The Rise and Fall of “The DAO” Capital Fund

Luis Wester
Sep 6, 2018 · 7 min read
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It is not that easy to talk about “The DAO” — one of the most successful decentralized autonomous organizations ever created — because of two reasons. Both of them take root in the project’s unbelievable (and quite inexplicable) popularity due to its contradictory nature.

The first reason is plain to see: considering all the advantages of DAOs comparing to the traditional organizations, which we’ve reviewed in this article, the failure of “The DAO” may seem like an obvious evidence of the contrary state of facts. But don’t draw your conclusion beforehand — we’re going to prove this statement wrong in no time.

The second reason is much more prosaic. Because of the created resonance around the topic, many spectators and participants have published their own view of the derived situation. So now it’s hard to divide the truth from wild guesses and speculations. Still, we’ll do our best to expound only the reliable information in a chronological order.

We hope you’ll enjoy our small ride from the beginnings of “The DAO” company right to its sad demise.

Act 1: How the Things Started

Christoph Jentzsch, the creator of the code which laid the foundation of “The DAO”, started his career as one of the founders of company. The organization’s goal was to make a decentralized sharing system — provide members of the community with an ability to remotely rent a bike, a car or even a house without direct contact with its owner and with an appliance of smart contacts.

The DAO” was meant to be a fundraising for, but things went off course. This is how Christoph describes its foundation:

“After we started in November 2015, we thought about how to fund it. When I programmed the ICO contract, I said, “Well, why not give token holders more power.” I said, “Let’s have a game and vote how we use the money.” Then let’s say, “Let’s give them even more power.” They can keep the money. Then I said, “Well, let’s open it for everyone so everybody can ask for money and get it based on the token holders saying it.”

As we see, the idea of the organization, which invests members’ money into the perspective projects submitted for consideration, was born absolutely by chance. It was a groundbreaking, pioneer startup, which was bound to huge success.

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The DAO is Code

“The DAO” launches on 30 April 2016, it collects more than $150 million from more than 11,000 members of the Ethereum community. The reasons for such gains still stays unclear. Yet, fact is fact — the 28 day creation period came in a history as the biggest crowdsale ever launched. At the end of that phase, “The DAO” investors possessed over 14% of Ethereum tokens issued to the date.

From the point when the fundraising started, a team of the creators let the project in a free-float. It is the community which chose such important things as the name of the organization — and this fact is very important for our onwards telling.

The main feature of Ethereum smart contracts (which is, simply saying, a base for each and every DAO, DApp, DAC and many other “decentralized autonomous …”) is its inconvertibility. From the moment it is put into action, nobody — even the creator — can stop it or change any line in the code. Such a mechanism, from one point of view, makes smart contracts an unhackable formation.

But, from another point, inability to adapt and debug the code is what caused the following uncheerful events for “The DAO”.

Act 2: The Not-So-Long Rise and A Quite Rapid Fall

When the fundraising finished and “The DAO” went into operation mode, some papers published articles about the recently found loopholesin its code. The authors insisted on holding off the launching date, yet, the project was already functioning and couldn’t have been stopped.

Later in his interview, Christoph Jentzsch confessed that the code of the smart contract wasn’t checked enough before project’s start because of the pressure of publicity.

“You had this community of about 6,000 people who just wanted the thing to start. We have basically postponed it and postponed it and postponed it, and only because I said I’m not ready, I’m not ready, I’m not ready. Everybody else was saying the thing is ready since a month.”

Launching the project before proofreading the code was one of the biggest mistakes the creators’ team has done. Soon, lots of influential newspapers and media persons talked about the potential threats to the security of the organization. In no time, critical fixes were put to a vote of “The DAO” investors. Yet, it wasn’t destined to pass those amendments.

On June 17, 2016, a little over a month since the finished crowdfunding, “The DAO” faces an attack, which leaves it without ⅓ of the raised money ($50 million). The hacker used one of the vulnerabilities the media sources were writing about, which allowed users to ask the system to transfer money from one account to others multiple times before it would actually update and check the balance of the sender.

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The DAO lost 50 million to Hackers on June 17, 2016

The next few days the community searched for a workaround. The money the hacker took was on “The DAO” child structure, based on the “parental” code. Only this feature saved the organization from a full disruption — according to the Ethereum smart contract terms, this money was put on a 28-holding “fundraising” period, during which the solution for the “old” DAO was found.

At the same time, the price of ETH fell from $20 to merely $13. Several specialists are working to turn the money back, but the proposed suggestions can’t get enough votes from the community.

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Ether Price Timeline throughout the DAO hack.

On 17th June Vitaliy Buterin, the Ethereum co-creator proposes a “hard fork” fix, which will “make any transactions that make any calls/call codes/delegate calls that reduce the balance of an account with code *** (that is the DAO and children) being invalid”.

The community has divided into several parties: some members voted for the deployment of the hard fork, some were insisting on attacking the hacker and taking money back, and the others were demanding to close “The DAO” entirely. Such radical sentiments were the reasonable reactions of those users, who found it inappropriate to rewrite the rules of the community and the whole blockchain infrastructure because of one project.

“Ethereum worked exactly as intended. I don’t believe software should be updated when it works exactly as intended.” — have said one of the users in the Reddit thread.

…Later, the “child” account will be frozen and the stolen money will return to the owners, but this wouldn’t be enough to stop the launched self-destruction processes for “The DAO”.

While the creators of the project are receiving tons of criticism, the biggest exchanges Poloniex and Kraken de-list the DAO token from their exchanges. At the same time, the SEC publishes an official report, in which it determines “The DAO” tokens as “the subject to the federal securities laws” and concludes the possible violations of the U.S. securities law.

All those factors led to the current situation — “The DAO” has disappeared from the radars and there are no signs of its return.

What has this story taught us?

Thanks to the rise & the fall of one of the greatest projects the crypto world has ever seen we’ve learned many valuable lessons.

First of all, future startups and DAOs in particular now have an example of how things shouldn’t be done. We’ve received a clear lesson: measure twice and cut once. If only proper code examination was done before the deployment of the contracts, the loophole could have been founded and liquidated without consequences.

Secondly, the example of “The DAO” in the end has a bright side: the creators and founders of the startups realized, how many funds good ideas can whip up. Moreover, now the whole world knows about decentralized autonomous organizations, and it’s only the question of time when the next “biggest crowdfunding in history” will appear.

To sum up:

And these are only the most obvious positive sides of the occurred situation.

But, eventually, what we have now is a precious experience and an understanding of how the world desperately needs high technologies to evolve. The small contracts worked their best, and if only the code hadn’t had critical weaknesses, things could’ve gone in the opposite direction.

The creation and the collapse of “The DAO” was undoubtedly a historical event. While the traditional organizations stay in the same condition as they were 10, 20, 50 years ago, the web projects develop and promise new potentials for the whole humanity. Keep in mind that only he who does nothing never errs!

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Luis Wester

Written by

Luis is a marketing expert, the founder of and the author of Blockchain Maximalist and numerous articles on technology, predominantly blockchain.

Welcome to a professional network of blockchain experts and marketers. We provide quality service to our clients. Read our case studies and articles here.

Luis Wester

Written by

Luis is a marketing expert, the founder of and the author of Blockchain Maximalist and numerous articles on technology, predominantly blockchain.

Welcome to a professional network of blockchain experts and marketers. We provide quality service to our clients. Read our case studies and articles here.

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