Chronicles of Ethereum: Part II: Return to Classic

Chronicles of Ethereum: Part II: Return to Classic

A comparison of Ethereum versus Ethereum Classic that frames their race to prove superior blockchain design and network adoption.

The piece can be downloaded as a PDF or read in its entirety below. The rest of the series can be found here.

Sam Lee – Director of Research
Tao Tao He – Co-Director of Advisory
Chris Robichaud – Research Analyst

Part II: Return to Classic


Extrapolating from our Part I piece, “The Lion, the Witch, and the Protocol”, Ethereum Classic’s emergence in July 2016 was the direct result of an ideological divide in how the Ethereum community wished to address the theft of approximately 14% of circulating Ether from its DAO fund.

The Ethereum Foundation, many of the Ethereum creators, and a disputed proportion of the broader community wanted to execute a technical procedure known as a hard fork to rewrite the blockchain’s transaction history and artificially return the stolen Ether to the rightful DAO account holders. However, a significant proportion of Ether holders also believed that this action would undermine Ethereum’s core value proposition as an immutable, censorship resistant, and de-centrally managed technology.

If a hard fork were to occur, minersi would have the ability to independently determine which version of blockchain history to support. The choice at hand would be complex in concept but binary in nature. Miners could either:

  1. Accept the blockchain’s rewritten history to erase the theft, but risk that the broader community loses faith in Ethereum’s core premise


  1. Reject the blockchain’s rewritten history, which would memorialize the theft but theoretically preserve the broader community’s faith in Ethereum’s devotion to its principles

After the hard fork occurred, Ethereum (ETH) and Ethereum Classic (ETC) officially separated into different permutations of the original blockchain. Surprisingly, both post-fork iterations maintained a following, and therefore also maintained some of their respective values. Vitalik Buterin’s own reaction indirectly touches on this concept.

“We would like to congratulate the Ethereum community on a successfully completed hard fork. Block 1920000 contained the execution of an irregular state change which transferred ~12 million ETH from the ‘Dark DAO’ and ‘Whitehat DAO’ contracts into the WithdrawDAO recovery contract. The fork itself took place smoothly, with roughly 85% of miners mining on the fork.1

Though 85% of miners makes up a strong majority, it also suggests that up to 15% of miners chose to support the older, unmodified version of the blockchain.

Charting a path after the fork

While the original difference between Ethereum and Ethereum Classic was philosophical in nature, both projects have since made decisions that have tangibly morphed Ethereum and Ethereum Classic into independent projects with separate leaders, development teams, and ambitions. These idiosyncratic and defining characteristics will continue to drive differences in progress and overall valuation. For example, an assessment of relative price appreciation since the DAO hard fork signals that the market is more optimistic about Ethereum’s future versus that of Ethereum Classic.


Differences: governance and centralization

Perhaps the most palpable difference between ETH and ETC is that Ethereum Classic followers chose to uphold the immutability characteristics of the blockchain in the aftermath of the DAO hack. Adding to the DAO situation’s chaos, a post-mortem analysis found that the ‘vote’ on whether to execute the hard fork was not well publicized, was open for less than 24 hours, and saw only 6% of Ether holders actually participate.3 One alarmed user posted on Reddit:

A vote that Nobody Knows About is Not a Vote. I didn’t even realize that it was happening right now. Whatever the results of this vote may be, they mean nothing if there was no widespread announcement of the vote beforehand.4

By comparison, proxy voting standards for US equities require formal documents to be mailed or communicated to shareholders well ahead of voting deadlines to ensure that an appropriate quorum is in place to validate governance decisions.5 The lack of a similar type of voting framework for Ethereum only added to speculation that the hard fork decision was a type of centralized mandate by the Ethereum foundation and its core developers.

Even so, it is not uncommon for young technologies to have at least some centralized characteristics. Revolutionary technologies are categorized as such because they break with convention and have not yet been widely adopted. It logically follows that these technologies must initially start with a smaller, centralized group of believers, investors, developers, and users in order to reach scale. The paradox for Ethereum was that it built its reputation on the promise of decentralization before it could technologically distance itself from its centralized relationships. It is important to consider that Ethereum was first launched in mid-2015 and is still very much in the early stages of its lifecycle. Vitalik and team are actively taking measures to maximize decentralization at the transaction, development, and governance layers of Ethereum’s platform. However, this has required periodic guidance from the steady hand of Vitalik Buterin, Ethereum’s “Benevolent Dictator.”

