More than two years on from the infamous DAO (Decentralised Autonomous Organisation) hack that ultimately led to a split in the Ethereum network, resulting in the Ethereum Classic and Ethereum chains, let’s take a look back at the debate, examine what has changed and seek to answer the popular social media hashtag proposition - is classic coming?
Ethereum was first proposed in 2013 by Vitalik Buterin, having failed to win agreement on his argument that Bitcoin needed a scripting language for app development. Ethereum was later funded through a crowd sale conducted in mid-2014, with 11.9m “pre-mined” coins being sold and “code is law” as a key principle. On 30th July 2015 the genesis block was released on this new open-source, public, blockchain-based distributed computing smart contract platform and nearly a year of relative community harmony and growth followed.
The DAO was an open-source coded decentralised autonomous organisation, effectively operating as a decentralised venture capital fund to vote on and invest in future dApps on the system. It sought to provide a decentralised alternative business model, built on the Ethereum blockchain, with no formal location, management structure or board of directors, and not being tied to a nation state. The DAO crowd funded with a token sale in May 2016 and set a record as the largest crowd fund at the time having raised over $150m from more than 11,000 investors within 28 days. Indeed it had attracted over 14% of all the Ether supply at that point. Investors then owned DAO tokens that provided rights to vote on potential projects.
In June 2016, a malicious player(s) exploited a vulnerability in the DAO code (not Ethereum), allowing them to extract approximately one third of the DAO's funds and subsequently the Ethereum price fell from $20 to $13. The stolen DAO funds were in a “Child DAO” account (a split-function designed to opt-out of an approved dApp with funds returned and to provide the option to create your own DAO), however this was subject to a 28-day holding period under the terms of the smart contract, so funds were not actually gone yet and it provided time to members of the DAO and the Ethereum community to debate what to do next.
Some called it a valid, though unethical move, and so nothing should be done/interfered with. Some wanted the stolen Ether to be re-appropriated, and others wanted the DAO shut down. Vitalik Buterin originally proposed a soft-fork solution to effectively freeze the assets from being spent whilst a further solution was developed. This was challenged however and opened up a potential DoS (Denial of Service) attack vector. Following this fierce debate, on 20th July 2016 01:20:40 PM +UTC at block 1920000, the majority (over 80%) of the Ethereum community (Ether holders through an unofficial “Carbon Vote” and nodes/miners through voting) decided to effectively roll-back transactions and restore the majority of lost funds to the original contract through a hard fork. Once this was done, you couldn’t go back, you either followed the old rules on the original blockchain, or followed the new rules on the new one. It was highly controversial, requiring at least 51% of nodes to agree to collude to rewrite history. The original unforked chain continued as Ethereum Classic, with Ethereum becoming a separate blockchain with its own crypto currency incorporating the roll-back. The DAO was delisted later that year.
The main argument in favour of Ethereum Classic (and therefore opposing the hard fork) comes down to the fundamental importance of immutability of the platform (the principle that the blockchain cannot and should not be changed) and the concept that “code is law” previously so espoused by the Ethereum and DAO founders alike, ensuring that no one entity or colluding entities can/should control it. Smart contracts are supposed to be their own arbiter, where only the code can change transaction rules. Many felt that changing the whole chain as a result of one hack defeated the purpose of Ethereum and proved that the blockchain could be influenced by human whims, even though the hack was personally damaging to irresponsible investors. The likes of Barry Silbert and Charles Hoskinson favoured this stance.
The hard fork voting process for holders was based on the amount of Ether they held and therefore big players and the Ethereum Foundation (the non profit organisation set up to promote and support the Ethereum platform) had a significant proportion of voting power and were likely concerned about potential legal consequences. This was not one member, one vote and called into question the conclusion that this was a community decision as it was predominantly one from those with the highest stakes who, unsurprisingly, wanted to protect themselves. Indeed, it is thought that 25% of the actual votes came from a single address. Less than 6% of total Ether holders took part in the vote and it was reportedly a confusing process for many. Those also invested in the DAO (holders, nodes, miners, etc) obviously had a greater incentive to vote too. As this unofficial “Carbon Vote” ended in favour of the hard fork, this was then used as the reasoning behind making that the default option for node clients. Historically however, hard forks are meant to be opt-in, meaning a non-vote should be taken as a no-vote.
By acting on the DAO community pressure to get their stolen funds restored, Vitalik and the Ethereum Foundation were getting directly involved in the DAO, which was simply one of many dApps that were just using Ethereum as a platform to build upon. By getting directly involved and suggesting a soft then hard fork proposal, it implied that such projects and their participants could influence the underlying platform to their own advantage, contrary to the principles of decentralised blockchains and more comparable to the role of a traditional bank. Hard forks were supposed to be designed to deal with emergency modifications to the Ethereum platform itself, rather than to deal with issues of other projects that ran on it.
Ironically, in contrast to its stance against financial corruption, it brought parallels with the legacy financial markets and the “too big to fail” concept. As the DAO accounted for 14% of all Ether at the time, the community set aside ideology and went to a centralised body (albeit with consensus) to organise a what was effectively a bail out. The Ethereum network was not supposed to be judge, jury and regulator for parties utilising projects built upon it.
