The $53Million Loophole… And The Radical Debate That Came Along With It

The late U.S. Supreme Court Justice Antonin Scalia was known for saying “I do not believe in a living Constitution, this document that morphs from generation to generation. I favor what some might call the dead Constitution, but I prefer to call it the enduring Constitution.” So-called “originalists,” like Scalia, believe the literal words of the Constitution and the intentions of those who constructed it are the letter of the law. They shouldn’t be altered or accommodated to our modern times. Of course, other people believe the guiding document of U.S. democracy is fallible, and that society should modernize alongside new circumstances. For example, we don’t hold onto the Constitution’s original language concerning the rights of women and minorities as inferior (or non-existent).

But every constitution, once codified, creates an age-old debate: are rules written to be followed or modified? Are there some codes, ethics, or legislation that should be respected as absolute, or is everything relative? This may sound fairly existential, but I was reminded of Scalia’s words this past month for a very modern, very new, very technological reason: we have seen a similar dead-versus-living doctrine rift in the blockchain community about its newest experiment in forming a digital, decentralized (or crowd-backed) company — a project called TheDAO.

The blockchain is a new data infrastructure that many are calling the “internet of value” as opposed to our existing internet of information. It creates a permanent record of transactions across a peer-to-peer network, and is secured cryptographically. Basically, blockchains create a public registry and record that lowers our need for traditional intermediaries like banks, government entities, and markets or corporations that manage our transactions. We have seen the rise of the public Bitcoin blockchain and its successor, a more general-purpose public blockchain, called Ethereum.

TheDAO (short for decentralized autonomous organization) was the first project of its kind implemented using the blockchain. Its goal was to create a distributed organization without a single leader — a company ruled by computer code. Throngs of blockchain enthusiasts bought tokens from TheDAO organization in a crowd-sale in return for money. The plan was for TheDAO to use this money to fund Ethereum-based projects and startups by having its backers (token-holders) “vote” on proposals. All of this would be managed by a set of smart contracts — or computer programs — on the blockchain. You can think of TheDAO as a crowd-contribution tool for deciding what to fund, in which the crowd has tokens that can increase in value themselves. Once launched, TheDAO raised over $150Million, and within a few weeks, its smart contract code was attacked by someone(s) who pinpointed a vulnerability within the code allowing them to siphon off vast sums (3.6Million Ether) into a child DAO. What was the community to do? Find a way to return the funds or let the attacker get away with the heist?

The attack brought up many responses across the crypto and blockchain communities. On the one side — let’s call it Scalia’s “dead constitution” camp, people felt strongly that the stated purpose of TheDAO (and any set of smart contracts for that matter) was to be immune to human intervention or fraud — and that any attempt to alter the code at this point would taint the whole project of decentralized platforms, like Ethereum for the future. Intervention would mean changing the rules ex post facto, when the community that bought tokens signed up to rules that were stated to be unchangeable, tamperproof. While they might sound like purists about code — a language that is itself written by humans — the Dead Constitutionalists in blockchain saw TheDAO heist as simply a result of poor coding, and a natural evolution of the emerging space, e.g. Some failure is inevitable. Rather than try to fix the situation, they believed it was a loss the community should live with. Writing smart contract code may not be easy or perfect yet, but an intervention would call into question the principles of the project, and open a Pandora’s Box for future intervention. If one of the implicit purposes of blockchains is to create verified, immutable environments for transacting without the need for trust or third-parties, then an early intervention looks a lot like “too big to fail” politics.

The second side of the blockchain community could be lumped as “living constitutionalists” or believers in what in Canada is called the “living tree doctrine.” In the context of blockchain, this group believes the social consensus of the decentralized community is more valuable than the code itself. To them, the blockchain represents a tool by which to build and execute a shifting social consensus without intermediaries. (See, for instance, Vlad Zamfir’s Medium post). Purchasers of tokens, miners (who validate transactions in the network), client developers, and others in the network can make their will known through actions like forks, updates, and transactions. This decision-making through adoption or action is the technological equivalent of voting with one’s feet. In this camp, what the community favors (and is economically incentivized to favor to keep the value of their cryptocurrencies high) is what matters. This camp acknowledges the misfortune of a $53Million early loophole in the grand experiment of a new digital company governed by decentralized technology. But rather than focus solely on the actions of the attacker, the Living Constitutionalists in blockchain are regrouping to find a way forward that preserves the community’s interests. To them, recovering the funds does not crush the progress of networks like Ethereum in advancing the science and adoption of blockchains. Rather than killing the principles, they see TheDAO attack as a setback that offers learning for the early adopters on how to start building smart contracts — and through a nexus of contracts, eventually build safe distributed autonomous organizations — that in fact succeed in whole or part without human intervention. Basically, early failures may offer the benefit of long-term success and stability of blockchain-based structures. Rather than tanking the whole effort, this kind of massive failure may be the key to blockchain resilience.

Often in these situations, a community looks to its de facto leaders. For US constitutional debates, originalists always look to the ideas of America’s founding fathers. Similarly, many across the blockchain world looked to Vitalik Buterin, other early leaders of the Ethereum Foundation and Project more broadly, and heavyweights from the cryptography world to light the potential pathways forward. These leaders offered a hard fork proposal (among other early options) alongside reasoning, but ultimately the choice of action in the blockchain community lay with its participants: client developers, miners, token- and crytocurrency-holders. The hard fork was planned for block 1,920,000, mined on July 20, 2016. (NB: If you’d like to read more detailed real-time accounts relating to TheDAO heist and options debate, see this Reddit FAQ or this set of comments.)

In the writing of the U.S. Constitution, many disparate views created a formalized structure for interpreting actions and prescribing conduct. Then the country was left to decipher that doctrine — alter, and debate its merits — for generations to come. Sometimes we change the doctrine, and sometimes we follow it to the letter. With the experiment of TheDAO we got to see the first such “constitutional” rift of the blockchain community: code versus consensus-driven intervention. Many have tracked the technical pluses and minuses of smart contracts better than I have (e.g. @el33th4xor or @gavofyork). But one point is abundantly clear, and more fascinating to me than the circumstances of TheDAO itself: we are without a doubt entering a new terrain. Unlike a constitution, smart-contract structures are based on self-execution — we have combined the acts of writing rules and carrying them out, and interpretation is a step that is largely left out. Imagine a constitution that was itself cognitive or intelligent. This is the new terrain of blockchain governance. What is yet to be discovered is how human codes, norms, interpretation, and enforcement will evolve alongside these technological codes. More simply, will we become a society of Dead Constitutionalists ruled by the technology we esteem highest, or Living Constitutionalists valuing the wisdom of crowds? Or is there a third option that is unique to blockchain’s evolution — one that offers a fluid social contract that leverages technology without only relying on it?

Back to Scalia’s words.

Beyond deciding between hard forks, soft forks or inaction, TheDAO heist opened up room for debate on what kinds of ethics, philosophy, and governance will result in an enduring world of blockchain.