Ethereum Classic’s governance and development teams consist of two primary groups – ETCDEV, a team of twelve ETC-focused developers and advisors,6 and a similarly sized team employed by Input Output Hong Kong (IOHK), “an engineering company that builds cryptocurrencies and blockchains for academic institutions, governments, and corporations.”7 This development team structure is somewhat reminiscent of Ethereum’s own multi-pronged approach. However, an important and notable difference is evident in the multitude of different platforms that IOHK supports. In addition to ETC, IOHK also leads development for solutions on competing platforms such as Cardano, Daedalus, Qetidas, Scorex, and RS|Coin. As the most significant contributor to ETC, IOHK’s relationships with external platforms have raised some questions about independence and the potential for cross-platform distraction to hinder ETC’s progress.

The ETC community itself has picked on this as well. One anonymous but well-respected ETC developer named Dexaran aired his displeasure with the progress of ETCDEV and IOHK and decided to hold an Initial Coin Offering (ICO) to launch their own independent development team, called Ethereum Commonwealth. Dexaran’s vision painted an incohesive picture of ETC’s project landscape:

“I disagree with the current vision for the development of ETC, and in my opinion it is moving in the wrong direction. I believe that the current [ETC] situation is a result of an inefficient distribution of human resources, In my opinion two separate development groups work on the same things for two separate but nearly identical projects.”8

Dexaran’s fundraise netted 8,476 in ETC from July to September 2017, worth approximately $129,000 at the ICO’s close.9 More importantly, Dexaran received approval and notoriety from the ETC community, potentially signaling that others supported this vision.

The situation evidenced that while ETC’s project is undisputedly decentralized, its governance mechanisms can lead to uncoordinated, individualized efforts with a lack of central vision. This is the tradeoff that crypto communities must accept in the absence of an organization like the Ethereum Foundation, which has supported Ethereum to its current position as the second largest cryptocurrency by market capitalization, 14 spots ahead of ETC as of February 12, 2018.

Differences: leadership

Charles Hoskinson, IOHK’s Chief Executive Officer, serves a similar role for ETC as Vitalik Buterin serves for ETH. As previously revealed, both were on the same team when Charles was the Chief Executive Officer of Ethereum for six months ending in May 2014. When asked about his departure, Hoskinson responded that Ethereum, “went 100% not for profit… So I left in June and wish them well.”10

This set the stage for Hoskinson to eventually introduce Ethereum Classic as an Ethereum rival. As ETC’s leader, Hoskinson is positioned to promote the project’s unwavering support of decentralized blockchain principles as a benefit over ETH. However in February 2017, he suggested a software change that would inflate ETC’s value to generate a community-funded treasury for ETC development projects. To many supporters, this proposal contradicted ETC’s own decentralized philosophy. When outrage emerged, Hoskinson later apologized for, “a poor and confusing release to the general public.”11

Some users compared Hoskinson’s suggested treasury idea to the Ethereum DAO due to its similar purpose. In a February 2017 blog to the ETC community, Hoskinson appeared to directly confirm this:

“Now on to my final topic, community management and governance. When ETC first began, I quickly hired two people. Christian Seberino and Carlo Vicari. They serve totally different, yet complimentary roles…It’s important to understand that while I pay Christian and Carlo, they ultimately work for you [the ETC community]. They are resources for the community and exactly the type of roles that a treasury could eventually cover.”12

This thought process seems somewhat misaligned with Ethereum Classic’s Crypto-Decentralist Manifesto, a document that serves as the guiding principles of the ETC movement:

“We’re committed to keeping blockchain systems decentralized. This informs all our actions and positions towards any developments in the crypto world and beyond… All changes to a blockchain’s rules that introduce new centralization risks or strengthen existing ones should be fought. Only developments that are clearly beneficial to decentralization or strengthen the three key blockchain characteristics should be supported and encouraged.”13

Even though some of Hoskinson’s proposals have stirred unrest in the Ethereum Classic community, the challenge of reaching mass adoption without centralized funding sources can make for a prohibitively expensive individual endeavor. Vitalik also faced the same issue, as has every other cryptocurrency project at some point. From this perspective, Hoskinson appears to be exercising the same type of judgement and influence that leaders of other cryptocurrency projects exhibit in hopes of building a robust, self-sustaining community. Charles’ approach specifically has been praised for its clarity and structure:

“Our team’s conviction in ETC is further bolstered by the transparency in the development roadmap for Ethereum Classic. Charles Hoskinson… continues to actively contribute to the roadmap’s transparency through a variety of communication mediums including Slack, Reddit, Twitter, and the ‘Let’s Talk ETC’ podcast.”14

The fact that Vitalik and Hoskinson have both been involved in high profile crypto projects for a comparable length of time may suggest that ETC’s primary leader is more than capable of championing a competitive cryptocurrency movement. That said, it remains to be seen whether Hoskinson can overcome the adoption, development, and market capitalization network effects established by Ethereum to date.

