The DAO Hack and the Future of Blockchain
The power of Ethereum became known in Spring 2016, with the invention of a radical new application known as the Decentralized Autonomous Organization (DAO). The DAO was a blockchain mutual fund that invested in projects across the Ethereum network.
By investing in the DAO, anyone could become a stakeholder. Stakeholders would receive returns, and earn voting rights towards deciding which projects would be funded, in proportion to their investment.
The DAO raised $150 million during its initial funding stage and became the most highly-funded internet project in history. As a result, Ethereum appeared to be the most advanced use of blockchain technology to date.
Two months after being introduced, the DAO was hacked. A hacker siphoned $50 million out of investor’s accounts by exploiting the Ether network’s smart contract code.
Ethereum’s Flaws
Some of the greatest accomplishments of Ethereum have also been its greatest failures. For instance, The DAO demonstrated the power of the platform as well as the glaring issues surrounding network governance, and the potential issues of smart contract immutability.
There was also Cryptokitties, a social app where Ethereum users could trade and “breed” colorful virtual kittens. Initially, the success of the app caused the entire Ethereum platform to lag. As a result, other apps that were developed on the Ethereum platform experienced a drop in performance.
Despite its ingenuity, some criticize Ethereum for being a better proof-of-concept than an actual application. Limits to network throughput remain a challenge for large-scale applications. The permanence of smart contracts has frequently hemmed developers into uncomfortable positions, and caused utter chaos for others. Unlike with Bitcoin, hacks of Ethereum apps happen regularly.
Business and Industry Adoption
Companies around the world are attempting to build new, better blockchains using Ethereum as their model in response to the open engineering challenges facing developers today. The most confident companies are attempting to position their platforms as the third generation of blockchain. Just as Ethereum expanded the scope of blockchain, any third-generation model will have to expand on Ethereum.
The next generation of blockchain may be a more incremental and spread-out evolution, rather than the result of a full-scale, single-instance invention by a genius on the level of Satoshi Nakamoto or Vitalik Buterin. Companies and nations around the world are beginning to use existing blockchain solutions for new problems.
Last year, IBM partnered with the shipping company Maersk, and Abu Dhabi’s national oil company, to implement blockchain-based global supply chain systems. The World Bank issued its first bond entirely based on distributed ledger technology. Kodak launched its cryptocurrency, as well as a blockchain platform for managing intellectual property rights over photographs. The list goes on.
We now have companies using blockchain towards verification of artwork, and food safety. Estonia has developed “e-Estonia”, its blockchain platform for application in health, judiciary, security, and data registry systems.
Barriers to Entry
Despite the innovation and early adoption of blockchain, there are significant barriers to entry. These must be solved before the technology enters the mainstream.
Ethereum remains the standard-bearer for blockchain software as a service. When an app such as Cryptokitties takes down the entire platform, it demonstrates how large-scale projects over relatively low-throughput blockchains are incompatible.
As of today, there’s no blockchain capable of servicing an app as widely used as Facebook. Even if the problem of throughput was solved, there are any number of development, design and user experience challenges that need to be addressed.
For example, consider the matter of passwords. “Forgot Password?” protocols help when people lose their login information. This works because your password is stored on each specific company’s servers. You just provide verification, then you can retrieve the data.
Blockchain, on the other hand, is naturally anonymous, immutable, and without oversight. In the blockchain, your “private key” is a data string stored only on your device. If you lose your private key, there is no way to retrieve it.
The permanency of lost information causes problems for both users and networks. Coin lost by one is eternally lost for all. This is the source of many a blockchain horror story.
Engineers are thinking up different workarounds, but this isn’t really about private keys. It’s that blockchain introduces challenges we usually don’t have to think about. The challenges of blockchain must be weighed against the benefits it provides. For example, when every action on a shared blockchain network must be approved by other nodes, regular application updates and bug fixes are suddenly complicated.
Governments and other regulatory bodies around the world are slowly beginning to approach the subject of decentralized technology. Both uncertainty and imbalance in the blockchain market remain high. And every established company considering blockchain must ask: is it worth overhauling the entire operation to experiment with the benefits of a yet-unproven technology? None of this is helped by cryptocurrency’s reputation for volatility, abetting criminal activity and fraud, and that the public generally refers to cryptocurrency and blockchain interchangeably.
Conclusion
Before we judge the future of blockchain, it’s worth remembering where blockchain started. There have only been two presidents since Bitcoin was invented. The industry is still so unpredictable because we haven’t yet finished writing the rulebook.
When the DAO got hacked, the Ethereum community came together over their problem. $50 million were moved from the hands of honest investors to that of a cyber-criminal. This meant huge losses for individuals, and it threatened the stability of the entire network and Ether cryptocurrency. Luckily, the hacker could not withdraw the stolen coin for a period of 30 days due to a technicality of the DAO’s smart contract code.
And the strangest part of it all? Everybody on the network knew exactly how to retrieve the money. All they needed to do was fork the Ether blockchain just before the point in time when the hack occurred. Then, all invalid activity would be rendered null, and accounts would revert to their original.
Some argued that manipulating the entire blockchain to bail out a private entity was a betrayal of the core principles of blockchain. They argued that we were not to manipulate or trust in human entities to affect the blockchain towards personal ends.
Debates raged in online forums as the 30-day window dwindled. The Ethereum Foundation, an organization co-founded by Vitalik Buterin for general service on the network, decided to hold a vote. Everyone on the network could cast one vote to determine whether the blockchain should be forked or not.
Investors voted and, in the end, the Ether network forked. The DAO was dismantled, all $50 million worth of crypto was returned to its rightful owners, and we all learned some important lessons related to Blockchain. The main takeaway from this experience was the Ether network needed to make sure a hack like that never happens again.
No other event so perfectly sums up the powers and pitfalls of blockchain as the DAO hack did. The core principles of decentralized technologies were questioned, and the Ethereum community came together to solve their shared problem.
The DAO hack may go down in history as one of the key events shaping how blockchain looks in the future. In the coming years, we are likely to see this technology develop on three fronts: in standards and regulations, in practical business and industry application, and in technical capability. What we have seen so far is merely the nascent stage of an emerging paradigm with great promise and glaring problems in equal measure.
This story was originally written by Nathaniel Nelson and published in Etekly. Nathaniel is a writer and podcast producer based in New York City. He writes the internationally top-ranked “Malicious Life” podcast on iTunes, hosts programs on SCADA security and blockchain, and contributes to tech websites.
