On Tuesday, May 29, another hard fork took place on the Ethereum Classic network. But instead of creating another "related" currency, the goal of this fork was to remove the so-called difficulty bomb from the Ethereum Classic mainnet on block 5, which, according to the developers, should solve the problems associated with the profitability of mining, which otherwise continued would decrease at an increasing rate.
What is “bomb complexity” and why was it installed?
By removing the code, code known as the "complexity bomb", as Aleksey Bashlykov, CTO of Zerion, explains, the developers of the ETC network removed the algorithm that makes Mining each successive block after 5 is more difficult. Moreover, this feature was supposed to exponentially increase the difficulty of mining each subsequent block to such an extent that eventually mining for profit would become pointless.
This feature was added by the developers of the original Ethereum, who plan to eventually switch from the Proof-of-Work (POW) protocol to the concept Proof-of-Stake (POS). A “complexity bomb” was introduced to stimulate the adoption of appropriate changes.
Bashlykov noted that Ethereum continues to adhere to this intention. Ethereum developers are about to switch to Casper, a PoS protocol that makes malicious mining much more difficult by attackers.
The developers of Ethereum Classic, however, have chosen a different path of development. They decided to neutralize the “bomb of complexity” and continue to adhere to the Proof-of-Work algorithm - at least for now.
What is motivated by this decision about hard fork? Bashlykov believes that ETC developers do not trust alternative consensus algorithms (such as PoS), while PoW, in their opinion, works quite reliably. Of course, there is no general consensus on this issue in the world of altcoins, and many - including ETH developers - believe that PoW has proved itself far from ideal.
According to Bashlykov, there is a point in sticking with the PoW algorithm in the decision so far.
“Yes, its energy consumption is enormous. Nor is it a matter of Nash equilibrium. It also lacks finalization, meaning you can never be completely sure about any state of the network. But it works, and the new consensus protocol ... No one knows what problems it might bring. As of today, the Ethereum Classic community has opted for a more conservative approach, which is quite consistent with their original vision. Right now it is difficult to say in advance whether this is the right decision or not. "
Triple win
Are there technical factors related to the hard fork that investors should be aware of? Michal Zajda, Lead Architect at the aeternity, blockchain 3.0 platform, says there are two things to understand.
The first is that a technical fix will be made on the 5 900 000 block, which will allow you to avoid a significant increase in mining complexity at this stage. The second relates more to the field of ideology and concerns the consensus of the parties concerned, Zaida notes. In his opinion, while continuing to adhere to the PoW consensus algorithm, Ethereum Classic once again emphasizes its conservative philosophy.
“Consensus is the heart of every blockchain, and most often it is he who determines the nature of cryptocurrency. While Proof-of-Work-algorithms are simply an exchange of energy for influence, Proof-of-Stake-solutions can demonstrate more complex connections. ”
Sonia Miles-Khan, co-founder and COO of WatermelonBlock, the company behind the blockchain app of the same name, agrees that the new fork's goal is to eliminate the complexity bomb. But notes that this is not unusual:
“Such forks are widespread in open-source blockchains, and this is not the first such fork in the Ethereum-based blockchain. When it comes to ways to monitor the state of the blockchain, various “proof-of-” methods are commonly used.
Other sources emphasize that miners are a fundamental element for PoW digital currency ecosystems, especially for ETC. Miners played a crucial role in the birth and development of ETC. LiquidationA liquidation is a sale of cryptocurrencies, usually forced, as a result of an investor's inability to secure a minimum margin for their leveraged position. Notorious for their volatility in the market, cryptocurrencies can quickly and easily lead to liquidation, especially when investors lose their leveraged positions and their investment plunges into negative balance, requiring them to sell crypto assets when a position is forced out. This usually happens in cryptocurrency margin trading, when investors borrow money from a crypto exchange or broker to increase their funds or assets for trading. While leveraged trading positions can lead to higher potential profits, this is a very risky move that could lead to liquidation if the price of the asset drops sharply and you lose your initial margin or equity. If you do not have enough funds to continue trading and cannot meet the minimum margin requirements for your leveraged position, the exchange may automatically close your position, resulting in a permanent loss of funds from your initial margin. This liquidation loss can be partial or total, depending on the initial margin and the extent of the price drop. A partial liquidation occurs when a position is partially closed at an early stage in order to reduce the position and the investor's leverage, while a full liquidation occurs when almost all of the initial margin has decreased due to a price drop. To better illustrate the liquidation process in cryptocurrency margin trading, here is an example: Suppose you start with an initial margin of $100 and 10x leverage. This means that your total trading position is $1, of which $000 is borrowed from an exchange or broker. The amount of leverage corresponds to the size of your profit or loss from the position. With 10x leverage, a 5% increase in the price of an asset will give you 50% profit. The same goes for a 5% drop in the price of an asset, which will result in a loss of 50% of your initial margin. The formula for calculating profit or loss is as follows: Initial Margin × (% Price Change × Leverage) = Profit/Loss. Based on the above calculation, a 10% decrease in the price of an asset will result in a loss of 100% of your initial margin. Before you lose all of your initial margin, you can get a margin call when the liquidation threshold is reached so you can decide if you want to add more equity to your margin to keep your position open (or lose your initial margin entirely when the exchange or the broker will automatically liquidate your position). When you force-close a position, the exchange or broker may charge you a liquidation fee, but you can avoid this fee if you close the position before it is liquidated. Liquidations often occur when investors are tempted by higher leverage, which can potentially bring them greater profits, but do not consider the possibility of incurring large losses, which can also lead to liquidation. Therefore, it is very important to apply smart crypto trading strategies in order to avoid liquidations, whether starting with lower leverage or carefully monitoring margins and liquidation prices. Using a stop loss order is another way to limit your losses as the order will automatically close the position for investors when it hits the stop price to prevent further losses. Investors may also consider using exchange insurance funds to protect themselves from excessive losses. "Difficulty bombs" will pave the way for further expansion of the "roadmap" of this cryptocurrency, thereby reflecting the interests of miners, investors and the ETC community.
Paradoxically for both Ethereum and Ethereum Classic, Matt Engel, community leader for Achain, notes that both currencies have become central to discussions about scalability and the next steps to correct it.
“Last year’s story of the launch of CryptoKitties showed how one dApp can slow down the Ethereum network enough to significantly degrade its usability. As a result, on the one hand, failure, and on the other - an example of how breakthrough and popular blockchain solutions can be, the problem of blockchain scalability has reached a new level. ”