Will ETC production cuts and the ETH 2.0 merger bring new hope to Ethereum Classic?

Author: D-Tiger Research

Preface

From March 16 to March 23, 2022, $ETC rose from 25.6 USD to a peak of 48.04 USD, an increase of 87.65%, becoming one of the few cryptocurrencies to perform well recently. The upcoming halving is clearly an important catalyst for this surge.

With the rapid growth of the cryptocurrency space, many new players have entered the market. While scrolling down the list of projects ranked by market capitalization, some have noticed a blockchain named Ethereum Classic that ranks quite high.

They see a name and logo similar to the famous Ethereum and may think that this project, which adds "Classic," is trying to profit from ETH's success. In a market filled with such projects and with limited user research time, many might thoughtlessly assume that Ethereum Classic is a clone of Ethereum.

Few understand that the relationship between "Ethereum Classic" and "Ethereum" is similar to that between "Bitcoin" and "Bitcoin Cash." The slight difference is that Ethereum Classic is the continuation of the original Ethereum blockchain launched in 2015 and is the longest-running smart contract in the world.

1: Project Overview

Ethereum Classic is an open-source, public, blockchain-based distributed computing platform. It provides a decentralized, Turing-complete virtual machine that can execute scripts using a global network of virtual machine nodes.

Users can store tokens in cryptocurrency wallets to reward the computational power of participating nodes. To prevent large transactions aimed at paralyzing the system, Ethereum Classic has a transaction pricing system called Gas, where transactions willing to pay higher fees are prioritized.

Ethereum Classic is a blockchain that was forked from the original Ethereum blockchain. After the hard fork, the old fork became Ethereum Classic, while the new fork continued to be called Ethereum.

1.1 Origin of Ethereum Classic

In mid-2016, the Ethereum blockchain, which had been running smoothly for a year, initiated a crowdfunding vote for a project called TheDAO. The blockchain company Slock.it announced and launched a 28-day community voting crowdfunding project, raising over 12 million Ethereum, which accounted for nearly 14% of the total Ethereum supply at the time, valued at over 150 million USD.

After the crowdfunding was completed, an anonymous hacker exploited a vulnerability in TheDAO's code to steal approximately 3.6 million Ether. Once this was confirmed, it immediately sparked intense debate within the cryptocurrency community. However, due to a 28-day clause in the smart contract, the hacker could not do anything with the stolen 3.6 million Ether until that time expired. This provided the Ethereum community with time to discuss possible solutions.

Community members proposed three ideas:

1. Soft fork, which is a backward-compatible method, means that any block containing transactions involving the stolen Ether will be ignored. This would lead to a "Denial-of-service attack," which not only significantly increases network costs but also requires miners to solve many meaningless algorithms.
2. Hard fork, which is a non-backward-compatible method, cannot be changed once completed. This method can return all lost assets to those who were victims of the DAO attack, while all users must execute new code/rules; otherwise, they cannot interact with the new blockchain or network in any way.
3. Do nothing, drawing on the idea of code is law, which means that the essence of blockchain is decentralized trust, and it should be immutable once confirmed by the network, which is the value of the network.

Some members of the ETH community believed that Ethereum should execute a hard fork to reclaim the stolen funds and reverse the illegal transactions. Other members argued that forking the blockchain would create moral hazard, which could lead to future forks, so the legitimacy of the 3 million stolen ETH must be acknowledged.

Ultimately, the network chain was split into two different blockchains due to these differing community views:

• After receiving support from over 85% of the community, the new chain that implemented the hard fork retained the name Ethereum and has been running smoothly to this day.

  The 1,920,000th block, due to the successful execution of the hard fork code, recovered the stolen funds on the new chain. The Ethereum team designed an unconventional state change in the 1,920,000th block and transferred most of the computational power from the original chain to the new chain that supports the hard fork, which is now the Ethereum smart chain.

• The old chain, which did nothing, was continued to be maintained and operated by some developers and community members and was renamed Ethereum Classic.

  The 1,920,001st block, people originally predicted that the old chain, which did not implement the hard fork, would disappear within a few hours, but it was found that some miners continued to maintain the old chain, and the over-the-counter trading of the old chain tokens provided value to the old chain, thus giving birth to Ethereum Classic. Although these two blockchains took different paths, they continued to share the same blockchain records before the hard fork (i.e., before the 1,920,000th block).

Hacker Interlude:

As of March 24, 2022, the attacker’s wallet still contained 3.36 million $ETC, having only transferred 280,000 $ETC to convert into over 100 $BTC at the end of 2016 (the attacker’s wallet now holds about 50 $BTC) and donated 2,000 $ETC to the ETC Foundation (quite stingy), after which there has been no movement.