Differences: consensus mechanisms

By their nature, cryptocurrency blockchains must ensure that proposed transactions on their networks are validated, secured, and verified in a decentralized fashion – a process known as ‘maintaining consensus.’

The most common consensus mechanism is known as proof of work (POW), which is used by Ethereum, Ethereum Classic, Bitcoin, and other popular cryptocurrencies. In this model, individual network participants, known as miners, are incentivized to use their own computing power to maintain consensus. While confirming transactions, miners are simultaneously allowed to compete to solve complex, time and energy consuming math problems that reward them with newly minted units of cryptocurrency. It is a race of sorts – the first miner to solve the math problem wins the right to own the next unit of cryptocurrency. This process creates an economic motivation for miners to police the network by ensuring that transactions are completed appropriately, that no funds are illegitimately spent twice, and that the blockchain’s history is preserved.

However, because POW has been scrutinized for its enormous electricity requirements and susceptibility to a 51% attack,[ii] Ethereum has long been working on its Casper solution, a Proof of Stake (POS) consensus mechanism that mitigates these issues. The basic premise of POS consensus suggests that miners place some portion of their cryptocurrency into a smart contract, betting that they will correctly verify the attributes of the next set of proposed transactions. The smart contract collects ‘bets’ placed by all miners, and tallies the votes to determine which state of the blockchain is most likely correct, based on how much cryptocurrency was wagered by each miner. This weighted average approach suggests that consensus influence is affected by how much each miner wagered as opposed to how much computational math has been done, hence proof of stake vs proof of work. Though a test version of Ethereum’s Casper was released in December 2017, a reliable go-live date has not yet been communicated.15

Ethereum Classic has not released plans to deviate from the POW system, though one well-known ETC developer named Arvicco suggested in January 2017 that IOHK has been quietly working on its own iteration of a POS and POW hybrid solution.16

In the meantime, ETC altered a piece of Ethereum’s original code known as the ‘difficulty bomb,’ labeled as such because it would increase the complexity of math problems that miners solved during POW. The code was developed as a way to reduce profitability of Ethereum’s own POW miners in order to persuade them to switch to the new POS system, which would theoretically be more profitable once developed.17 Because POS does not appear to be an option for ETC, the ‘difficulty bomb’ would only serve to reduce profitability for ETC miners with no replacement option in place, a potentially devastating consequence for the smaller and less popular ETC community. An ETC vote to delay the ‘difficulty bomb’ was proposed and subsequently passed.

Postponing the ‘difficulty bomb’ implementation meant that ETC’s miners would be less likely to switch to more profitable blockchain networks in the short term. A respected, anonymous ETC developer commented that, “delaying the bomb leaves the [ETC] community with [the] most open options towards [a] long-term choice of consensus mechanism.”18 Perhaps this is true, however it is unclear what other options are on the table for ETC at this juncture. Ironically, complaints from the ETC community about the manner in which the decision was made resemble some arguments used by ETC’s own DAO hard fork dissenters just months earlier:

There was no clear polling of the community for a final say about the vote. This should be conducted clearly and publicly across all ETC channels with the arguments and information for and against being represented, with a final voting deadline and transparent count.”19

In summation, though the POW system remains the current consensus mechanism for both ETH and ETC, this may not reflect the long-term state for either project. As ETH’s Casper solution progresses through its testing phase, ETC is still determining how and in what capacity the POS consensus mechanism will play into its own plans.

POS solutions are not easy to develop. The Casper team worked for three years on today’s POS test version, and the team has remained with the Ethereum foundation after the DAO split. It is possible that, even if ETC secretly believed that POS is the better option, they do not have the developer capacity needed to move forward with their own POS solution.

