Ethereum made crypto-history this week by being the first PoW blockchain to execute a hard fork. They claimed it was done after getting unanimous consensus from the community through stake voting which many have criticised as being nothing more than a farce, as less that a total of 13% of the coin population bothered to turn up to vote, and some sources say it was even possibly less than 2%. Nevertheless, the hard fork was devised and coded, hastily tested, and released, and when the fateful day arrived when it was pre-programmed to activate, July 21st 2016, the network indeed split into two. Quietly, smoothly, without much fanfare.
A week before a group of developers and supporters who opposed the hard fork on ethical principles formed a movement called Ethereum Classic, and pledged to reject the new fork which would see the seizure and confiscation of the ETH that the DAO attacker had acquired during his raid. This movement also saw the defection of about 5% of the mining power in the ethereum network.
What happened after the fork block made history. Contrary to what the ETH developers said, the fork did not remerge and the minority chain persisted. At first the block rate was a fraction of the majority chain. But now after 2 days the block rate has stabilized and the minor chain is mining blocks at about the same rate as before the fork. In addition, the difficulty of the mining is only 1% of the majority chain, which adds an economic incentive for miners to mine on the minor chain in order to make more rewards. This second chain represents the split-fork scenario that many Bitcoin core devs have been warning the community that would cause chaos and destroy both systems. Only, it didn’t. At least not yet.
The next phase was the premature proclamation from the Ethereum Foundation that the fork was successfully executed, and all was well. I find this particularly ironic, as the only thing that the Hard Fork was successful in demonstrating was that the worst case scenario that the hard fork alarmists have been droning on about for more than a year was completely unfounded, and that two chains can exist without any fire and brimstone falling from the skies. Those who believed in protecting fungibility in Ethereum decided to take the necessary steps to prepare their wallets and separate their coins, and some exchanges announced that they would allow them to withdraw their ETH Classic coins for keepsake purposes. The stage was set…
Four days after the fork, Poloniex decides to list ETC as a separate asset. With price discovery between the minor and major chains, now the free market decides which coin people want to support by way of buying the one they think will be worth more, and selling the other.
The drama now intesifies when a large Ethereum miner in China announces that he will execute a 51% attack on the minor chain as a protest against Poloniex listing the split-fork chain as a legitimate altcoin.
I am Chandler Guo, a 51% attack on Ethereum Classic (ETC) is coming with my 98G hashrate. This is roughly 3 times of current ETC network hashrate. This is an action to against Poloniex’s decision to support ETC. Check www.powtopos.com for more information, and please join me.
Here is a case of a miner who believes the often repeated rhetoric that hard forks are dangerous, and that splitting the coin is bad. That, or he is a brilliant strategian because any attack which involves throwing more hashpower into the network is bound to backfire. It only adds security to the system, and although it may increase the odds of a double spend, it would only be of the attackers own coins.
A couple of days later, the first signs of some troubles start to emerge on exchanges businesses that have ignored the fork
It seems that Coinbase learned the hard way that you can’t just ignore a fork, unless you want to potentially lose some money. But, is this the same as somebody stealing money from you? Not really. The best analogy is one of recyclable aluminum cans. After you finish drinking your cola, you are happy to dump the cans into the bin, because they are worth nothing to you. If someone were to scrounge your trash and collect all the cans to sell them, would you consider that stealing? That is essentially what the exploit used against Coinbase involved. Coinbase publicly declared that they did not honor, value or recognize ETC. A user then would buy ETH on Coinbase exchange, withdraw it, and then replay the same withdraw txn on the ETC chain, thereby ‘stealing’ ETC that they otherwise would not have owned. This is because Coinbase did not ensure that their ETH holdings were properly separated from ETC as some have warned about as long as a year prior. Alternatively, Ethereum developers could have changed the transaction IDs as part of the fork to ensure that any txns on one chain would not be accepted on any other, making this exploit impossible and solving the problem for everyone. In hindsight, this safety feature seems to be something that all hard forks in the future should incorporate, just in case. “We told you so!”, the hard fork alarmists would say. But despite all of this, is it really that bad? One can argue that the value that Coinbase lost was gifted _free of charge_ to them at the time of the fork, and they consciously chose to ignore it. Essentially, they willingly _donated_ their ETC shares to anyone who wished to withdraw it from them. Seen in this light, I wouldn’t call this an attack, so much as an open-ended charity.
What does this mean for Bitcoin?
So why am I interested in this? I have been very critical of Ethereum in the past, and I still am uncertain if it really has a use case, but the hard fork that they are executing is very interesting because it is showing empirically, that many of the arguments brought forward by some Bitcoin core developers and supporters were false. A coin that is split, can certainly compete in the free market, and so long as there are people who believe strongly in the philosophy or purpose of the coin. Certainly there may be loss of value in the short term and increased market volatility, but in the long run, people who want to steer the system to different goals will inevitably need to part ways. Moreover, we have seen that the sum of the value of both coins can be more than the sum of the single coin previous to the fork. This is certainly not a zero sum game. And of course this makes sense, because the price of a coin pre-fork which is subjected to internal dispute and conflict is a suppressed price. If Bitcoin is $650 in price today, it could actually mean that it could be $600/$200 post a fork split. There really is no telling what the price post split could be, but it stands to reason that a price of a coin with internal political conflict should increase once the internal conflict is resolved, even if that means splitting the coin into two.
Notable thought leaders in Bitcoin like Adam Back have constantly repeated that the only thing that keeps Bitcoin functioning is the gentleman’s agreement that “no contentious change should ever be implemented” but we know this rule cannot be enforced. It is a human rule, and humans being mortal will eventually die. Eventually one day some of the successors of the core dev team may view this rule as antiquated and ignore it. Some time far in the future if Bitcoin survives that long, the mining rewards will drop to zero, and perhaps some political groups may see it prudent to introduce demurrage into Bitcoin, or perhaps inflation beyond 21m coins. At that point, I would happily break away into a split-fork Bitcoin, one that preserved the values and principles which made me buy into Bitcoin in the first place.
In a way the principle of avoiding change is kind of like avoiding mutation. Mutation is a natural process by which some random element is introduced into a system that keeps it evolving and growing. If you remove mutation, you certainly remove most of the risk and you have a much more stable system, but you also have a stagnant one, which cannot adapt to changes. I’m reminded of the world of Aeon Flux, a cult favorite among geeks. In it, the world has perfected cloning, and thus the world’s population is tightly controlled and everyone is just born as clones of people who die. This system eventually leads to stagnation not only in the genome, but also in the mentality of the society’s leaders.
Let’s allow nature (and the free market) take its course. Bitcoin was designed to use free market forces to incentivize the distribution and support of the network. We shouldn’t need to rely on human constructs to keep it working.
P.S. For the record, such split in Bitcoin would have drastically different economic repercussions and contributing factors, which would mean that the likelihood of a such a split in Bitcoin happening would be much, much less. Nevertheless, in this article I have chosen to disregard the likelihood of a split, and instead focus on how to manage the results of one technically.