The Story Of The Dao — Its History And Consequences
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In this piece, Siegal attempts khổng lồ help journalists understand the DAO attack và what happened when The DAO collapsed và why he believes it’s important for the press khổng lồ get the story right.
The article will be updated on Medium as the situation develops. Disclaimer:Siegal owns a small number of DAO tokens.
The basics
The ethereum network is a network of computers all running the ethereum blockchain. The blockchain allows people to lớn exchange tokens of value, called ether, which is currently the second most popular cryptocurrency behind bitcoin. ethereum also allows people to write and put on the network smart contracts – general-purpose code that executes on every computer in the network (currently over 6,000 computers). People then execute these programs by sending ether khổng lồ them.
A DAO is a Decentralized Autonomous Organization. Its goal is to codify the rules & decisionmaking apparatus of an organization, eliminating the need for documents và people in governing, creating a structure with decentralized control.
Here’s how a DAO works:
A group of people writes the smart contracts (programs) that will run the organizationThere is an initial funding period, in which people add funds lớn the DAO by purchasing tokens that represent ownership – this is called a crowdsale, or an initial coin offering (ICO) – lớn give sầu it the resources it needs.When the funding period is over, the DAO begins to operate.People then can make proposals to the DAO on how to spover the money, & the members who have bought in can vote lớn approve these proposals.It’s important to lớn underst& that great care has been taken not lớn make these tokens into lớn equity shares – they are more like contributions that give sầu people voting rights but not ownership. In most cases, a DAO is not owned by anyone – it’s just software runningon the ethereum network.
The very first DAO is bitcoin itself, which is governed by consensus aý muốn its core team and its mining network.All other DAOs have sầu been launched on the ethereum platsize.
“The DAO” is the name of a particular DAO, conceived of and programmed by the team behind German startup Slock.it – a company building “smart locks” that let people chia sẻ their things (cars, boats, apartments) in a decentralized version of Airbnb.
The DAO launched on 30th April, năm nhâm thìn, with a 28-day funding window.
For whatever reason, The DAO was popular, raising over $100m by 15th May, và by the end of the funding period, The DAO was the largest crowdfunding in history, having raised over $150m from more than 11,000 enthusiastic members. The DAO raised far more money than its creators expected.
It can be said that the sale was better than the execution, for during the crowdsale, several people expressed concerns that the code was vulnerable lớn attack.
Once the crowdsale was over, there was much discussion of first addressing the vulnerabilities before starting to fund proposals. In particular, Stephan Tual, one of The DAO’s creators, announced on 12th June that a “recursive sầu call bug” had been found in the software but that “no DAO funds
At the time, more than 50 project proposals were waiting for The DAO’s token holders lớn vote on them.
It’s important to reiterate that the ethereum network has no such bugs và has been working perfectly the entire time. All networked systems are vulnerable to lớn various kinds of attacks. The ethereum network, which supports (depending on the price) around $1bn worth of ether, has not been hacked và is continuously executing many other smart contracts.
Everyone who writes a smart contract knows that if it can move sầu a large amount of cash it will be subject to lớn attaông xã. This particular vulnerability was discovered recently in another system, called Maker DAO, and was neutralized quickly because that DAO was still in testing.
Many people feel that testing and certifying smart contracts will be an important part of keeping the ethereum ecosystem safe. You’ll find several smart-contract validation services listed at DecentralStation.com.
The DAO Hack
Unfortunately, while programmers were working on fixing this và other problems, an unknown attacker began using this approach to lớn start draining The DAO of ether collected from the sale of its tokens.
By Saturday, 18th June, the attacker managed lớn drain more than 3.6m ether inkhổng lồ a “child DAO” that has the same structure as The DAO. The price of ether dropped from over $20 lớn under $13.
Several people made attempts to lớn split The DAO khổng lồ prsự kiện more ether from being taken, but they couldn’t get the votes necessary in such a short time. Because the designers didn’t expect this much money, all the ether was in a single address (bad idea), và we believe sầu the attacker stopped voluntarily after hearing about the fork proposal (see below). In fact, that attaông chồng, or another similar one, could continue at any time.
Smart contracts are meant khổng lồ be stand-alone agreements – not subject to lớn interpretation by outside entities or jurisdictions. The code itself is meant to lớn be the ultimate arbiter of “the deal” it represents. But of course, that’s an idealist (crypto-anarchist) perspective.
Even before the attaông xã, several lawyers raised concerns that The DAO overstepped its crowdfunding mandate & ran afoul of securities laws in several countries. Lawyers also pointed to its creators as potentially liable for any problems that may occur, & several expressed concern that token holders of The DAO were accepting responsibility they were likely unaware of. The DAO exists in a gray area of law and regulation.
