Ethereum Hard Fork Explained
What caused the Ethereum blockchain to split and how two separate chains exist, along with two cryptocoins - Ethereum and Ethereum Classic.
A hard fork is one of the most unnerving events in the blockchain world. It is a case in which chain nodes lack consensus on which blocks are valid, and the chain splits its support, creating two separate blockchains. For further information on blockchain technology, refer to our guide (link What is Blockchain). The DAO hacking of 2016 revealed potential vulnerabilities in the creation of new blockchain projects. While the fault in the software had nothing to do with the Ethereum network, the price of the cryptocoin and its credibility suffered for a while.
The DAO Ethereum Hack
The Ethereum network went through one of the most prominent hard forks in the history of cryptocurrencies. The splitting of the blockchain happened after the hacking of the DAO project, a transaction system built on top of the Ethereum blockchain.
But what exactly was the DAO hack? Someone had noticed a vulnerability in the DAO network. The application made it possible to make a call and revert the DAO tokens into Ethereum. The possibility to return DAO tokens was meant as a feature to allow investors to give up on a call for funding. Unfortunately, the feature was a major bug.
The DAO application could be compared to an ATM, to understand the nature of the hack more intuitively. An ATM will count a transaction and immediately change the balance in the cardholder's bank account. The DAO application, however, performed as a faulty ATM that did not alter the balance and could pay out a transaction multiple times in one session. So the DAO software could make demands for Ethereum payouts multiple times and only change the balance after the session has ended.
The software bug allowed the hacker to move 3.6 million Ethereum within hours. At the time of the hack, the amount of Ethereum was worth around $70 million, and by current market prices, the theft would be for more than $742 million.
Ethereum Hard Fork- Why it was Needed?
So why was a hard fork the only good solution for saving the lost Ethereum and going back to normal? Well, the Ethereum network did not support a soft fork, due to another bug in the software. And so a hard fork, or splitting off one part of the blockchain, was voted. The valid blockchain would deny the DAO hack transaction, thus returning the tokens and Ethereum to the investors.
In a hard fork, two working versions of the blockchain remain, and it is up to miners and supporters to run either version.
The Ethereum blockchain split at block number 1,920,000, more than a year ago today- on July 20th, 2016. At that point, the market price of Ethereum hovered between $10 and $13.
The matter was put up for a vote, and 89% of Ethereum blockchain members voted in favor of the hard fork and a return of funds. The rest of the community split off to support the old, immutable chain and thus Ethereum Classic showed up as an alternative coin.
DAO Attack Good for Ethereum?
The DAO attack shook up the Ethereum community for a while, but only a year went by to show that in the end, the debacle did little to stop the expansion of the platform. Ethereum logged a 5000% rise in market prices since the beginning of 2017. Ethereum turned out to be anti-fragile, a system that benefited from chaos and became stronger instead of breaking.
At the same time, Ethereum Classic remains underappreciated. Its market price remained stagnant for the past months, and few projects utilize the blockchain, although it offers the same technological capabilities as the "official" Ethereum network.
Ethereum and ICO
Even after the DAO debacle, interest in the Ethereum project remains robust. New coins continue to appear based on the Ethereum blockchain and have a marked effect on the trading volume of Ethereum.
An ongoing ICO of the DAO Casino tokens suffered a similar attack due to a problem in Parity Multi-Sig wallets. Currently, investors should not put new Ethereum funds in exchange for the coin. But the ICO is listed as ongoing, and there are expectations the new cryptocoin would trade on at least one cryptocurrency exchange. For now, a lot of ICO offerings remain speculative, and yet users send in Ethereum for new coins, expecting a potential price spike and a payout.
WARNING: Parity multi-sig wallets underwent a hacking on July 19th, 2017. Regular Parity wallets are still safe, to the best of our knowledge. Users must be aware that not all wallets offer the same security and diversify their holdings of Ethereum.
The security break affects Parity wallets of version 1.5 or higher.
A hacked diverted more than $31 million's worth of funds from Parity multi-sig wallets or around 153,000 Ethereum.
Why Hard Forks Look Scary
As investors have seen over the years, some form of forking has happened both on the Bitcoin and Ethereum blockchains- and while there was some confusion, disaster did not strike. Litecoin passed the test with less hassle, as a consensus was reached to deploy SegWit and no fork was needed. But in the end, the cryptocurrencies managed to keep their price, investors kept their confidence, and market prices rose on upward pressure and an inflow of funds.
For Bitcoin, an upcoming hard fork decision put some pressure on the markets leading up to August 2017 and the possibility of a hard fork. Trading volumes were suddenly low, below $1 billion, awaiting the event. The problem is the changes are happening on a live network, while transactions are running, and no one can predict all the side effects accurately.