By Jonathan Chester for Forbes
The past couple months have been quite the roller coaster in the world ofpublic blockchains. $125 million has been stolen and the communities of Bitcoin and Ethereum have been scrambling to pick up the pieces.
First there was the $50m Ether heist from The DAO, a company which had raised over $150 million based on the premise that its management was a distributed autonomous organization. Now the Bitcoin community is faced with a $75 million loss from what was the largest exchange, Bitfinex. The thefts are roughly the same size, but there have been two completely different reactions from their respective communities. Understanding these reactions are very important when thinking how to leverage one of these blockchains.
In my article, “Why The Bitcoin Blockchain Matters For Your Company Or Startup”, I explained the 4 main value additions a blockchain can provide as an infrastructure. The most important attribute of a blockchain I mentioned was asset settlement, the ability to directly move value nearly instantly and almost for free. This is something that has implications in the world of global payments and beyond with far superior transfer speeds and costs, but for the time being, this can only be done with payments through public blockchains.
The first blockchain is open, public, and its tokens are worth over $9 billion. This is the system that runs Bitcoin, and it has drawn over $1 billion in additional infrastructure investment in addition to its market capitalization. At the time of this writing, the Bitcoin blockchain is the only system that is secure enough and has the needed liquidity to run live commercial applications, such as our international wage payment & payment processor, Bitwage.
How can we view the Bitcoin blockchain as secure if $75 million was just stolen from the top exchange? Simple – the hack was not based on a fault in the blockchain itself, it had to do with the security of the exchange’s software and password management. You wouldn’t stop using the dollar just because one bank was robbed, right? The same principal applies here.
Five years after Bitcoin’s release, prodigy Vitalik Buterin created Ethereum, the most notable of the second generation blockchains. Buterin approved of the presence of scripting features in Bitcoin but he saw that they were very limited. Ethereum provides a Turing complete computing environment in its blockchain, which is the computer scientist’s way of saying that it includes a full featured programming language. You can write a program in Solidity, the Python-like language of Ethereum, release it into the blockchain, and it’ll run on whatever Ethereum node is handy when conditions trigger its execution. That doesn’t sound like much, but it’s the foundation of workable smart contracts, the thing that enabled the creation of The DAO, and which will permit all sorts of financial innovation going forward. While this can theoretically be done on the Bitcoin blockchain (companies like Counterpartyand Roostock are trying to do just that), smart contracts are far more streamlined on Ethereum, which was built specifically for this use case.
So why are the reactions to the heists so important when determining what blockchain to build on top of? Bitfinex is just one Bitcoin user, albeit a very notable one, and they are forced to give all their customer a 36% haircut in order to keep the company viable, just like any other distressed company would do to their bond holders.
Ethereum, having a much smaller community and very different values, performed a hard fork to forcibly take back funds from The DAO hacker. A hard fork is a change to the software used to maintain the blockchain which compels everyone using the blockchain to upgrade prior to the activation of the change, or risk a “fork”, in which there are two different competing versions of the blockchain.
Hard forks come with a major risk that there will be two versions of the same blockchain active at the same time. What if someone has one client with the old software, one client with the new, and spends the coins from each blockchain? Now imagine what would happen if everyone could do that all at the same time. This would be instant 100% inflation, and it would be immediately followed by a loss in confidence and a dramatic crash in value of the cryptocurrency that depends on the blockchain in question.
I was recently at the Ethereum headquarters in Berlin and spoke with Fabian Vogelsteller, the Ethereum developer who built Ethereum Wallet and the initial Mist browser and is currently building web3.js, all critical components to the ethereum infrastructure. He is uniquely positioned to offer well informed opinions on what is happening in the blockchain world.
There seems to be a definite difference between the two communities. The main difference is that Ethereum is more developer driven, this means the people who are working with Ethereum want to actually build new kinds of applications because the Ethereum blockchain is built for that. Bitcoin on the other side represents money and is dominated by investors and payment services.
Ethereum is also very young and relatively small. This gives it more flexibility than Bitcoin…Bitcoin is a slow moving cruise ship, everybody knows that a wrong decision can make it hit an iceberg, causing billions of lost investments.
Additionally there were already successful hard forks of Ethereum with Homestead, and even the launch itself could be counted as one. Hard forks are a part of the Ethereum roadmap and are expected by the community. The DAO fork could be seen as a successful exercise towards a switch to proof of stake.
Ethereum is much more developer friendly and with a startup attitude where it’s move fast and break things. Bitcoin, as Fabian mentions, is much slower moving, with it’s infamously slow scalability debate that has had significant attention since the release of BitcoinXT, an attempted hardfork that never gained any traction, in the middle of 2015. There was a lot of contention around whether to do a hard fork in order to increase the scalability or to do it slowly through protocol improvements. As a result of the divide amongst the community, there have not been any upgrades put into live production, although one of these software improvements, Segregated Witness, has been released.
Why does this matter? The hard fork in Ethereum was controversial as well, as it broke the immutability of the blockchain. Essentially a transaction that happened at one point was removed. If you’re using a blockchain to notarize data, and the majority of users decide to adjust things the way Ethereum did, are your notarizations still valid? There are a lot of businesses that have a value proposition based on the immutability of the Bitcoin blockchain, as immutability acts as a core component required to build trust among users of a public blockchain.
Because of this divide of opinion, when the Ethereum hard fork occurred, both the original blockchain universe, where the theft happened, and the new universe, where the theft was reversed, have continued. Not just continued, but both continued with a rough split of the once $1.5bn market capitalization. The bulk of the community, some 84%, favored retrieving the stolen funds, and they ended up with $1 billion in value, while Ethereum Classic continues with a $160 million market cap.
So while some may have considered the reluctance to incorporate a controversial hard fork within the Bitcoin community as a political quagmire, it is actually just a conservative mindset. When you have almost $10 billion of value depending on the proper management of a technology where billions of investment may be lost due to a misstep, as a founder of a company that leverages the Bitcoin blockchain, it is quite comforting to know that the technology is being managed in a deliberate, conservative fashion.
Does this mean one should totally dismiss Ethereum as a platform for application development? No. Ethereum is ripe for experimentation, and their methodology of building fast and breaking things will lead to the ability to build very interesting, powerful smart contract technology in the future, once a killer smart contract app has be found. But as for whether or not to build a live commercial application moving millions of dollars of customer value and money, we’ll be sticking with the conservative blockchain for now.
First appeared at Forbes