The flow of these DAO funds, during this bull market period, reached a peak value of over 100 million USD, with the attacker remaining completely inactive, which should be one of the biggest unsolved mysteries in the cryptocurrency field to date.

After the DAO incident, there were many technical analyses and investigations, and various signs indicated that the person who discovered this vulnerability and initiated the attack was very likely among the following individuals within the Ethereum core development team, who ultimately "voted" to select the attacker.

1.2 Team and Foundation

ETCDev is composed of software engineers and experts from different regions and disciplines. They work full-time on many core ETC projects, including the ETC client Geth, the Emerald SDK/Platform, SputnikVM virtual machine, and sidechains, working on the front lines of blockchain development and research.

At the Consensus 2018 conference in New York, the incubation platform "Ethereum Classic Labs," based on the ETC blockchain and jointly funded by three investment institutions: Foxconn Technology Group (HCM), Digital Finance Group (DFG), and Digital Currency Group (DCG), was officially established with initial funding of 50 million USD.

1.3 Significant Related Events

• 2015-07-30, Ethereum released its initial version: Vitalik Buterin and the Ethereum Foundation created a Turing-complete smart contract platform based on blockchain.
• 2016-04-05, TheDAO project was created: Slock.it designed the TheDAO Ethereum contract, with security audits conducted by Dejavu.
• 2016-06-17, Assets were stolen: The DAO project on Ethereum was hacked due to a system vulnerability, with approximately 30% of the raised Ether being stolen, valued at about 50 million USD at the time, with a large amount of funds transferred to the hacker-controlled "Child DAO" contract.
• 2016-06-21, White hat hacker organization established: A self-proclaimed "white hat" hacker organization recovered 70% of TheDAO funds, but the remaining 30% required protocol-level modifications to retrieve the funds in the hacker's possession.
• 2016-07-20, Hard fork successful: The community engaged in intense discussions on Reddit, ultimately leading to a split, and the hard fork was successfully executed, creating the first block of Ethereum Classic. From that point on, any future updates to the Ethereum blockchain would not be compatible with ETC.
• 2016-08-15, Rebuilding the Ethereum Classic network: Through the efforts of the team and community members, the price of $ETC gradually stabilized, and the Ethereum Classic community began to grow.
• 2017-02-20, ETCDEV team established: The long-term contributors and volunteer team of ETC was renamed to the ETCDEV team.
• 2017-03-01, New monetary policy adopted: The Ethereum Classic community adopted a fixed supply monetary policy, similar to Bitcoin, with a limited issuance plan.
• 2020-03-17, Ethereum Classic halving: Block rewards were reduced from 4 ETC to 3.2 ETC.
• 2020-06-02, Ethereum Classic hard fork upgrade: According to official news from Ethereum Classic (ETC), an emergency occurred during its hard fork upgrade, as some node operators failed to update their node operating versions in time after the hard fork upgrade on June 1, 2020, leading to significant block synchronization issues and a hard fork situation.
• 2020-10, Attack resistance system: During July-August, due to low attack costs, Ethereum Classic recently suffered three 51% attacks. In response, the ETC blockchain established a system called MESS, making attack costs very expensive.
• 2022-02-13, Mystique hard fork successful: The ETC Mystique hard fork was successfully activated at block 14,525,000.

1.4 Current Development Status

In terms of ecology, whether it is the richness of on-chain applications, asset accumulation, or user numbers, ETC is very difficult to compare with emerging public chains in the market.

According to statistics from OKLink, in the past week, the number of daily active addresses for ETC has remained around 30,000, with daily transactions averaging about 60,000.

According to data from decentralized finance Llama, the top five public chains by total locked value are Ethereum, Terra, BNBChain, Avalanche, and Solana, while ETC is far behind, ranking over 80th.

As a smart contract platform that respects "code is law," ETC has also attempted to increase blockchain use cases in recent years. Currently, it has developed game projects such as Commonwealth Tribes and Aqua Bank on-chain, as well as DEX projects like HebeSwap. Additionally, there are several NFT projects on the ETC chain, including ETCpunks and Lazy Lions.

1.4.1 Hash Rate Situation

The hash rate of the Ethereum Classic network reflects the overall performance of all miners in the ETC network. As of March 24, 2022, the Ethereum Classic network hash rate was 27.30 TH/s = 27,298,794,869,938 h/s. A total of 14,785,810 blocks have been generated, with an average block generation time of 13.1 seconds, and the hash power is mainly distributed across both coasts of Europe and North America.

1.4.2 Grayscale Holdings Data Change Chart

During the downturn in the cryptocurrency market, ETC showed unusual activity, rising from 25.6 USD to a peak of 48.04 USD between March 16 and March 23, 2022, an increase of 87.65%, becoming one of the few cryptocurrencies to perform well recently. The upcoming halving is clearly an important catalyst for this surge.

