By Nathan Ferguson
Ethereum, one of the newer innovations in blockchain technology. While many hear the word and often picture the Russian-Canadian young Vitalik Buterin behind one of the most famous creations of the 21st century, a large number of people may not really know what Ethereum is.
In this article, we not only shed light on what Ethereum is, but also discuss in detail an exploit which took place causing Ethereum to be dumped, and a new version of it to be accepted by the cryptocurrency community.
In order to discuss Ethereum and it’s backstory, it is necessary to divide the article into digestible sections. The following table of content outlines how we will be exploring the topic:
- Say Hello to Ethereum
- The Split of Ethereum Classic and Ethereum
- Bad Rep
- The Hard Fork‘s Impact
When thinking of cryptocurrency or even blockchain technology for that matter, the most infamous comes into mind; Bitcoin. Bitcoin was the most famous of its kind, it was a good source of inspiration for many to build more sophisticated systems. Perhaps, when people first studied the whitepaper of Bitcoin first published in 2008, they were surprised to see the utilization of multiple users all across the globe for the processing of data and hence creating a network which would be referred to as blockchain.
This is what essentially allowed Bitcoin to exist in a decentralized manner. The most cunning feature of most cryptocurrencies, the fact that they are decentralized and outside the control of banking institutions or any single entity for that matter, is only possible because the processing of transactions is enabled by having a blockchain network. What this essentially means is that people are able to place their trust in cryptocurrencies because unlike fiat currencies, they are decentralized and outside any one’s control.
As this form of currency is not controlled by any institution, a valid question of “Who maintains a cryptocurrency?” can arise. The answer is, people. This is possible because cryptocurrencies operate in a decentralized manner. Users get rewarded for processing transactions of one particular cryptocurrency by getting offered newly minted amounts of that particular cryptocurrency in a process called mining.
As a result, many users do so in the pursuit of the incentive and this leads to a particular cryptocurrency having a network of users willing to process transactions of the very cryptocurrency. This network is referred to as the blockchain network and the users processing transactions are hence called “nodes” of a blockchain.
With this concept at its core, Bitcoin rolled out in 2008. Given it was the first of what would come as the modern cryptocurrencies of the 21st century, it faced a lot of friction in the beginning. However, with time, it started to get adopted by many. In a few years, there was indeed a good crypto enthusiastic community taking root on the internet.
In this community was an individual with an even more radical idea compared to the original Bitcoin. This individual argued that Bitcoin should utilize it’s blockchain to allow for various tasks to be automated and hence, allow applications to be made on top of it’s blockchain network. This would mean the processing of application data to be done by the network of nodes all around the world. As with Bitcoin itself, anything so different in the beginning does face its own ounce of friction.
Say hello to Ethereum
This individual was Vitalik Buterin and after his ideas of being able to build applications on the blockchain network did not gain enough traction, he decided to make his own cryptocurrency; called Ethereum at the time and now referred to as Ethereum Classic for reasons discussed later on in this very article.
As he was having a difficult time convincing others at the time of his ideas about bitcoin, he decided it was to launch a crowdsale for his new cryptocurrency. In July 2014, 25,000 BTC were raised in what would come to be known as one of the largest cryptocurrency fundraising ventures ever. These were worth almost $17 million at the time and as a result; Ethereum was formed.
Ethereum itself is the name of the blockchain on which tokens called Ether are processed. Ether can hence be called the cryptocurrency token of the Ethereum blockchain. It is abbreviated to ETH in short. ETH works very much like the BTC in terms of its maintenance of the blockchain where users process transactions and ultimately keep the blockchain maintained in return for some ETH. This provides them with an effective incentive to maintain the wholesale market.
On the average user’s end, each user pays a small amount of processing fees each transaction which is used to provide the miners incentive to keep using their resources to maintain the blockchain.
However, one key difference to note here, is indeed the fact that this is Vitalik Buterin who founded the cryptocurrency. His original plight of allowing blockchain networks to house the processing of applications is something he made sure got fulfilled when he developed the cryptocurrency himself.
Ethereum brought rise to programming abilities on its blockchain by allowing the creation of decentralized smart contracts. These would be lines of code which essentially allow a task to be executed, once certain predetermined conditions are met. Smart Contracts is the key feature which sets Ethereum apart from Bitcoin as due to the presence of smart contracts, applications can be built on the blockchain using them.
Smart Contracts are processed by the same nodes of the blockchain network as ones used to process transactions, hence allowing the processing of data to be done in a decentralized manner. The code of the smart contract is also open-source hence both the developer and the users can have an increased feeling of trust in the execution of the code as it is accessible and non-editable by both.
However, let’s refer back to something mentioned earlier in this article; which is about there being a difference between Ethereum and Ethereum Classic. The following part of the article is going to be dedicated to why there are two different versions of the same cryptocurrency.
In the summer of 2016, the cryptocurrency industry saw one of the worst attacks in its history, which marked a huge change for the entire Ethereum blockchain. This one digital catastrophe caused masses to drop the version of Ethereum widely accepted at the time, now called Ethereum Classic and move to a new version of it. What could have caused such a change? This and more in the following part of the article.
The Split of Ethereum Classic and Ethereum
In order to understand the split of the Ethereum blockchain into Classic Ethereum and Ethereum, we have to look at another feature which was well received by the community of crypto enthusiasts at the time; the DAO. Short for Decentralized Autonomous Organization, it aimed to be a platform somewhat like Kickstarter.
A place where people could pitch ideas participating and polishing their entrepreneurial sides while others could act as investors and support ideas the community saw potential in.
A game-changing feature was indeed that all parties, the one who pitched and the one who invested, would reap the rewards if the project was successful. The creation of the DAO was possible due to the fact there are smart contracts available for the creation of such applications on the Ethereum blockchain. In April of 2016, it raised around 12.7 million Ether or over $150 million.
