Ethereum is now two chains. What value is there in another chain? How can this happen? What does it mean? We explore the action in this article.
Ethereum Classic is Born
Ethereum forked a few days ago to much fan-fare due to the DAO exploit found by an enterprising white-hat hacker who found a flaw in the smart contract code. A hard fork was the ETH community's way of fixing this problem, which was essentially to freeze the assets of the hacker who found the exploit. Not everyone agreed with this solution and decided against the hard fork of freezing assets. And thus, Ethereum Classic was born.
The Lull
For a little while, the Classic chain continued but wasn't liquid. But there were enough people desiring a "pure" Ethereum that they continued to mine on the non-hard-forked chain. So Poloniex decided to start trading ETC (Ethereum Classic) and soon, there was a market.
The Price
Ethereum currently trades at about 1/20th of the price of normal Ethereum and this brings up the obvious question. Why does it have value at all? There are many explanations, but I'll start with 3.
Legitimate Market
Think of Ethereum as the main chain and Ethereum Classic as the "testnet" of sorts. All smart contracts on one will run on the other and if you want to test whether something people will invest in a smart contract on the main chain, you can see if people will do so on the small chain, first. There's obviously utility on trying something on a smaller scale, as many movies do the same thing by testing out a release in a smaller English speaker countries like New Zealand before the US.
There also may be people that value a chain that doesn't have a governance structure that Ethereum has. The hard fork was perceived in many ways as having been pushed through by the core dev team and there were many that opposed a centralized control like that in principle. Certainly, if you are creating a smart contract that you believe to have some risk of being hard forked on Ethereum proper, you would instead be more inclined to introduce that on Ethereum Classic.
Finally, there may be value in a chain that simply doesn't cost as much. Executing a smart contract will cost you less on Classic than Ethereum proper. If there's a lot of calculations that need to happen for your smart contract, there may be an argument to be made that Classic is the way to go in order to minimize costs.
Dead Cat Bounce
There's an interesting phenomenon that happens with public stocks when they declare bankruptcy. They drop almost to zero and then they pop up to some non-insignificant value. This happens so often that it has its own name, the "Dead Cat Bounce". The assumption being that when you drop a dead cat, it'll bounce off the floor and drop again later.
Traders have used this bounce to bank nice profits and it often becomes a trading toy for them that has zero correlation to the actual company outlook. Obviously, if a company has filed for bankruptcy protection, the stock holders aren't going to get much, if at all. This makes for fascinating price action as all traders know it's eventually going to zero, but hold, rally and sell at various points in the process, sometimes stretching these things out for years.
In essence, it takes the company a lot longer to die than would in a rational market as it's traders that control the action. This may be happening with Ethereum Classic where the hard-liners that voted against the hard-fork are providing a backstop for traders.
LULZ
There's a lot of Bitcoin folk that are currently buying up Ethereum Classic for fun. Some want to see Ethereum Proper fail because of their going back on the immutability claims. Some want to just mess with the (m)Eth heads as they call them. Some want to create doubt in Ethereum so the money flows back into Bitcoin.
Whatever the reason, there are enough people in Bitcoin that want Ethereum Classic to succeed that there may be market based solely on their buying power.
So what does this mean?
The reason for Ethereum Classic's existence is probably some combination of all of the above. It's hard to tell, though if my money were on it, it's some sort of legitimate use case.
What does this mean for Bitcoin? There's been a theory in the Bitcoin community that if there were a hard fork, all the mining power would quickly congregate to one fork and that the other fork would die a very quick death. What's happened to Ethereum has since cast considerable doubt into that theory as it seems there are enough hard-line people on either side that a hard fork may actually cause two chains to exist for a while.
And maybe that's not a bad thing. There's what seems to be irreconcilable differences between the big-block and small-block camps and maybe a split of this magnitude wouldn't be terrible. What's been crazy about the action is that Ethereum proper has gone up in value and Ethereum Classic continues to have value. The market sees the split as a good thing. Maybe it wouldn't be so bad for Bitcoin, either.