Because the child DAO has the same structure, limitations, & vulnerabilities as the parent DAO, the ether in this newly created child DAO can’t be accessed for 28 days, as that is the initial funding period.
Everyone can see the ether in this child DAO – any attempts to cash it in will trigger alarms & investigations. It could be that the attacker will never get to lớn cash or spover a single ether of it.
It’s entirely possible that the attacker had a large short position on ether at the time of the attachồng, which he or she then cashed out after ether had been cut roughly in half. The attacker may already have made his money, regardless of the ether sitting in the child DAO.
There are things the Ethereum Foundation could vì that may be able to nullify the ether in this DAO. That’s where things get complicated.
The Soft-Fork Proposal
The DAO contains roughly 15% of all ether, so a failure of The DAO has a negative sầu impact on the ethereum network và its cryptocurrency.
It’s worth noting that dozens of startups are working on DAO or governance products, many smart contracts have similar vulnerabilities and building complex software using smart contracts is still in its infancy. Everyone involved has a stake in what happens next.
All eyes are on The DAO và the Ethereum Foundation, hoping for a resolution that allows the ecosystem to continue lớn develop as it was before.
To understand what happens next, you will need to lớn underst& blockchain basics: A network of nodes puts transactions inkhổng lồ blocks and blocks inlớn a single chain that represents the “truth” of what has happened. If two competing transactions happen at about the same time, the network resolves this conflict by choosing one và rejecting the other, so all nodes have the exact same copy of the distributed ledger.
The only way to “rewrite history” would be to have sầu at least 51% of all nodes agree khổng lồ such a collusion – something that has never happened in the history of bitcoin or ethereum. The goal of a decentralized network is that no one has the power to do that, or the network itself becomes untrustworthy.
On 17th June, Vitalik Buterin of the Ethereum Foundation issued a critical update, saying that the DAO was under attaông xã và that he had worked out a solution:
A software fork has been proposed, (with NO ROLLBACK; no transactions or blocks will be “reversed”) which will make any transactions that make any calls/callcodes/delegatecalls that reduce the balance of an trương mục with code hash0x7278d050619a624f84f51987149ddb439cdaadfba5966f7cfaea7ad44340a4tía (ie. the DAO và children) lead khổng lồ the transaction (not just the Call, the transaction) being invalid …
In this, Buterin specifically states that he isn’t proposing to rewrite any blocks, but just to lớn install a “switch” in the basic ethereum code that prevents moving any ether out of the DAO or its children.
Effectively, this is a one-time fix (called a “fork”) for a one-time sự kiện that seals those ether into lớn that address for all time.
Buterin continued:
“Miners và mining pools should resume allowing transactions as normal, wait for the soft fork code and stand ready to download và run it if they agree with this path forward for the Ethereum ecosystem. DAO token holders & ethereum users should sit tight and remain calm. Exchanges should feel safe in resuming trading ETH.”
In other words, a blackdanh sách will be built into the ethereum code lớn keep the bad guy from claiming his prize. In this “freezing of assets” scenario, Buterin calls for a discussion of how to help DAO token holders recover their initial investment.
This seemingly innocuous và well-meaning “Deus ex machina” proposal – which must still be adopted by a majority of ethereum network nodes khổng lồ take effect – has opened a huge can of worms.
The Attacker Responds — or Does He?
I will call the attacker a lone male, even though I have no idea if he is one.
What happened next was interesting. In an open letter to The DAO and ethereum Community, the attacker supposedly claimed that his “reward” was legal và threatened lớn take legal action against anyone who tried khổng lồ invalidate his work. Several people pointed out that the cryptographic signature in this message wasn’t valid – it could be nhái.
But it’s well written, & from a certain point of view, well reasoned: The premise of smart contracts is that they are their own arbiters & that nothing outside the code can “change the rules” of the transaction.
Later, through an intermediary, the attacker claimed that he would put a stop to the organized “theft” of his property by rewarding miners (nodes) who don’t go along with the proposed soft fork, saying:
“oon we will have a smart contract to reward miners who oppose the soft fork & mines the transaction. 1m ETH + 100 BTC will be shared with miners.”
This is clearly a complex dynamic system.
These messages from “the attacker””cannot be verified, so we’ll have sầu khổng lồ wait và see what happens.
The Hard-Fork Proposal
Another proposal is more aggressive sầu – lớn ask the miners khổng lồ completely unwind the theft và return all ether khổng lồ The DAO, where it can be redeemed by token holders automatically, thereby ending The DAO.