The way this would work is by allowing people to vote on which idea pitched would they want to support. People could easily participate in the DAO by purchasing DAO tokens using Ether. The people could then use the DAO tokens to support the projects they see potential in. The projects on the DAO would likely exist in the form of dApps or decentralized applications. In order for the projects to receive funding from the DAO to proceed, they would have to gain more than 20% of the community’s support.
However, as it would come to be known, the DAO had a flaw. A flaw so pesky, it would cost the people a lot of the trust they kept in the Ethereum platform. If we were to go back to the definition of smart contracts, they were pieces of code which would allow particular programs to be executed upon the meeting of some predetermined conditions.
These are heavily trusted upon as their codes are open-source meaning anybody can access the code and see for themselves what would happen if it were to be executed. Moreover, smart contracts are not editable.
So when the DAO coded for a “split function”, which basically allowed the investor to withdraw their funding for a particular decentralized project they found on the DAO. This would mean that the investor will be able to withdraw their investment, made in the form of DAO tokens but would be withdrawn in Ether. The investor would not be able to access the withdrawn funds for about 28 days.
However, in June of 2016, the split function on the DAO was called multiple times which led to it being exploited. The split function being called multiple times amounted to the attacker being able to get away with almost $50 million dollars worth of ETC. Being able to drain 11.5 million Ether meant that the attacker was able to get away with almost one third of the total Ether available on the DAO.
When one might stop to wonder how one was able to find an exploit in the Ethereum ecosystem, the answer may be as simple as the names of features Ethereum offers. As mentioned earlier, Smart Contracts are open-source and non-editable. This means that when one finds an exploit in the code, there is nothing that can be done about it as Smart Contracts are conventionally non-editable.
Due to the developers of the smart contracts of DAO not expecting a recursive call. The smart contracts responsible for the “split function” would also first refund the Ethereum amount before the internal token balance could be updated.
As a result of the DAO Hack, a huge vulnerability in the Ethereum DAO smart contracts was uncovered. Although the hack meant that there was only code which others could exploit solely in the smart contracts as per history and not in the functioning of the blockchain itself.
This is because there is nothing inherently wrong about the cryptocurrency of Ethereum itself or the way it’s blockchain works. Rather it was only due to a code which one found the exploit of. The code was located in a smart contract of the DAO.
Looking at the activity of the attacker who had found the exploit, they were not really able to get away with the stolen Ether tokens as the 28 day rule of not being able to access the refunded assets for 28 days from the time of the refund came into play.
All transactions are recorded onto a public ledger so those cryptocurrencies are indeed trackable across the blockchain, even if tracing them to a particular person’s personal information may be impossible. As a result, the attacker did not continue to exploit the Ethereum DAO smart contracts despite the fact that they could have.
Bad Rep
This was heavily damaging for Ethereum at the time as unknown users being able to find exploits in the smart contracts governing so many virtual assets meant that the funds of many users were not particularly safe. Hence, Ethereum’s reputation fell.
Given that the clock was ticking for the Ethereum team to act quickly and fix the damage that had been done. It sought to seek the opinion of the already present and quite vocal Ethereum community. Many individuals who were a part of the community stood up for the fact that cryptocurrencies are supposed to be subjected to blockchains which are non-editable. This is indeed a core-concept governing many different cryptocurrencies so it was no surprise that many users wanted the same for Ethereum as well.
On the other hand, there also existed a large group of people within the community who believed that the Ethereum blockchain should be hard forked, and in effect, ultimately refund those who were affected by the DAO hack. Hard Fork is an event where one blockchain splits into two. One original and the other new chain. This allows developers to fix or update cryptocurrency blockchains permanently and hard forks are usually subject to a lot of discussion amongst the crypto community.
So was the case in this situation as well where eventually, a vote was taken and it was decided to move with the latter option of initiating a Hard Fork of the original Ethereum blockchain. This allowed the developers to transfer the stolen Ether tokens back to their original owners and as a result, successfully refunding the virtual assets back to those they were stolen from.
The Hard Fork’s Impact
Here is where it would be imperative to mark the creation of a clear distinction between Ethereum Classic and Ethereum. Ethereum Classic is the original blockchain which faced the DAO exploit while Ethereum is the one where the Ether tokens were refunded and the one which now exists as a result of the hard fork.
The crypto community has many debates of its own which may never seem to come to a conclusion. One of those debates is the one of who is better out of the two: Ethereum Classic and Ethereum.
We should keep in mind the feelings spread across the community when the discussion of a potential hard fork in the Ethereum community started. Many were against the idea of a hard fork as they believed it violated the idea of decentralization; a key pillar in many cryptocurrencies. They would base their arguments on the simple fact that a hard fork would indeed be an action being carried out by developers who are not supposed to meddle with how transactions in the blockchain are flowing.
While for others, hard forking Ethereum was a necessary measure in order to ensure the unique cryptocurrency survives. They rationalized hard forking as the best possible measure the developers could take in order to ensure the exploit was in a way undone and those exploited were compensated. These people were adamant on the stance that things should be done in a “fair and square” manner, where rare cases of regulation may be okay if it means things are running smoothly on a larger scale.
Conclusion
All in all, this article dealt with a fair deal of history attached to Ethereum. The article discussed the origins of Ethereum where inspiration was drawn in from the Bitcoin blockchain network to produce a cryptocurrency which allows for the creation of decentralized applications. Moreover, attention was also drawn to discussing the circumstances and reasons under which a hard fork of the blockchain was done. Its impact on the cryptocurrency community as a result is also something which was touched upon and hence all form a good tool to assess both blockchains.
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