The DAO

Apr 28, 2024 1:13:57 AM

One of the most famous hacking cases in blockchains occurred on the Ethereum network in 2016, involving a project known as The DAO. It was a project for a decentralized autonomous organization, which would serve as a kind of decentralized venture capital where startups could apply for funding. The project raised about 140 million dollars in ether for its development, a considerable amount for the time.

However, The DAO never got to work as planned. Due to a flaw in a smart contract, malicious actors managed to drain almost 50 million dollars in ether, using a technique now known as reentrancy. Fortunately, as the drained money was supposed to be locked up in a child contract for a week before it could be withdrawn, the community had time to brainstorm a solution.

Part of the community advocates that transactions involving the hacker should be rolled back to avoid any advantage gained from such actions. But reversing transactions is a radical act on the , whose philosophy is that transactions should not be censored.

Another party argued the opposite. Despite being malicious, the transactions exploited a bug in the smart contract code rather than a problem in the . The hackers’ actions may have been unethical but not illegal; or, better said, they didn’t break the main rule of blockchain, which states that the code is the law. Hackers simply took advantage of bad code.

The DAO hacker caused great instability in Ethereum, which culminates in its separation into two distinct chains, the current Ethereum and Ethereum classic. This is known as a contentious hard fork, where the chain splits into two that remain independent. In the original Ethereum, the transactions were reversed, and the hackers did not gain financially from their actions. On the Ethereum classic, nothing was changed, and the chain proceeded normally.

The case of The DAO highlighted the issue of blockchain . Governance is maintained by network participants who effectively run full nodes. They are the ones who will decide, in the case of a Hard Fork, whether to continue running the old version of the protocol or the updated version. Sometimes the community as a whole chooses to migrate to the new version, but in other cases, like this DAO, the community splits.

The Ethereum network was not the only one to undergo a contentious hard fork. Some Bitcoin users also decided to split the network into what is now called Bitcoin and Bitcoin Cash. A dispute over the size of the blocks was one of the origins of the division. Shortly after that, Bitcoin Cash itself also suffered a contentious hard fork, giving rise to Bitcoin Satoshi Vision.

Contentious Hard Forks are one of the main causes of blockchain instability, but it is a natural artifact of open-source software and decentralization. Communities must choose their goals, and the choice is not always unanimous among its members.