As Stephan Tual puts it in his blog …
“By 4pm local time, the consensus was that should a soft fork be deployed within 27 days, the attacker would not be able khổng lồ retrieve the funds he had stashed inkhổng lồ a child DAO.
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A subsequent hard fork could even return all ether, including the DAO’s ‘extraBalance’ & the stolen funds, baông xã inkhổng lồ a smart contract. That smart contract would contain a single function: withdraw().
This would make it possible for everyone who participated in the DAO lớn withdraw their funds: thanks lớn the tư vấn of the miners, & because nothing had been spent so far, nothing would be lost.”
This has the effect of rewriting the rules by which the blockchain executes, which is supposed to lớn be impossible. Should we let that rule slide just this one time, lớn put the ethereum project baông xã on track?
The Sloông xã.it guys and most DAO tokenholders would be grateful if we did.
Responses khổng lồ the soft fork
Seen on its own, the proposal is reasonable. It’s a one-time fix lớn a one-time problem. But many people don’t see it that way.
You can read the massive sầu response on Reddit, which I will try to lớn summarize:Trustworthiness of the network is sacred.
As one person on Reddit put it:
“The involvement of the ethereum foundation in the DAO has been and is a mistake. As I see it ethereum is supposed to lớn be the foundational infrastructure upon which a flurry of projects and experiments are supposed khổng lồ blossom, & in order for them khổng lồ blossom they need a foundation that is svào, and that has integrity in the face of challenges. The hard fork proposal is a compromise that ruins that integrity & signals that projects like the DAO can influence the underlying foundation to lớn their own advantage. To me that is totally unacceptable & is a departure from the principles that drew me to ethereum.”
The hard fork is a valid option, but it should be kept for situations which require emergency modifications of the ethereum protocol itself, & not for projects that run on it.
The fact that the Ethereum Foundation has been involved in and promoted The DAO project has been an error and it only usurps the trust that people have sầu in ethereum as a foundational infrastructure for other projects.
I hope they will correct this error.
Another one chimed in:
“I made a bad contract in the first days ETH was online và lost 2K ETH with it, can I also get it back? Thanks!”
And finally:
“Ethereum worked exactly as intended. I don’t believe software should be updated when it works exactly as intended.You assume the risks of your investment. If you don’t underst& your investment, you assume unknown risk. Anything else is a bailout by a central authority, i.e. the antithesis of the crypkhổng lồ world.In a related way, this is why Lehman Brothers was allowed to fail – because the deal is the deal, and if you bend the rules for a particular player, all other players will want special treatment, too.”
Too Big lớn Fail
Just a month after Lehman Brothers, other banks did get special treatment, and you can decide for yourself whether that was a good idea – it’s quite analogous to the situation at hvà. The DAO is not an islvà.
It is considered “too big lớn fail” from the point of view of the ethereum ecosystem. It may be noted that several people from the Ethereum Foundation are DAO token holders and also have sầu advisory positions in The DAO. Even Gavin Wood, one of the original ethereum founders, supported the fork in a blog post.
In this view, then, it’s possible that some other large projects could need to lớn be rescued và the Ethereum Foundation, having mix a precedent once, may once again ask miners khổng lồ rewrite history.
The analogy lớn the ngân hàng bailouts is remarkable: banks were able khổng lồ take huge risks hoping for huge returns, và when those trades went south, the taxpayers bailed them out (except for poor Lehman Brothers). This risk asymmetry is generally thought of as a bad way lớn incentivize market participants.
Those are the two extremes, but most people fall into one or the other.The long arm of the law, not khổng lồ mention the tax man
The above sầu discussion assumes we are operating in a vacuum, in crypto-anarchy space, where laws don’t apply. But people have invested real money and real laws can và will apply to lớn this case.
In fact, all parties here may have legitimate claims that could take years to settle out in courts around the world.
Who’s at risk?
Even though they took great care to lớn not create securities & make sure people were aware of the risks, they still may be held liable. If the DAO token holders thua thảm most of their $150m+ investment, a class-action suit against the originators seems likely.
Other DAOsSome people have sầu taken The DAO smart contract word for word to implement other DAOs. In the case of a hard fork, all of the ether in any DAO that uses The DAO’s 1.0 smart contracts will forfeit their ether inlớn a refund address, to lớn be divided among mỏi DAO token holders. Thus, DAO token holders could end up getting more than they put in. This is sure to anger those who have sầu put their own money inlớn their own DAOs using The DAO 1.0 code.
