What Is Ethereum Classic (ETC)?
Ethereum Classic (ETC) is an open-source, decentralized, blockchain-based distributed cryptocurrency platform that runs smart contracts. Ethereum Classic was formed in 2016 as a result of a hack of The DAO, a smart contract operating on the Ethereum blockchain. The original blockchain was split in two, with the majority of users choosing to reverse the hack and return the stolen funds.
The split revealed philosophical divisions within the Ethereum community. Based on the principle that “Code is Law,” a small number of developers and miners believed that The DAO's investors should suffer the consequences of investing in a flawed project. However, the majority of the Ethereum community decided to roll back the blockchain, effectively creating a bailout for The DAO's investors.
- Ethereum Classic (ETC) is an open-source, decentralized, blockchain-based distributed cryptocurrency platform that runs smart contracts.
- Ethereum Classic was originally known as Ethereum. It was conceived by Vitalik Buterin and the Ethereum Foundation and launched in 2015.
- Ethereum Classic was created after The DAO hack in 2016.
- The dispute caused a split in the Ethereum community, with the majority choosing to reverse the hack. Ethereum Classic is the name of the original, smaller blockchain.
Understanding Ethereum Classic (ETC)
Ethereum is a blockchain platform similar to bitcoin, with one key difference: in addition to recording transactions of value, it can also be used as a distributed computer to run self-executing smart contracts.
Ethereum Classic facilitates smart contracts by offering the benefit of decentralized governance. In other words, the contracts can be enforced without a third party involved, such as a lawyer. Smart contracts are similar to if-then statements, meaning if the actions required within the contract have been fulfilled, then the responding contract parameters would be completed. If the contract parameters have not been fulfilled, then there might be a penalty, a fee, or the contract might be voided, depending on the terms established at the onset of the contract.
For example, in a real estate transaction, if the contract stated that an upfront deposit was to be paid on a certain date, and the funds were not received, then the contract could be voided. The smart contracts are contained within a distributed ledger or blockchain network. A distributed ledger is a ledger of transactions and contracts, which are kept and maintained in a decentralized manner across various locations.
The agreement between a buyer and seller is written in lines of code within the smart contract, which is self-executing, depending on the terms within the contract. As a result, there is no need for external monitoring or censoring by a central authority since the code controls the execution of the contract.
History of Ethereum Classic
Initially, the Ethereum blockchain was established as a single network where transactions were facilitated by using the cryptocurrency ether or ETH. The new network quickly became popular for initial coin offerings, as different teams used the platform to launch their own tokens.
One of the most successful ICOs was The DAO, a decentralized venture fund where investors would vote on assets to invest in. The DAO quickly accumulated more than 11 million ETH, from over 18,000 investors, before unknown hackers discovered a smart contract bug allowing them to withdraw about a third of The DAO's accumulated ether.
Due to the scale of the hack, many investors proposed reversing the Ethereum blockchain to rescue the affected investors, while others argued that doing so would set the precedent for future bailouts. After a hastily-arranged poll, 97% of the community voted to restore the lost funds through a hard fork.
As a result, the Ethereum blockchain split into two separate networks. The newer network inherited the name Ethereum and uses ETH or ether as its cryptocurrency. The older one, known as Ethereum Classic, uses ETC.
Concerns of Ethereum Classic
Although both Ethereum and Ethereum Classic offer smart contracts and are after the same market, Ethereum has gained in popularity as the more legitimate of the two networks. Also, Ethereum's ETH is second only to Bitcoin as the most valuable cryptocurrency network in the world.
One of the chief concerns of Ethereum Classic is the potential limitations when it comes to scalability. Typically, the network can handle 15 transactions per second, but that number is far less than payment networks such as Visa, which handles more than one thousand transactions per second. Although Ethereum Classic has gone through many software upgrades, the scalability of its payment systems remains to be one of its biggest challenges going forward.
Also, security is likely to remain an issue with smart contracts, particularly since Ethereum Classic has already experienced a hack and theft of millions of dollars. These concerns could potentially prevent smart contracts via Ethereum Classic from being used in major financial and real estate transactions.
Regulations of the cryptocurrency market continue to develop, which may or may not change how Ethereum Classic—and other networks—operate. For example, the Security and Exchange Commission (SEC) does not consider Ethereum or Bitcoin securities due to their decentralized networks.
Without being considered a security, some cryptos may have challenges getting approved for inclusion in various financial products that contain a basket of securities, stocks, and bonds such as exchange traded funds and mutual funds. Going forward, uncertainty remains surrounding the regulatory landscape for Ethereum Classic as well as other, less popular blockchain networks.
Future of Ethereum Classic
The future of Ethereum Classic looks less bright than Ethereum since Ethereum is considered the more legitimate of the two networks, especially with the security concerns of Ethereum Classic.
Investors have lost confidence in ETC over the years due to hacks into the system, and until ETC can redevelop its code and software to prevent future hacks, Ethereum Classic may have challenges ahead. However, it remains to be seen how the smart contracts will be developed within the Ethereum Classic project and whether they can be adopted for widespread use.
How Is Ethereum Classic Different from Ethereum?
Although Ethereum Classic's ETC has value as a speculative digital asset that investors can trade, Ethereum's ETH is considered the more legitimate and widely traded. In early 2021, the Chicago Mercantile Exchange (CME) approved the trading of ether futures. Only Bitcoin and Ether have been approved for such transactions. The futures are derivative contracts on an underlying security with a fixed price and maturity date. Ether futures allow investors to trade ether for speculation but also to hedge an outstanding position in ETH or perhaps other cryptos.
We can determine how the investment community views ETC versus ETH by analyzing how much capital or investment dollars are being committed to the two currencies. When comparing the two market capitalizations of the two cryptos, ETH is the clear winner. The market cap of a cryptocurrency is calculated by multiplying the currency's price—based on a fiat currency such as U.S. dollars—by the outstanding coins or tokens in circulation.
ETC has 133.9 million coins in circulation with a market capitalization of $6.1 billion while ETH has approximately 120 million in circulation and a market cap of more than $417 billion. ETC trades at $46.00, while ETH trades for more than $3,475 per coin as of April 2, 2022.
Although both networks offer smart contracts, the potential for the aforementioned security concerns surrounding ETC will likely push investors to invest in ETH and adopt Ethereum's smart contracts versus those of Ethereum's Classic.
Goals of Ethereum Classic
Since the split, there have been many upgrades and improvements to the Ethereum Classic project. The goal of the project continues to be working toward becoming a global payment network using smart contracts that can function without centralized governance.
As with other cryptocurrencies, Ethereum Classic will likely continue to strive to be a digital store of value, meaning it can be saved and exchanged while retaining its value. The digital store of value for crypto includes its purchasing power that can be quickly turned into cash or used to buy another asset, similar to money.
Correction–April 2, 2022: This article has been edited to reflect that The DAO, not Ethereum, was hacked in 2016.