote, with the majority of participants agreeing that they wanted to change ethereum’s code to get the funds back to investors – and away from the attacker.

Enter ethereum classic

What happened next is that a small minority disagreed with this choice, and then took action.

While the majority argued that blockchains can and should be altered if enough people agree, other developers asserted that, in order to provide a sound history, a blockchain has to be censorship-resistant and free from tampering.

So, instead of making the switch when ethereum created an entirely new blockchain, the vocal minority continued to mine the old version of the blockchain. Effectively, ‘ethereum classic’ is a parallel version of the blockchain where funds were never returned to ether owners who lost funds in the demise of The DAO. Ethereum, by contrast, is a blockchain that has moved those funds to another address.

But this seemingly small disagreement had an outsized impact.

“Ethereum Foundation responded to DAO debacle in the worst way possible,” reads the ethereum classic website, and explains further:

“We believe in the original vision of Ethereum as a world computer you can't shut down, running irreversible smart contracts.”

Project organizers followed up with a crypto manifesto outlining the rules that blockchains are supposed to follow in their eyes, including openness and, perhaps more vitally, immutability – the idea that once transactions are made, in this case a hack, they shouldn’t be reversed.

"Not all blockchains are created equal," it reads.

And by staying on the unchanged version of ethereum, they’re preserving these values.

Who's involved in ethereum classic?

The ethereum classic team currently has four developers, according to its lead organizer, named Arvicco (he won’t reveal his identity), but theoretically, anyone can join. Just like ethereum itself, ethereum classic is supported by an open-source community.

A number of notable developers have also voiced an interest in helping the ethereum classic project, including early ethereum CEO Charles Hoskinson (who left the team in 2014 over differences detailed here).

What’s important to note, though, is the blockchain is not merely being supported for ideological reasons. A growing number of ethereum miners have devoted computational power toward the classic blockchain, seemingly, because they see a value in securing its transactions and winning the associated mining rewards.

At press time, the hash rate for the network was 544 GH/s, or about 13% of the ethereum network’s hashing power, an arguably impressive figure given that the blockchain has only been around for a matter of days.

Why is profitable?

The question of what gives classic ethers (ETC) value is still up for debate, but in short, it has value because people believe in the project, and those interested in supporting it can invest in (or speculate) on the market now that it’s listed on exchanges.

Since ethereum classic is essentially a clone of the digital currency, ether holders can now make money by making an account on the ethereum classic version of the blockchain and duplicating their balance.

As ethereum classic is a replica of the original blockchain, except for a few key changes regarding The DAO transaction reversals, everyone who had tokens on ethereum at the time of the fork now has the same amount of tokens on ethereum classic. To traders, this is essentially free money.

If you owned $100 of ether at the time of the fork (when it was worth roughly $12), you’d have had about 8 ETH, which means you now have 8 ETC, or an extra $16. However, those who held more ether, now have a lot more free money.

This has since caused problems for exchanges, as, even if they don’t want to list classic ether tokens, they’re arguably holding what could be called customer funds anyway simply by possessing ether at the time of the split. But major exchanges have picked up the alternative ethereum coin, so it’s now possible to trade ETH for ETC.

Poloniex, an ethereum exchange, was the first. Kraken, Shapeshift, and Bitfinex followed shortly after, meaning most of the exchanges that support ethereum now support ethereum classic.

There’s also been the opportunity for profiting by switching between currencies, and one startup founder has even wondered if this is a new way to double spend currency, a problem that the bitcoin blockchain was design to solve as it doesn’t require a central authority.

Who's impacted?

Ethereum token holders on both blockchains could be affected by "replay attacks" if they don’t properly “separate” their addresses to differentiate them on each blockchain, which looks like a complicated process for each individual user to follow.

Since, again, much of ethereum classic is the same as the old network, most users with a balance on one of them can use it on the other, but this could theoretically result in some funny mistakes, like unintentionally moving funds on one of the other networks.

Poloniex has decided to automatically take precautions for its users and ethereum creator Vitalik Buterin suggested that ethereum classic update its code to solve the problem.

What does this have to do with bitcoin?

Speaking of important takeaways, whatever happens with classic is new insight that might be used in bitcoin.

The debate around expanding bitcoin’s block size, a technical upward bound on the size of transactions that the network can support, might not seem relevant to the split, but it is.

One point Bitcoin Core developers continued to argue during the long-standing debate was that contentious hard forks are dangerous and can have unexpected consequences, such as splitting a blockchain into two competing blockchains.

Many in the community, for example BitPay Co-Founder and CEO Stephen Pair, think that ethereum classic’s sudden popularity shows that these were valid concerns.

Adding to the debate is that ethereum’s hard fork was immediately branded as a success by many Ethereum developers and others in the bitcoin industry. For example, Coinbase CEO Brian Armstrong tweeted that they’re "not something to be feared that results in multiple coins".

But this analysis might have been premature, and he indicated as much in a new blog post.

In a weird twist, some bitcoin developers appear to support ethereum classic for this very reason, if also to demonstrate what the potential risks of switching to a new blockchain in order to update the codebase without consensus.

What does this mean for ethereum?

The attention currently on ethereum classic could fizzle out, or it might not. Taking bitcoin classic as an example, the bitcoin classic subreddit is still active even if it never replaced bitcoin as its engineers intended.

There could be two ethereum’s that continue to develop along different paths into the future.

For now, one of them has the same functionality that ethereum is supposed to deliver, mainly smart contracts that help to construct versions of Twitter that are safe from censorship and decentralized autonomous organizations. But it’s both cheaper and more of a hassle to use without an ecosystem of developer tools built around it.

Ethereum itself is also impacted as some users and miners are staying on the old chain, decreasing the number of total users and the network security.

Now that it’s happened though, and ethereum classic exists, the community has tons of questions. These include whether hard forking the blockchain, or rewriting the code to reverse transactions without near-unanimous consensus, is worth the risk, and if ethereum developers forked again to solve a similar problem, would it split again?

Either way, it’s not clear if the rise of ethereum classic is a bad thing for the technology.

The protest blockchain gave the minority a chance to build their own system, and some people think it’s an exciting development.

What do you think? Share your thoughts below.

Correction: An earlier version of this article indicated Bitcoin Core member BTCDrak was a contributor to Ethereum Classic. 

Pete Rizzo was the co-author of this report. 

Baby image via Shutterstock

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