DAO tokenholdersAs investors, and without the protection of a corporation, all 11,000+ DAO token holders may be seen as general partners in the fund. In that case, the attacker can sue individual DAO token holders in their own trang chủ jurisdictions, claiming that they represent the entity that seized his rightful property.
The ExchangesNot long after the initial funding period, several cryptocurrency exchanges began making markets in DAO tokens.
As part of the chain, anyone who bought DAO tokens from any exchange may sue the exchange for selling flawed investments. This could go very deep – khổng lồ the cấp độ of securities law violations, or they could simply be liable for the profit they made on the tokens.
Given that several exchanges have plenty of cash, they could be ahy vọng the first targets.
The Ethereum FoundationThe Ethereum Foundation has a lot at stake here. They want the network lớn be rochồng solid, to support billions of dollars worth of commerce, and lớn be “the operating system of the future”.
But now they are between a roông xã and a hard place: if they vì nothing, the ethereum network suffers a setbaông chồng that could take years lớn recover from; if they intervene, they mix a dangerous precedent that erodes the social contract they phối up with their network of independent nodes.
They didn’t kiến thiết the ethereum network lớn be the judge & jury in case one or more parties are injured.
Miners andnodesThe 6,000+ full ethereum nodes may be liable for any forks they vote for.
If the attacker can be seen as having acquired his ether as a result of a “feature” of a smart contract, then he may (& has already threatened to) sue any of the miners that try khổng lồ take what he feels is rightfully his away from him. He could also sue the Ethereum Foundation if they write the software that implements the fork.
On the other hand, DAO token holders could sue nodes that don’t vote for the fork, claiming that they aren’t doing the right thing. On the other hvà, people running nodes lượt thích money, & they may get money from “the attacker” not to fork. It’s entirely possible that governments will step in here và try to lớn make big changes in the governance of the Ethereum system.
The attackerThe attacker may already have made a substantial sum via market manipulation – this is illegal in many jurisdictions. He also may have sầu a huge tax liability. There is obviously a tremendous incentive for the community khổng lồ learn his identity & “out” hyên ổn.
There is probably enough information out there for people khổng lồ figure out who he is – it may just be a matter of time before they vày.
The Aftermath
It seems at this point that The DAO will die, & that DAO token holders will get somewhere between 0% and 100% of their ether baông chồng.
It’s safe khổng lồ say that the Sloông chồng.it guys have sầu their hands full for a while, they may not get their project funded (I’m told they put quite a bit of their own money into lớn The DAO), và they may be talking with lawyers for months.
The DAO is still subject khổng lồ another similar attachồng.
Vitalik can propose an ethereum-based solution, but the nodes must decide. It’s not clear which of these paths the nodes will take. Many people say that “doing nothing is perhaps the worst option”. It depends which side of various fences you’re on. There are slippery slopes everywhere.
There’s another wrinkle: The Ethereum Foundation is on track to lớn switch to a new consensus mechanism called “proof of stake”, & in that scenario, anyone who owns 14% of all ether will have tremendous control over the future blockchain.
In fact, Vitalik has asked for projects lớn have a limit of $10m or so, lớn help contain the magnitude of unintended errors.
It’s also very likely that there will be lawsuits. We could see a total mess, with lawsuits extending for many years. Or we could see a fairly neat and tidy ending, ethereum goes on and “the attacker” never surfaces again.
Though I would bet 5 ether that the attacker will be found within a month or two. Even though the letter and the spirit of smart contracts is that “smart contracts rule,” & the rule of law doesn’t apply – in this case, most people would like to lớn see a do-over. I’m guessing we will see various rules of law apply.
I have tried khổng lồ stick with the facts, và now I will offer one simple opinion: This situation will resolve itself well if the attacker will simply buy a bunch of ether, then agree to lớn work with The DAO people to return the money lớn all tokenholders & dissolve sầu The DAO completely.
The attacker will have made some money, made his point, no lawyers will be involved, we will all have learned a hard lesson, & the Ethereum Foundation can start planning for a safer, more resilient future.
Summary
I believe we can say that this event marks the beginning of a new era of ethereum’s public blockchain.
While the agile approach of “ready, fire, aim” generally works best with new software, it can be dangerous when $150m gets loaded inkhổng lồ the chamber.
Ethereum was billed as a general-purpose computer and the harbinger of a new decentralized model for computing & for society. We will see, a bit sooner than we may have sầu wanted, how all this plays out in the real world.
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Some resources:
DAOs, DACs, và More – by Vitalik Buterin
How khổng lồ Build a Democracy on the Blockchain – by the Ethereum Foundation
The DAO, The Fork, The Fallout – A group discussion
This post originally appearedon Medium and has been republished with the author’s permission.
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