Here lies the DAO – a vision of the future, born too early.
In cryptocurrency circles, the implosion that was the DAO has quickly gone from being one of the most cataclysmic events to occur since the Bitcoin white paper to a footnote in the ash heap of history.
The DAO began life as a vision of a new future of development and project fund. The Decentralized Autonomous Organization, as it was officially called, was launched through a crowdfunded token sale on May 2016 – setting the record for the largest crowdfunding campaign in history at the time.
The DAO was designed to be a form of venture capital fund, created on Ethereum’s blockchain, that would serve as a decentralized funding model empowering the development of both commercial and non-profit initiatives.
Designed to be agnostic to borders, states, regulations, or government supervision, the DAO was envisioned to rely on Ethereum’s blockchain as a series of smart contracts among its users.
As “a hub that disperses funds to projects”, the DAO would have issued voting rights to its members by the means of a DAO token, and would vote to disperse those funds to projects proposed by online ‘contractors’. ‘Curators’ would have verified the identity of those submitting proposals prior to such projects becoming ‘whitelisted’.
The DAO envisioned that profits from investments would have been returned to investors – online venture capitalists would have used DAO tokens as voting rights and would have been able to withdraw their funds until they had voted for the first time.
While the DAO may have represented a bold new form of venture capital and could have empowered investors around the world, the dream was not to last.
The death of a dream
In June of 2016, a hacker – or team of hackers – was successfully able to exploit a vulnerability in the DAO’s codebase, which enabled the party to plunder a third of the DAO’s funds to a subsidiary account.
A hacking group exploited a vulnerability that was retroactively titled the ‘Race to Empty’ bug – an exploit that targeted the processing order of smart transactions. Hackers successfully leveraged this vulnerability to effectively withdraw twice the funding their accounts held, and then recursively embedded this function to create an endless loop that effectively drained funds on tap.
In a period of just a few hours, around $70 million USD – or 3.6 million ETH – were stolen.
The divide thereafter
In the wake of the hack, two proposals emerged as to how the Ethereum community would handle the loss of funds. The debate, and its result, ultimately re-shaped Ethereum forever.
On the one hand, community members proposed that – given that a blockchain is immutable and that transactions cannot be reversed or otherwise altered without overwhelming consensus from network participants – an Ethereum soft fork should be implemented that would have effectivley ‘locked’ stolen funds, and render them unable to be used for any meaningful purpose.
However, a software bug was later discovered with the soft fork’s implementation protocol, meaning that the decision was never executed.
The second, and ultimately successful proposal, saw the introduction of a hard fork.
That proposal delineated that Ethereum users would undertake to use a smart contract to return all of the Ether stolen in the incident to investors. The new contract would only be able to withdraw stolen Ether, and the DAO’s investors would be able to make refund requests.
While on the surface of the matter a refund seemed like a logical proposal, several community stalwarts protested against the matter – suggesting that the inherent nature of blockchain technology proposed immutable and trustworthy transaction histories, and any attempt at such a sizeable refund would set the stage for a ‘slippery slope’ of precedent in the near future.
Further, detractors of the proposal cited that the original purview of the DAO stipulated that its terms and conditions should not be changed, and in any event the decision to make the refund inherently introduced censorship to the Ethereum community.
In response, proponents of the hard fork argued that the hacker should not be able to retain profits after plundering funds, that leaving the theft unaddressed would invite legal considerations, and that returning lost funds would stabilize the price of Ether in the first instance.
The final decision was ultimately put to a vote, with 89% of the Ethereum community voting in its favor. On July 20th, the Ethereum blockchain split into two chains.
Ethereum Classic, the original blockchain, did not introduce new consensus rules and did not effect the transfer. Ethereum – the forked chain, and the one which now bears the ETH ticker symbol thanks to its market capitalization and larger community – did.
In the wake of the DAO hack and the Ethereum community’s decision to implement a hard fork, DAO tokens were ultimately de-listed from several leading cryptocurrency exchanges. A declaration from the US SEC that the sale of DAO tokens may have constituted securities ultimately saw the original vision behind the project perish.
Ethereum has since continued the (controversial) development of new fund recovery proposals, which could one day serve to mitigate the influence of another attack on the level of the DAO. Ethereum Classic, stalwart in its beliefs, continues its development and has focussed its efforts on new scaling concerns.
The term DAO, despite its connotation with the DAO, has found favour with several other cryptocurrency communities since the hack that divided Ethereum.
In the months and years since the attack, several other cryptocurrency communities have considered – or formed – Decentralized Autonomous Organizations to manage the development, use, and adoption of a particular cryptocurrency without introducing a centralized governing body.
Ultimately, the impact of the DAO has led to concerns that have influenced the new and increased development of security features on blockchain projects.
Ethereum co-creator Vitalik Buterin has ultimately noted his interested in resuscitating the DAO as a means to empower new ICO projects – noting that “the kind of paradigm shift I’m interested in with DAOs is that instead of teams raising money, you have ideas raising money.”
Performance & round based ICOS. Make token team perform to unlock ICO funds.
Vitalik Buterin proposes a new standardized concept of ICOs dubbed ‘DAICOs’.
Merging benefits of the DAO & #ICO.
— Justin Wu (@hackapreneur) January 14, 2018
Ultimately, Buterin has noted that the DAO makes for an important footnote for Ethereum’s ongoing development – citing that “(investors are) starting to see that Ethereum governance is stabilizing more and more and that the project is continuing to move forward.”