What Is Ethereum Classic?

Ethereum Classic 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 network. The original Ethereum blockchain was split in two with Ethereum Classic being the original and Ethereum being the newer blockchain.

Based on the principle of “Code is Law,” smart contracts are self-executing autonomous digital applications, which are capable of running on their own as programmed. Examples of such applications include automatic teller machines (ATM) and the Bitcoin system.

Key Takeaways

  • Ethereum Classic is an open-source, decentralized, blockchain-based distributed cryptocurrency platform that runs smart contracts.
  • Ethereum Classic uses smart contracts contained within a distributed ledger or blockchain network offering decentralized governance.
  • Ethereum Classic emerged as a split version of Ethereum's Blockchain, as a result of a hack, the newer version created was Ethereum.

Understanding Ethereum Classic

Ethereum Classic facilitates running 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 one network in which transactions were facilitated by using the cryptocurrency ether of ETH. However, in June 2016, the blockchain was hacked and $50 million worth of funds were stolen. As a result, a split or hard fork was performed to secure the network. Ethereum Classic emerged as a split version of Ethereum's blockchain, the other being Ethereum itself. The split was performed to return the stolen funds to their original owners, as per the records prior to the hack.

This resulted in a fork leading to the two versions existing simultaneously. The newer network, or Ethereum, uses ETH or ether as its cryptocurrency while the older one, renamed 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 popular cryptocurrency 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 129.5 million coins in circulation with a market capitalization of $5.1 billion while ETH has approximately 117.3 million in circulation and a market cap of more than $375 billion. ETC trades at $64.13, while ETH trades for more than $3,189 per coin as of August 29, 2021.

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 towards 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.