It also set a dangerous precedent. From this point on, how could anyone be sure they wouldn’t step in again and again in this fashion on the basis of human whims and requests for centralised bodies to resolve issues, as opposed to how the system was designed. This may well have been a one-off, but it was certainly damaging to the credibility of the Ethereum project.
Whilst immutability is a pillar of blockchain technology, so is consensus. In this case, approximately 80% of the Ethereum community at the time voted in favour of effectively restoring the Ether taken as a result of the exploit to its affected owners. Consensus agreed with the ethnical argument over the ideological one in this case. It was seen as the reasonable thing to do by the majority of the community, seeking to restore the stolen tokens to their rightful owners in an approach that was favoured by Vitalik Buterin, Gavid Wood and other influential people in the ecosystem.
The majority of developers, hash power and the Enterprise Ethereum Alliance (EEA) were also in favour of the hard fork, though others would see the backing of the EEA (a powerful group of over 200 corporations) as an argument for Ethereum Classic instead. Despite the low number of participants and the significant voting power of larger players in the eco-system, there was not a mass-exodus post hard fork and generally speaking the majority of the community focussed on the Ethereum chain.
Some also argue that the anti-Ethereum community openly supported Ethereum Classic in order to exacerbate the split and encourage disruption.
Had the hard fork not taken place, many would have lost funds and some argue that the vast number of dApps subsequently built on the platform may not exist today. This is supported by measure of market cap, suggesting that Ethereum has had greater success as a result.
In January 2017, Ethereum Classic delayed the difficulty bomb that was intended to move the original network from PoW to PoS, whilst also adding replay protection to prevent transactions on the Ethereum network being accepted on the Ethereum Classic chain. In December of the same year, a monetary policy change sought to further distance the protocol from Ethereum by changing the unlimited aspect of token issuance to a fixed supply comparable to Bitcoin, but at around 210m ETC.
Despite expectations that the original chain would cease to exist, it seems to have both survived and thrived as Ethereum Classic, with its Coinbase listing the latest boost in a series of high level support for the platform in the industry.
Since the hard fork, Ethereum went on to facilitate booming dApps and ICOs throughout 2017 and beyond as a principle use case, whilst Ethereum Classic have retained smart contract dApp capabilities as well as targeting the market for IoT (Internet of Things) and interoperability.
Ethereum Classic is embracing PoW into the future just as Ethereum begins moving away from it, first in the form of a hybrid system, then a full PoS network. There is a different debate to be had over the PoW v PoS strategy, particularly when it comes to scaling, however at least in the short-term, you’d imagine the potential forced switch over for ETH miners to ETC will be of benefit to Ethereum Classic. Ultimately only time will tell if PoS or PoW with additional layer solutions will retain the most successful balance between scalability, security and decentralisation.
The DAO was supposed to be revolutionary. How successful it may or may not have been we will never now know. Its impact has still been huge, though not in the way its developers would have wished. We have to acknowledge, regardless on which side of the debate you fall, the incredible comeback from what was a complete disaster. But it just should never have happened in my opinion. Platforms have to be thoroughly tested and vulnerabilities like this on the DAO should have been eliminated way before it going live. I can’t help but feel that the small team behind this bold vision for the DAO were completely caught off guard by its success and were inadequately prepared or resourced to effectively implement it. Likewise, if you invest in something that it not tried and tested, you are open to significant risk. This is on top of the risk already taken for effectively being your own bank through the freedom brought by crypto currencies, and investors should always carry out appropriate research in advance.
I understand the importance of consensus, however given the arguments above, the extent to which this was true consensus of the whole community, measured in a fair and reasonable way is questionable. Just because the original majority followed Ethereum doesn’t mean they agreed or disagreed with what happened, just that it is easier to go with the crowd, or that they simply wanted to get their own money back. This therefore trumped an important blockchain principle, previously peddled as the cornerstone of these platforms. Additionally, the argument that the anti-Ethereum community openly supported Ethereum Classic to encourage disruption may or may not be true. It is superfluous to the ethical verses ideology argument however. The idea that the number of Ethereum based dApps now wouldn’t have existed without the hard fork being a measure for the success of the Ethereum chain is difficult to fairly assess. It also assumes that quantity has greater value over potential quality, something that I would greatly disagree with and would suggest was also one of the factors causing the bear market we have seen during 2018. This may still have significant regulatory ramifications for these projects and the Ethereum platform too.
Therefore, for me, whilst I completely sympathise with people who would have lost money, the sacrifice of the fundamental decentralised blockchain immutability principle in order to enact the bail out in this case, is a step too far. For example, if a jury sympathises with and finds a guilty defendant not guilty, does that consensus provide justice, or injustice? For me, that is the system failing. Yes, the consensus arguably agreed, but it doesn’t mean that decision was ultimately the right thing to do.
Following the steps taken since, apparent increased respect and support for ETC across the wider crypto community, the comparable risks (regulatory or otherwise) and roadmap strategy laid ahead, the Ethereum Classic platform has more credibility from my point of view and therefore the proposition that “Classic is coming” rings true where the right thing to do is most valued. Whether or not that correlates with success in the long-term remains to be seen.
Disclaimer: The author is a user of Ethereum and Ethereum Classic amongst other crypto currencies. Investing or trading in crypto currencies involves significant risk. It is important to research and carefully assess any such investments. All the information presented in this article does not constitute financial advice or recommendations of any kind.
By James Hunt (@humanjets)