2: ETC Token Halving Mechanism

On December 11, 2017, the ECIP 1017 document was released, re-establishing limits on the issuance of ETC: when the block height reaches 5,000,000, the block reward will be reduced by 20%, and thereafter reduced by 20% for every 5,000,000 blocks. Due to the change in the $ETC reward rate, the total supply is expected to be around 210 million $ETC, with a maximum not exceeding 230 million $ETC.

According to data statistics, Ethereum Classic is expected to reach Bitcoin-level inflation by 2032.

The last halving of Ethereum Classic occurred on March 17, 2020, when the block reward was reduced from 4 $ETC to 3.2 $ETC. Prior to that halving, the cryptocurrency asset market experienced the 3.12 black swan event, with $ETC dropping from a peak of 13.2 USD to a low of 3.1 USD within 40 days before the halving.

According to data, ETC is expected to undergo a block reward halving in 32 days, with the Ethereum Classic network likely to surpass 15,000,000 blocks, entering the fourth era of the 5M20 emission schedule. At that time, the ETC block reward will be reduced from 3.2 $ETC to 2.56 $ETC, a reduction of about 20%.

This means a decrease in the total supply of the ETC ecosystem, leading to the actual circulation being influenced by market expectations. However, in the long term, the unit quantity of tokens will be more valuable, similar to BTC's halving mechanism, making ETC one of the favored investment products in the short term.

3: ETC vs ETH

3.1 Consensus Mechanism

Changes in the consensus mechanism lead to miner migration. It is well known that many users in the real world purchase large quantities of graphics cards to participate in ETH mining. In fact, their mining is predicated on the Ethereum consensus layer being PoW (Proof of Work). However, with the emergence of new consensus mechanisms in recent years, more and more people are participating in "mining," exposing the disadvantages of the PoW mechanism.

The goal of ETH 2.0 is to shift the consensus from energy-intensive and inefficient PoW to a more energy-efficient and lower-energy PoS mechanism, while also effectively preventing the classic 51% attack vulnerability in blockchains.

As Ethereum changes its consensus layer, miners will inevitably migrate from ETH to other mining networks. From the perspective of working principles and consensus layers, ETC is the most suitable for integrating Ethereum miners, as it can execute PoW mining using graphics cards and other computational power.

Xu Kang, the head of the Asia-Pacific region for ETC, stated that during the consensus transition of ETH, there will be a flow of hash power to other chains, and ETC is the most suitable PoW blockchain to absorb Ethereum's hash power.

Currently, ETC has published a hash power migration guide on its official blog, welcoming disenfranchised Ethash miners. It points out that ETC has the capacity to absorb most of the abandoned Ethash hash power. However, the mining version running on ETC is a modified version of Ethash, called ETChash. ETH miners migrating to ETC will need to upgrade their firmware.

One viewpoint suggests that ETC, compared to ETH, is a purer decentralized system and will ultimately prevail. Another viewpoint argues that ETH has the support of the majority and core developers like Vitalik, making ETH the representative of the future.

The D-Tiger team believes that Ethereum's community governance model is more flexible compared to Ethereum Classic, allowing for timely modifications and maintenance when vulnerabilities occur, as no network is infallible. Furthermore, the vast majority of original developers and community members chose Ethereum, which undoubtedly has stronger development capabilities and resources than Ethereum Classic.

From a technical perspective, Ethereum is a blockchain platform for deploying various smart contracts, while Ethereum Classic is more about traditional programming and lacks sufficient blockchain scalability and extensibility, leading to unresolved security and scalability issues, which may eventually cause investors to lose confidence in ETC.

4: Conclusion

The Ethereum Foundation is definitely transitioning to a PoS (Proof of Stake) system named Casper, while the ETC community believes that based on the technical characteristics of PoS, it may lead to the rich getting richer and the poor getting poorer, creating institutional barriers for users, which is unacceptable to the core values of the ETC community. ETC will continue to adhere to PoW. This is also one of the key factors in the transformation of the two networks.

In fact, for ETC, whether it is joining ETH's hash power or halving, it is merely a catalyst and not the determining factor for the development of the ecosystem. Although the current network ecosystem is relatively complete, including projects across various tracks, there is still a significant gap in asset accumulation and user numbers compared to emerging public chains, because halving only reduces supply and does not create demand.

To gain a competitive advantage, further on-chain development is still necessary. Although the current era is dominated by new concepts like WEB3.0 and the Metaverse, ETC, as an established public chain, will not give up on the development of its own ecosystem.

The opportunity brought by the Ethereum 2.0 merger and its own halving has once again made ETC a hot topic in the public chain space. Seizing this opportunity to achieve ecological integration and create demand to accumulate users and funds may be the key to winning in the competition.