On July 20th, the Ethereum network is undergoing a hard fork. What this means is that the software is getting rewritten to alter conditions that won’t be compatible with older versions of Ethereum. This means that miners, exchanges and users will all have to upgrade to the new version.
The hard fork is a response to the DAO attack, where someone found an exploit in the code and drained millions of ether. The DAO was a smart contract with the value proposition of “being governed by code and not political whims”.
This was an example of severe FOMO (fear of missing out), where most investors including some of the core developers rushed in with eyes closed and overlooked some critical errors in the code.
As soon as people noticed the DAO was being drained, the developers and white hat hackers stepped in to secure the rest of the funds. The remaining funds were later secured but the attacker still managed to steal millions of ether.
Initially the first plan was to do a soft fork and blacklist all the stolen ether from being spent. That plan was scraped because it was discovered that a soft fork could lead to a DOS attack on the network.
The only real solution to stop the attacker from getting access to the funds is to rewrite the blockchain history so that the attack never happened and implement it with a hard fork.
Rumour has it that the DAO attacker shorted ether moments before the exploit and made a substantial amount of bitcoins in profit. The attacker was on the DAO slack channel giving away free bitcoins to anyone who praised the attack. According to this interview, the attack was carried out by a group who were politically motivated because they don’t like Ethereum.
The attackers also tried to bribe miners by offering to share some of the stolen ether funds in exchange for their hashing power.
The Pros of a Hard Fork
The majority of the Ethereum community voted in favour of a hard fork. Most DAO investors want the hard fork because they’ll get their stolen money refunded to them.
The overall consensus is that the attacker should not be rewarded for exploiting the code and that a hard fork is a feature driven by the community.
The Cons of a Hard Fork
The main argument against the hard fork is that it undermines the feature of blockchains being immutable ledgers. It also undermines the value proposition of smart contracts being governed by code and not political whims.
Some are calling the hard fork a bail-out for people who made a bad investment decision. Others say that Vitalik’s investment in the DAO and push for a hard fork is a conflict of interest.
Not everyone in the Ethereum community agrees with the hard fork and some have decided to keep the old chain alive. They’re calling it Ethereum classic and will run the old code as an immutable ledger similar to Bitcoin.
Poloniex recently announced that they will support the chain that has the most hashing power but will allow a one time withdrawal on the old chain. Some exchanges like Bitsquare may open a market for people to trade ETHC.
As long as there’s a community, miners and an exchange that supports Classic then the old chain will stay alive and Ethereum will be split in two.
According to a vote done on carbonvote, 13% of Ethereum users oppose the hardfork. This may be enough support to keep the old chain alive and running as an alternative to the new chain.
Decentralization and the Free Market
People on both sides of the argument may defend their position with a sort of religious zeal. Sometimes crypto users get caught up in tribalism, which can lead to infighting or fierce competition with other groups.
The most important thing is that this is a free market, which means that individual users are free to choose whatever model suits their needs. Personally, I try to stay neutral on such matters because decentralization and the power of choice is what I find most appealing.
The only rules that exist in this game are the one’s that we create. The DAO was an interesting experiment and the results of the hard fork will add to the ecosystem’s knowledge base.
Nobody is forced through violence and coercion to support the hard fork. Individuals can choose to support either chain or even use the open-source code to create their own model.
Impact on the Markets
Regardless of one’s philosophical disposition regarding the hard fork, the ether markets are in a bear trend. The rule of thumb for trends is that they remain intact until proven otherwise. Investors need to accept the fact that the markets don’t stay bullish forever and a bear trend following a 2000% price increase is natural.
Fundamentally it’s probable we may see more selling pressure after the hard fork. Having 15% of the ether supply unlocked from the DAO can only translate into one of four things:
- Selling on spot
- Margin longs
- Margin shorts
Margin longs are the only possible way that this can lead to buying pressure on the markets. This is only temporary because longs are eventually closed out. Too many longs can lead to a squeeze triggering a price dump.
Some think this theory is a fallacy claiming that the DAO tokens on the market already represent that 15% supply of ether. Although the DAO tokens are a correlated asset class to ether, they’re still trading on an entirely separate order book which helps buffer any direct impact on the ether markets.
Another thing to take into consideration is that some Ethereum classic supporters vowed to dump their ether holdings from the new chain.
Looking at the flip side of the coin, it’s still possible that a successful hard fork may lead to a relief rally, as the fears associated with it dissipates.
In the event that the ether bear trend persists, volume will continue to drop until the markets reach a point of capitulation. At that point we’ll likely see a nice bounce play which may present a good opportunity for traders to step in and buy cheap ETH.
Eventually the price may consolidate along a new floor, signalling accumulation and the first phase of a new bull market. If the ether markets recover and start another bull cycle, Ethereum will have proven itself as an established market with the potential of being a long-term store of value.