Differences: capped supply

While Ethereum Classic’s maximum supply is capped at 230 million ETC, programmers estimate that the total supply will fluctuate around 210 million ETC.21

Conversely, while Ethereum is subject to an annual creation limit of 18 million ETH per year, a maximum supply of Ether has yet to be established. This has led to criticism that ETH is exposed to inflation in ways that do not appear to exist for ETC.

However, the Ethereum Foundation argues that electricity costs associated with POW consensus mechanisms create a natural supply and demand equilibrium which will stabilize inflation in the long run. Said differently, miners will only continue to mine Ether as long as the value they create for themselves exceeds their costs. Ethereum’s ‘difficulty bombs’ will continually make POW Ether mining more time consuming and expensive. Unprofitable miners will inevitably drop out, further slowing the rate of token creation to a level that approaches the rate of token loss due to misuse, owner death, private key misplacement, and other reasons. The result is an automatic Ether supply stabilization mechanism which would curb inflation over the long-term.

That said, Ethereum’s impending switch to a POS consensus mechanism does not inherently imply the same type of inflation-regulating system found in POW. As a result, the Ethereum team is considering implementation of other inflation controls, such as transaction fees that destroy Ether.

“If the [ETH] token is being burned, then you have an economic model that says the value of the token is the net present value of basically all future burnings… [otherwise] it’s just a currency that goes up and down.”21

Though Ethereum’s approach to inflation risk remains unresolved, the fact that its leaders are proposing solutions suggests that ETC’s inflation-limiting supply cap may not provide sustainable competitive advantage over Ethereum. Additionally, there are scenarios where a hard cap on ETC could prove to be a detriment. Central banks have learned (over a few centuries) that spending is critical to a healthy economy, and that inflation is an integral component for incentivizing spending and maintaining price stability. This is in stark contrast to the prevailing thought within the crypto community that a fixed token supply is an investment merit.

Currently, ETH’s deflationary pressure is by construct, to be brought on by planned time bombs and the transition to POS. However, ETC will inevitably experience token loss that may lead to long-term deflationary pressure because of its supply cap. This would make addressing deflation more difficult for the Ethereum Classic economy. The result would be reduced liquidity, higher transaction fees, and less inclination for people to spend versus hold ETC, leading to a reduction in circulating supply and problems for decentralized applications (dApps) that rely on income from ETC transactions. Without a monetary policy option to increase liquidity accordingly, ETC could struggle to keep up with platforms like ETH that have some type of economic failsafe to deploy in similar scenarios.


To close this edition, we would like to comment on prevailing investment arguments related to Ethereum Classic and Ethereum, including a preface to our thoughts on crypto valuation. Many ETC supporters and Bitcoin maximalists point to ETH’s hard fork ledger rollback and uncapped supply as primary reasons to avoid investing in Ethereum. However, it is possible that these conclusions are premature.

Regarding the ledger rollback, we would like to modify an axiom from the investment rulebook – “past decisions are not always indicative of future decisions.” The concept of immutability is not hardwired into a blockchain – any authority with enough influence can initiate a fork and rewrite the ledger. For example, immutability is currently written into Ethereum’s code, but it only takes one programmer to fork the network and rewrite the ledger. It’s up to the community to decide whether to migrate to the forked blockchain. While we agree that Ethereum’s decision to fork posed significant risk to the project and its viability at the time of the rollback, the Ethereum Foundation successfully executed the hard fork and a vibrant community remains. What is most important is whether leadership has learned from this critical event, which will affect how they guide the platform’s governance going forward.

Related to valuation, we believe too much emphasis is placed on token supply. While scarcity may play a factor in the valuation process, we believe that the ultimate driver of value should be the size of the network. A limited token supply is meaningless if the network cannot generate new economic value and activity.

Further, one of the most popular valuation tools in the market is the modified equation of exchange: M = PQ/V.[22] While this theory has unquestionably progressed crypto pricing models, we propose reverting this equation back to its original form, MV = PQ, when conducting crypto asset valuations.

While there is no mathematical difference, the implications for valuation methodologies are significant. In the modified equation (M = PQ/V), emphasis is placed on M, which is important because investors divide this value by the circulating supply of tokens to arrive at a per token price. However, in focusing on M, we end up making large assumptions about V. Velocity is the largest unknown because – for example – predictions on how much currency investors will hold versus spend are not easily forecasted. In addition, forecasting attempts for this metric commonly draw from historical economic data, of which there is little in the crypto space. By solving for M, V will have an outsized influence on value – very small changes in V will result in significant changes in valuation.

