Ethereum vs Ethereum Classic: Understanding the Differences

INTRODUCTION

ETH is the native token of the Ethereum network, the prominent Layer-1 blockchain created by Vitalik Buterin. It is the 2nd largest cryptocurrency by market cap and the most prominent smart contract platform. However, many aren't aware that the current Ethereum network is not the network originally launched by the founding team. 

This original network is still running and is called Ethereum Classic (ETC). The split occurred in 2016 when a hacker stole 3.6 million ETH tokens representing around 14% of the Ether supply at the time. This loss threatening the growth of the fledgling Ethereum blockchain. - and as suchIn response, the participants in the Ethereum ecosystem voted for an Ethereum hard fork, setting up a new blockchain that incorporated all of Ethereum’s history before the hack, but effectively undoing the hack and all transactions that occurred afterwards.

Some participants disagreed with this decision, believing it violated the blockchain's ethos of data immutability, and stuck with the original blockchain. The original blockchain upon which the DAO hack occurred is still running and is called Ethereum Classic (ETC), while the forked chain widely used by the majority of users is Ethereum (ETH).

This article will look into the differences between both, as well as their history & prospects.

ETHEREUM VS ETHEREUM CLASSIC: ARE THEY THE SAME?

The Ethereum blockchain is not the same as the Ethereum Classic network. The Ethereum network was a hard fork of the original Ethereum project launched by Vitalik Buterin & his cofounders in 2015. This original Ethereum blockchain is now referred to as Ethereum Classic and exists as a separate blockchain network with its own history, transactions and its own native token - ETC. However ETH is by far the more popular cryptocurrency of the two and has the support of Vitalik and the vast majority of pre-fork Ethereum developers. Ethereum has a market capitalization >$280B, whereas Ethereum Classic has a market cap of <$3.5B. Ethereum is about 80x the size of the Ethereum Classic by market value.

The tokenomics of both networks are also different. There are approximately 120 million ETH tokens against 143 million ETC tokens. These tokens also have different supply cap policies, which limits the total amount of tokens that can be created - ETH has no fixed supply cap, whereas ETC has a maximum supply cap of 210.7 million tokens, 10x more than the Bitcoin supply cap.

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The reason Ethereum Classic has a fixed supply cap is to ensure that its tokens can be a store of value, following a similar principle as Bitcoin's supply cap. In contrast, ETH does not have a supply cap, so as to provide the network with more flexibility to adjust its tokenomics over time. The argument put forth is that token issuances may be adjusted to incentivize users and developers to adopt scaling methods like Layer 2 networks to raise Ethereum's transaction processing capacity.

ETHEREUM VS ETHEREUM CLASSIC - TOP HOLDER DISTRIBUTION

The table below shows the holdings of the top 10 addresses on Ethereum vs Ethereum Classic. As you can see they differ significantly. ETH's top holder holds >8% of the total supply (the ETH2 Beacon Deposit Contract) whereas the top Ethereum Classic holder holds around 16% of the total supply. 

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Exchanges hold a substantial amount of ETH tokens to facilitate token withdrawals and swaps for their users.

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DECENTRALIZED FINANCE AND DECENTRALIZED APPLICATIONS

Another notable difference between the two is that the Ethereum platform is the home for most of the DeFi ecosystem. Ethereum remains the more popular platform for smart contracts, with over 700 dApps as of early 2023, while the Ethereum Classic network has approximately 100 dApps and a far lower number of users and volume on those apps. The ETC dapp ecosystem is basically nonexistent.

Ethereum's Total Value Locked (TVL) stands at almost $30 billion whereas Ethereum Classic's is tiny at under $1 million.

ETHEREUM VS ETHEREUM CLASSIC: TECHNICAL SPECIFICATIONS, CONSENSUS MECHANISMS & SECURITY

Unsurprisingly there are many technical similarities between the networks since they have the same origin. Both process around 12-15 transactions per second and both run smart contracts which are Turing complete, allowing for a wide range of dApps.

THE CONSENSUS MECHANISMS

However, one notable technical difference between the two is their choice of consensus mechanism. Ethereum previously used the Proof-of-Work (PoW) consensus mechanism like Bitcoin, however it no longer does. Ethereum Classic still uses PoW, which refers to a transaction validation mechanism involving network validators, known as miners, solving complex mathematical puzzles using computational power to verify transactions.

