With reference to Ethereum and Ethereum Classic, there was Initially just one cryptocurrency – Ethereum. A series of events occurred which led to a split or fork of the blockchain on which the cryptocurrency was programmed and two different cryptocurrencies emerged – Ethereum and Ethereum Classic. We discuss the interesting sequence of events below.
The entire Ethereum network operates on the basis of smart contracts. These are automated contracts that help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman or a centralized third party. For this, DAO (Decentralized Autonomous Organization) was created on the Ethereum blockchain, a complex, smart contract which revolutionized Ethereum forever. It basically decentralized venture capital funding that was going to fund all future decentralized applications (DAPPS) made in the Ethereum blockchain.
The way it worked was pretty straightforward. If you wanted to have any say in the DAPPS that would get funded, then you would have to buy DAO Tokens for a certain amount of Ethereum. The DAO tokens were indicators that you would now officially be part of the DAO system.
The potential of The DAO and the flexibility, control and complete transparency that it offered was unprecedented, people leaped to get their share of the pie and within 28 days of its formation, it accumulated over $150 million worth of Ethereum in a crowd sale. At that time, 14% of all Ethereum tokens had been issued.
You might be wondering: “That’s all good and well, but how does one get out of The DAO? What if a DAPP gets approved that you are not a huge fan of, how do you opt out of The DAO then?” To enable this, an exit door was created called the Split Function. Using this function, you would get back the Ethereum you had invested.
At the time, there was one condition in the DAO contract. After splitting off from The DAO you would have to hold onto your Ethereum for 28 days before you could spend them. So everything looked fine until people spotted a possible loophole and pointed it out. The DAO creators however offered their assurance that this would not be a big issue. As it turned out a scam took place and a total of 3.6m Ether (worth around $70M at the time) was drained by a hacker. This was the storm that split Ethereum into Ethereum and Ethereum Classic.
It is important to understand that the bug that led to the attack did not come from Ethereum itself, but from The DAO that was built on Ethereum. As the hacker paused for a while, the Ethereum community and team quickly took control of the situation and presented multiple proposals to deal with the exploit.
The proposals presented were Soft Fork and Hard Fork. Soft Fork is an update on the Ethereum blockchain that is backward compatible. In other words you can upgrade your blockchain and still interact with users of the older version. The idea was to completely lock down the Ethereum that was stolen by the hacker by ignoring and segregating any blocks that contained a transaction which would help the hacker move around their stolen Ethereum.
This seemed like a great plan and the majority of the Ethereum community supported it, but then another problem surfaced, a problem which brought the entire community to face another predicament. Implementing a Soft Fork would result in a “Denial Of Service” (DoS) attack vector that would still allow a hacker to have his way around the Ethereum in the long run.
This was then discarded for the Hard Fork, the only difference between the Soft Fork and the Hard Fork, that the Hard Fork is not backward compatible. This meant that once the block had been upgraded, the hacker would not be able to find his way around the Ethereum, ensuring a safe community.
To explain, the Hard Fork is a branch that separates from the main block chain at a particular point. Up until that point (that is, block 1,920,000) the old chain and the new chain is the same, but immediately after the Hard Fork, the two chains become completely different entities. The new chain was named “Ethereum” or “ETH” for short.
The Hard Fork was mainly formed to refund all the money that had been taken during the hack, this was done via a refund smart contract which had the sole function to withdraw. So, for every 100 DAO, 1 ETH would be given to the DAO token holders. This proposal caused a huge controversy and split in the community which meant those against the Hard Fork remained in the old blockchain naming it “Ethereum Classic” or “ETC.”