When Ethereum saved Bitcoin
To begin, let me point out that I consider Bitcoin as an asset that will be the reserve currency of the world in the future. And I consider Ethereum just as a technology platform. I do not buy into the ultrasound money narrative of Ethereum.
With that being said, I also believe that the Bitcoin world can learn from the Ethereum platform and this has been happening. Hence we should be thankful for Ethereum.
Today I would like to describe one such story where Ethereum and it’s experiments helped prevent a split in Bitcoin.
It was the summer of 2016. The Bitcoin world was in the throes of a war - a war over the size of the blocks in the blockchain. At this time, blocks were limited to 1MB in size. The Bitcoin purists (P) wanted to keep block size unchanged.
Their argument was that such a change could result in “centralization”. By increasing the blocksize, you would need lot more network bandwidth and possibly storage space. This would make it difficult for many users from running nodes and verifying the transactions. This would thereby lead to very few Bitcoin nodes and hence cause centralization.
In addition, this group was also concerned at how would the block size be increased without causing a split in the community and general confusion. The understanding at that time was that to increase the block size the Bitcoin protocol had to be changed radically that would split the Bitcoin chain into two incompatible branches - the so called hardfork.
The liberals (L) on the other hand wanted to increase the block size. They wanted to do this since by increasing the block size Bitcoin could support many more transactions per second. Note that on the average a block is produced every 10 min in Bitcoin and with a 1 MB limit on block size, the number of transactions per second was in the single digits. This was because only a few hundred transactions could fit in a 1MB block.
On the other hand a 32 MB block size allows 32 times more transactions per second. And the liberal group was concerned that if the number of transactions per minute that Bitcoin could support was not increased, then the widespread adoption of Bitcoin would be challenging. Of course these concerns are no longer valid today with the increasing adoption of the Lightning Network. Regardless, Lightning network proposal was just about a year old at the time of this war and hence was not widely known and hence was not an option.
In addition, the Liberal group also believed that Bitcoin would survive a hardfork just fine.
It was during these turbulent times in May 2016 that a new project called Decentralized Autonomous Organization (DAO) was proposed on a new blockchain called Ethereum (Eth). DAO was a smart contract built on Eth that would make investment decisions based on votes from its users.
Eth was first conceived by Vitalik Buterin in 2013 since he wanted more features than were present in Bitcoin at that time. Specifically, he wanted to have the blockchain track any state change - not just state changes in tokens. This was the concept of smart contracts - code whose state changes would be captured on the blockchain. And the code was immutable once deployed. So you could interact with the smart contract knowing that the rules of the smart contract would not change once it was deployed. As a result we would have a world where the code was law.
When Vitalik proposed to have smart contracts on Bitcoin, the Bitcoiners did not agree. This was because the Bitcoiners did not want to clutter Bitcoin with additional complexity. Hence Vitalik broke off and formed a separate blockchain - Ethereum (Eth).
Eth went live in the summer of 2015. Eth positioned itself as the future - a future with low transaction fees, with dynamic block sizes etc. The objectives and also the features of Eth attracted several people from the liberal group of Bitcoin. These were the people who were not only tired of the Bitcoin blockchain war but who were also looking to benefit monetarily from the new platform.
The DAO raised about US$150 million for the fund - about 14% of all Ether in existence. The token sale concluded on 5/25/2016. And on 6/17/2016, a hacker struck.
By leveraging an exploit in the code of the smart contract, the hacker stole the funds collected by this DAO. So a battle ensued in the Eth community over the decision of how to recover the stolen funds. The solution required that the "code is law" promise be broken. This required a hardfork.
And that too for this "special DAO" only. A DAO identified with the "ruling class" of Eth. Some people did not like the idea of the hardfork. Their argument was that changing the DAO rules to recover funds was similar to the way the ruling class behaved in the fiat world.
Regardless, the hardfork idea was put to a vote. It was claimed that a vast majority supported the hardfork. So Eth was subjected to a hardfork and we had two chains.
The Eth hard fork
caused lot of confusion
was very disruptive to the markets
split the community
This Eth hardfork had happened in the middle of the Bitcoin war. A war in which there was a proposal to hardfork Bitcoin too. The outcome of the Eth hardfork scared many people in the Bitcoin community.
This split in Eth was an important moment in the Bitcoin blocksize war. The Bitcoin purists had turned out to be right about the negative impacts of a hardfork. And so a Bitcoin hardfork was off the table.
So a split in Bitcoin seemed to have been averted given the experience of the Eth community with the hardfork. So Eth saved Bitcoin from a split in 2016.
Hence I am glad that Eth exists. Of course the blocksize war resumed after a hiatus. And ultimately it was settled by doing a small increase in the block size but without a hardfork - the SegWit softfork.
But that is for another day.
Read all these details about the 2016 saga in chapter 10 of the book - Blocksize war by @jonathanbier
You can read this chapter for free thanks to @BitMEXResearch here.