Ethereum now uses the Proof of Stake (PoS) consensus mechanism, which requires validators to lock ETH tokens to the network to validate transactions. This shift to Proof of Stake happened during an event called The Merge. The Ethereum Classic blockchain community however, chose to continue with PoW, concerned by the potential for large ETH holders to influence the network, leading to fears of greater centralization.

SECURITY FACTORS

Despite this, Ethereum Classic has experienced two 51% attacks in which malicious actors took control of a majority of ETC mining computational power to validate transactions, allowing them to manipulate transaction data for their own benefit. These attacks happened between 2019 and 2020 and involved the theft of $1.7 million and $5.6 million respectively. The attacks can be attributed to the fact that Ethereum Classic has a relatively small number of validators owing to a small number of network participants. As such, less computational power is required for a malicious takeover of the network, as compared with Bitcoin.

Since these attacks however, the Ethereum Classic network has taken steps to upgrade security through the Thanos upgrade, which aimed to make the network more accessible to smaller network validators to further distribute the computational power involved in transaction validation.

By contrast, Ethereum has never experienced a 51% attack. Attackers would need to stake billions t of dollars of ETH which would potentially be destroyed (slashed) through existing network protection mechanisms. Given the size of the Ethereum network and the sheer number of Ethereum users, attackers would need to deploy a substantial amount of ETH tokens - equivalent to >50% of the 28.1 million ETH tokens that are currently staked (worth over $60 billion). This is likely prohibitively expensive for any potential bad actor.

UNDERLYING PHILOSOPHY

Ethereum and Ethereum Classic fundamentally differ in their underlying philosophy. Ethereum Classic stands by the “code is law” philosophy pioneered by the Bitcoin community, which proposes that blockchain data should never be altered, even for reasons like returning the stolen funds from a hack. Ethereum on the other hand takes a less strict approach, as seen in the willingness of Ethereum developers to hard fork after The DAO was hacked in 2016.

WHAT CAUSED ETHEREUM TO HARD FORK INTO ETHEREUM AND ETHEREUM CLASSIC?

The Ethereum hard fork was precipitated by The DAO Hack in 2016. The DAO (Decentralized Autonomous Organization) was a decentralized venture capital fund launched on the original Ethereum network in April 2016. It was intended to serve as an experiment in decentralized funding & governance, and would allow token holders to directly vote on projects to fund. Post launch, it raised over $150 million in ETH tokens.

In June 2016, a hacker stole 3.6 million ETH tokens worth approximately $50 million at the time from The DAO's treasury, by exploiting a vulnerability in The DAO smart contract. These funds made up 1/3 of The DAO's funds & 14% of circulating ETH.

Instead of siphoning the stolen funds to their own address, The DAO hacker withdrew the stolen funds to a "Child DAO" which was a separate smart contract that was created using the same flawed code as The DAO. Despite the funds being under the hacker's control, they were still unable to access them as The DAO's built-in smart contracts required funds to remain in the Child DAO for 28 days before they could be transferred. This feature was implemented as a failsafe for dispute resolution and withdrawal cancellation.

During this waiting period, the Ethereum community and developers decided to hard fork the chain to roll back the blockchain to a state before the original Ethereum was hacked. This would effectively reverse the hack transactions, returning the stolen funds and create a separate new chain.

While the majority of the Ethereum community moved over to the new Ethereum, some holdouts rejected the hard fork as they believed it went against the principle of immutability. They believed that blockchains have value because they do not allow transactions to be reversed. Reversing the state of the original chain would invalidate this foundational principle.

IS ETHEREUM CLASSIC (ETC) WORTH BUYING?

This depends entirely on an individual's preferences, risk appetite, time horizon and many other factors. Several analysts have differing predictions on the prospects for Ethereum Classic in the future. Some traders see it as beta to the main Ethereum network - meaning, it will move with greater volatility to the main Ethereum network, but with more prominent moves in either direction due to a smaller overall market cap.

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It is worth noting that Ethereum is a far more widely adopted network than ETH Classic, with many more protocols built on top of it.

IS ETHEREUM OR ETHEREUM CLASSIC BETTER?

Ethereum and Ethereum Classic are different networks which serve different purposes. For die-hard believers in the principles of immutability, or traders who prefer trading lower market cap tokens, Ethereum Classic may be preferable. On the other hand, Ethereum could be more appealing to DeFi users as well as those who prefer trading in major tokens only. Ethereum is a far more established platform for DeFi protocols, and users of platforms like Aave and Synthetix, as well as those looking to bridge ETH to chains like Arbitrum or Base, must use Ethereum, as most of these platforms do not operate on Ethereum Classic.