In the original iteration of the equation (MV = PQ), we focus on the PQ portion of the formula. P and Q provide us with the size of the economy in question, a metric akin to the measure of a country’s GDP, for example. By understanding the potential of PQ, we have a sense of a token’s total addressable market. While PQ is still an assumption, we believe that we can make more reasonable attempts to determine an accurate value by looking at existing markets.

PQ represents the entire economic value generated within the ecosystem, a relatively stable metric when compared to the volatility and uncertainty of PQ/V. Because of this, we believe PQ should be the highest-level input in quantitatively determining a token’s value.

As such, while both Ethereum and Ethereum Classic have potential to unlock enormous economic value (or PQ), we believe the most important factor in assessing ETH versus ETC from an investment perspective should be the pathway each project takes to maximize its respective PQ. Token supply and past network fork decisions should be secondary factors.

Though ETC and ETH were at one point unified, both projects have now fully diverged with unique identities and differing ideologies. This intricate and impassioned competition will continue to unfold going forward, complicated by the emergence of even more competitors. In the next edition, Part III: “Prince NEO,” we will observe one of these competitors in greater detail.

End Notes

[i] Ethereum users who maintain the blockchain by verifying proposed transactions and preserving its history. More on miners in the ‘Differences: consensus mechanisms’ section below.

1 Buterin, Vitalik. “Hard Fork Completed.” Ethereum Blog, Ethereum Foundation, 20 July 2016,

2 “ETH-USD Historical Prices.” Yahoo! Finance, Yahoo!, 6 Mar. 2018,

3 Breitman, Kathleen. “Why Ethereum’s Hard Fork Will Cause Problems in the Coming Year.” Bitcoin Magazine, BitcoinMagazine, 3 Feb. 2017,

4 Lozj. “A Vote That Nobody Knows About Is Not a Vote.” Reddit, Reddit, 9 July 2016,

5 Stokdyk , Steven B, and Joel H Trotter. “Proxy Disclosure Recommendations.” Harvard Law School Forum, Harvard College, 14 Mar. 2016,

6 “Meet Our Team.” ETCDEV Team, Ethereum Classic Project,

7 “About.” IOHK, IOHK,

8 Dexaran. “Ethereum Commonwealth ICO.” DEX ICO,


10 Hoskinson, Charles. “Why Was Charles Hoskinson(Now Cardano CEO) Fired from Ethereum?” Steemit, Steemit, 5 Jan. 2018,

11 Ether, Classic. “An Analysis of Charles Hoskinson’s Apology Letter – Classic Ether – Medium.” Medium, Medium, 8 Mar. 2017,

12 Axiom. “Some Thoughts on ETC.” Thoughts from Charles, Blogger, 25 Feb. 2017,

13 “The Classic ‘Release’.” Ethereum Classic 0.1 Documentation, Ethereum Classic Community, 2016,

14 Beck, Matthew. “Into the Ether with Ethereum Classic.” Grayscale, Aug. 2017,

[ii] A scenario whereby one party gains more than 50% share of a particular network, allowing that party to hold a majority of the consensus power, and allowing it the ability to approve illicit transactions. This attack would undermine any faith that a community has in a particular cryptocurrency, due to the decision-making power becoming centralized.

15 Murray, David. “Ethereum Launches Casper Testnet, Paving the Way for Proof-of-Stake.” Block Explorer News, Block Explorer News, 1 Jan. 2018,

16 Hertig, Alyssa. “Ethereum Classic Freezes ‘Difficulty Bomb’ With ‘Diehard’ Fork.” CoinDesk, CoinDesk, 13 Jan. 2017,

17 Hertig, Alyssa

18 Hertig, Alyssa

19 “Diehard ETC Protocol Upgrade Successful. Nethash Stable, Geth and Parity Mine Blocks, Transactions Coming through. Congrats, Everyone! • r/EthereumClassic.” Reddit, Reddit,

20 “A Joint Statement on Ethereum Classic’s Monetary Policy.” ETCDEV Team, Ethereum Classic Community,

21 Leising, Matthew. “Ethereum Creator Wonders Whether His Currency Should Be Scarcer.” Bloomberg Technology, Bloomberg LP, 8 Nov. 2017,

[22] Monetary base (M) = Price (P) x Quantity of goods (Q) / Velocity of currency moving through system (V)


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