The blockchain is often touted as being immutable and impervious to hacks. That being said, several of the cryptocurrencies that live atop the blockchain have suffered severe hacks in the past few years; Steemit (2016), Krypton & Shift (2016), Bitcoin (2010) and DAO (2016) to name a few. The DAO’s hack had significant outcomes from both a monetary and regulatory perspective so I’m going to give you some background on how it came to be.
What is the DAO?
The DAO was a Decentralized Autonomous Organization that sought to codify the decision making aspect of a business by giving investors the power to decide on everything from investment plans and payments to corporate governance. In exchange for the portion of tokens you owned, holders were given the ability to vote on the direction of this fund. Proposals were put forward, voted on, and if they received enough support (20%+) their plans would be put into motion. The decentralized ethos that underlies the crypto community aligned beautifully with what The DAO were building and as a result, it received a lot of support. They had a record breaking ICO, raising around $150M in ether.
Not long after, someone hacked the DAO and stole 3.6M worth of ether (or $50M USD). Today, given Ethereum’s current value, it would be worth over one billion dollars. Before this attack, several people raised concerns around a loophole found when users tried to take their tokens out of The DAO. If you were a token holder that wanted to get out of the DAO (say, for example, you disagreed with proposals that were being put into motion) you could leverage a “split function” that would allow you to exit your tokens. When this function was initiated your tokens were put into a holding account for 28 days. The hacker leveraged a recursive function that drained 3.6M worth of ether when requests were made by token holders to take their money out of The DAO.
This crisis sparked a great deal of debate amongst the community as to whether they should have a hard or a soft fork. A soft fork would entail a change to the blockchain protocol whereby only the previously affected transactions would become invalid. In order to go backwards and execute this sort of fork, you would require a majority of the miners to comply with this decision and enforce this new rule. This would result in you operating on the same blockchain but with an altered past. On the other hand, a hard fork is a permanent bifurcation from the old blockchain. This creates a division in the blockchain, whereby one path follows the new path and one follows the old. In the end, the hard fork had the majority of the support from the community, allowing for the old transactions to be rolled back and those impacted by the hack to get a refund.
As a result, we ended up with two different tokens which are currently being traded. We have Ethereum Classic (ETC), which was adopted by the people who felt strongly about not having any alteration to the blockchain. We also have Ethereum (ETH), which had its chain altered so that people impacted by the hack would get a portion of their tokens refunded.
This hack also caused The DAO to be the first victims of the SEC’s investigation, which you can read more about here.
Written by: Matt Hibberd