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What Is Ethereum Classic and How Does It Work?

June 30, 2022
5
min

Learn about how the second-largest cryptocurrencies, Ethereum and Ethereum Classic were built on the same blockchain, and they each offer features like smart contracts.

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The community of Ethereum (ETH), the second-largest cryptocurrency by market capitalization, found itself split after a July 2016 hacking incident in which bad actors stole funds from a project that leverages the Ethereum blockchain. Most of the Ethereum community voted to reverse the hack and get the funds back to their owners — but some critics vehemently disagreed.

As a result the network split into two completely separate groups, each with their own platform and coin.

What is Ethereum Classic? 

Ethereum Classic (ETC) is a crypto created after a July 2016 incident that philosophically split the Ethereum community.

Here’s what happened: The Ethereum network originally launched in 2015 as a community-run platform that powers its crypto, called Ether (ETH), and decentralized applications (DApps). It was imagined as a way for developers to build their apps with more freedom, and hailed as “the world’s programmable blockchain.”

The original Ethereum platform also created the concept of smart contracts: programs that execute automatically, without human intervention, when agreed-upon conditions are met. This unique offering, plus the ability to trade other cryptos on the Ethereum platform, attracted other communities to use its underlying technology.

Among those was the Decentralized Autonomous Organization (the DAO), which allowed people to invest in companies anonymously through automation and crowdsourcing. The DAO raised $150 million after its launch in spring 2016 and held a notable portion of all ETH in circulation — but that June, hackers breached the DAO and accessed $50 million worth of ETH.

Most of the Ethereum community polled voted to reverse the transactions and return the money to the DAO investors. But some vehemently opposed this rollback, arguing that it set a dangerous precedent. These critics adhered to a “code is law” philosophy: No one has the right to interfere with or censor the technology, so investors in challenged projects like the DAO should have to reap the consequences of their choice to invest. They believed the bailout was antithetical to the entire concept of the crypto.

And so the Ethereum network split into two separate communities, with their own platforms and cryptos — known as a hard fork. The community that reversed the DAO hack inherited the original Ethereum name and continued to trade ETH on its altered blockchain. The critics of that move remained on the original platform, now called Ethereum Classic (ETC).

Ethereum vs. Ethereum Classic

The two cryptos are built on the same blockchain, with the same underlying algorithm. But there are fundamental differences in philosophy that separate them. 

Similarities between Ethereum and Ethereum Classic

  • Built on the blockchain. Like Bitcoin, both Ethereum and Ethereum Classic rely on blockchain technology: a public ledger that relies on complex cryptography to record every transaction. It’s a decentralized system spread across thousands of computers around the world, and users are identified not by name but by the ID numbers of their digital wallets. Anyone can look at these entries, and typically, verified transactions cannot be altered.
  • Rely on proof of work algorithm. The algorithm underlying both blockchains is also similar: They were built around proof of work (PoW), a consensus protocol that’s used to create, or mine, new tokens by requiring computers to solve complex math puzzles. This process ensures people can’t copy and paste tokens, confirming that every transaction and newly minted token is neither a duplicate nor a forgery.
  • Offer smart contracts. Both Ethereum blockchain platforms facilitate executing smart contracts, which make transactions faster and cheaper because there’s no need for lawyers, paperwork, banks, or middlemen. They can be used for decentralized finance (DeFi), apps, and games as well as enterprise contexts like supply-chain processes and business contracts.
  • Gas fees. Both require users to pay fees in ETC or ETH, respectively, to execute smart contracts and transactions. They’re called gas fees because they’re a big part of what keeps the system going.

Differences between Ethereum and Ethereum Classic

  • Code is law. One of the major differences is the philosophy that split the community in the first place: Ethereum Classic is dedicated to immutability, arguing that the code has the final say. That is, if a verified transaction goes through, it must remain so. Ethereum’s handling of the DAO breach flies in the face of that staunchly held belief.
  • Changes coming to an underlying algorithm. The Ethereum community has long planned to change its blockchain, as proof of work requires a lot of computational power and electricity. So Ethereum is switching to a newer protocol called proof of stake (PoS), which lets users validate the transactions on the network to receive rewards paid in newly minted crypto. It’s done through a mechanism called a stake pool, or a server node that can hold the combined crypto of many users. A recent estimate says PoS could cut Ethereum’s energy consumption by 99.95%. Ethereum Classic, by contrast, has no plans to switch from proof of work.
  • Circulation. Like Bitcoin, Ethereum Classic has a cap on the amount of ETC that will ever be created: 210 million. Ethereum, by contrast, has not limited its supply.

The future of Ethereum Classic

Given the history of both cryptos and the hack that led to their split, investors have largely seen ETH as more secure for features like smart contracts, and ETC as a store of value — that is, a digital asset to trade for potential profit.

The changes made to Ethereum after the DAO hack helped boost that point of view; by contrast, over the years Ethereum Classic has experienced several so-called 51% attacks. In this process, bad actors gain control of a majority of the power to mine ETC — and are then able to spend coins they don’t own, in what’s known as a double spend attack.

That sense of legitimacy has pushed ETH to be the No. 2 crypto by market capitalization, trading at about $1,777 as of June 2022. Ethereum Classic pricing is quite different, at about $21 during the same month.

The bottom line

Ethereum (ETH) is well known as the second-largest cryptocurrency by market capitalization, behind only Bitcoin. But it also gave rise to another coin called Ethereum Classic (ETC).

Ethereum and Ethereum Classic were built on the same blockchain, and they each offer features like smart contracts. But Ethereum Classic is dedicated to immutability — arguing that the code is law and should never be reversed — while Ethereum has garnered more trust. Classic has been subject to attacks in which bad actors are able to spend coins they don’t own. In large part because of the trust differential, ETH fetches much higher prices than ETC.

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