[Note: I neither own nor have any trading position on any cryptocurrency. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
If you’re bored of catching Pokemon and happen to have a lot of butter stored up, now is the time to break out the premium organic popcorn kernels and enjoy Fork Wars: Summer 2016 Edition.
As mentioned in the previous post: last week many miners, exchanges, and developers coordinated a hardfork of Ethereum. At the time there were lots of celebrations for having done something that flew in contrast to the views prominently held by the Bitcoin Core development community: namely that a fast hardfork can’t be done safely on a public blockchain.
Well, it has been done, but there were also some consequences. Some intended and others unintended. The biggest consequence — which was touched on in my last post too — was that there were now parallel universes: Ethereum Core (ETH) and Ethereum Classic (ETC).
What does this mean?
If you owned a coin on pre-hardfork Ethereum, you now own not just the ETH facsimile but also the Classic coin (ETC) too. Two for the price of one!1
This also opens up the very real possibility of replay attacks which was also a possibility when Ethereum moved from Olympic to Frontier.
A replay attack predates cryptocurrencies such as Bitcoin and Ethereum:
[I]s a form of network attack in which a valid data transmission is maliciously or fraudulently repeated or delayed. This is carried out either by the originator or by an adversary who intercepts the data and re-transmits it, possibly as part of a masquerade attack by IP packet substitution.
In this case, it is the retransmission of a transaction (not IP packet). Or in the Ethereum world, a replay attack would be to take a transaction from one Ethereum fork and maliciously or fraudulently repeating it on another Ethereum fork.
A little confused? Check out: Sirer, Rapp, and Vessenes.
At first most of the Ethereum community assumed that Classic would effectively become deprecated and fade away into history much like Olympic. After all, so went the argument, who would want to use or support a network in which at least one participant owned/controlled roughly ~10% in now “hot” ether?
Sidebar: recall that the main motivating force behind the hardfork was spurred on by the successful attack on The DAO, an investment fund created by Slock.it who did not adequately test the smart contract for security vulnerabilities (among other issues).
Well, it seems that Classic will not go silent into the night, at least not yet.
From a technical integration standpoint, while all of the large exchanges initially supported ETH, one altcoin exchange based in Montana — Poloniex — began supporting both forks.2
Traders — seeing a potential arbitrage opportunity — began doing what they do best: speculating and driving up demand for ETC via posts on social media. As a consequence of their marketing efforts, the price of ETC dramatically rose over 380% in one 24-hour period alone. In return, some of the miners that had abandoned the original Ethereum chain (ETC) to mine on the ETH hardfork have now begun mining on both which means that the original ETC network actually has once again begun seeing an increase in its hashrate (recall that it had dramatically dropped a week ago).
This is an interesting twist because less than 3 days ago, Chandler Guo an executive at BW.com — a large mining pool — announced he would undertake a 51% attack on the ETC blockchain because of the decision by Poloniex to support it. Chandler later announced he would not carry it out.
Incidentally, it is likely that the noise that was created from this threat actually drew more attention to the Poloniex arbitrage opportunity, creating a type of Streisand Effect.3
What does this situation look like?
Above is a line graph that is auto-generated and reflects the past 48 hours of two types of ratios: the Ethereum Classic (ETC) to Ethereum Core (ETH) price; and the ETC to ETH hashrate. Price is derived from the two largest exchanges in terms of ether liquidity (Bitfinex and Poloneix).
This is actually not surprising behavior, we empirically observe the same type of trend with other cryptocurrencies: when price increases more hashrate comes on-board and vice-versa.45
Over the past several days there has been much guessing as to which chain will live or die, but rarely do people suggest that both will live on in the long-run.
And I think that is short-sighted. While not a fully direct comparison, even though they’re effectively based on the same code, we have seen how Litecoin and Dogecoin have permanently conjoined at the hip via merged mining: they co-exist via the Scrypt Alliance. In addition, we have seen for years the continued existence of multiple multipools, which automatically direct GPU-miners to the most profitable cryptocurrency usually with a payout in bitcoin.
I cannot predict who which chain outlasts the other. Perhaps now that ethcore has said it will also support Ethereum Classic, the two (or more!) chains will both continue to exist and grow. Either way, we do know that the maximalist thesis, that there is a “coming demise of altcoins,” continues to be empirically incorrect and I suspect that it will remain incorrect for as long as there is continued speculative demand for cryptocurrencies in general. This includes both ETH and ETC.
Other winners and losers
Who else gains from this phenomenon? In the short run, anyone interested in trading will probably be able to find some kind of arbitrage — assuming demand grows or at least stays at the same level.
Other cryptocurrency communities that see Ethereum as a competitor could believe they now have an incentive to support multiple forks too, as it draws hashrate and potential mindshare away one chain at the expense of the other. And the more that the Ethereum community is painted as being “chaotic” the less of a threat it is seen to other public blockchains. But maybe this is shortsighted too and will simply enlarge the Ethereum community because they now end up as ETC holders and want it to appreciate in value.
Either way, it sounds like the makings of some kind of TV miniseries staring Jean-Luc Bilodeau as Vitalik Buterin (they’re both Canadian).
Want to read more on the topic?
- Onward from the Hard Fork by Vitalik Buterin
- A Grab Bag of Thoughts on ETC and Forks by Vitalik Buterin
- How the Ethereum Hard Fork Can Fail by Emin Gün Sirer
- Do Not Mess With ETH Classic, It Will F You Up by Peter Vessenes
- Alternative Ethereum Blockchain Gains Support as Price Declines from CoinDesk
- Ethereum Hard Fork Creates Competing Currencies as Support for Ethereum Classic Rises from CoinDesk
Ignoring the above quasi-illustration of the many-worlds interpretation, surprisingly not much has been discussed regarding the analog world of when fiat currencies are created or even removed at certain exchange rates and the unintended consequences therein.
For instance, in the comedy Good Bye, Lenin! we see the repercussions for those who were unable to convert East German marks for West German marks after the fall of the Berlin Wall.
More recently we have seen multiple Iraqi dinar scams, in which individuals were deceived and conned into acquiring pre-war dinar (a deprecated fiat currency) with the fraudulent pitch that at some point in the future, the previous pre-war exchange rate would somehow be reached.
However, one of the biggest differences with the Ethereum-based chains above is that cryptocurrencies are anarchic — without terms of service or ties to the legal system. Therefore it is difficult (impossible even?) to say which chain is the de jure legitimate chain. Consequently it is unclear if anyone has a legal claim to prevent or create additional forks in the future and because of this, it is hard to see who has liability for past, present or future forks on these chains.
Whether that is a risk organizations and regulated institutions are willing to take is a topic for another post. Perhaps if or when this is done, there will be even more chances to consume warm buttery popcorn as we watch and learn from the trials and tribulations of anarchic blockchains.
- It is closer to a spinoff than a stock-split. Similar to the Ebay/Paypal spinoff, where a company that once had single market capitalization (EBAY) now trades under two different symbols (EBAY/PYPL) that trade and move independently. [↩]
- Note: by this I mean that the existing exchanges that had already on-boarded ether, not that all large cryptocurrency exchanges had on-boarded ether. [↩]
- Guo wanted to remove something (a chain in this case) but by advertising his intention to do so, only drew more interest and activity back into the very chain he intended to remove. [↩]
- See Appendix B [↩]
- See also Ethereum chain state [↩]
Thanks for the very helpful post. I know prior to this Ethereum fork, I was in the camp that just blindly assumed everyone would quickly converge to a single fork. Having seen a different outcome has caused me to rethink how things might go with a Bitcoin fork some day. More popcorn . . .