What is the DAO Hack: Ethereum, Immutability, Consensus-rule & Forks
Ethereum gifted us with a splendid case-study on the idea behind immutability, consensus-rule, and artifact of forks.
During the winter of 2013, a young teenage boy introduced the Ethereum Project in a highly comprehensive whitepaper, longer than Bitcoin’s. Vitalik Buterin is his name, a genius Canadian-Russian computer programmer whom has since become a man and blockchain celebrity earning numerous accolades. The Ethereum Project promises a platform allowing developers to create decentralized applications (dApps) on top of a uniform blockchain. For now, Bitcoin lacks versatility because of its rigid and hard-to-change natural construct. As a matter of fact, Vitalik initially wanted to introduce smart contracts to Bitcoin but was met with community resistance. Ethereum excels in providing smart contracts, a computer protocol that facilitates negotiable contracts prior to execution, validating and securing these contracts post-execution via the Ethereum blockchain. In layman’s terms, this enables documents and traditional written-agreements by attorneys, businesses, and/or governments to be easily recorded on a transparent, decentralized ledger while substantially reducing menial paperwork and auditing times. On January 23, 2014, Mr. Buterin announced the start of the Ethereum Project, excavating a deep tunnel in the Cryptocurrency rabbit hole.
Just three years later, the Ethereum Enterprise Alliance (EEA) was formed, accompanied by J.P. Morgan, the National Bank of Canada, Toyota, Samsung, IBM, and HP Enterprise to name a few of over two-hundred international EEA members mainly comprised of Fortune 500 Companies. Although most of these entities use private blockchains, Ethereum’s base layer is the medium to which smart contracts are enforced by Solidity, Ethereum’s built-in unique programming language. Ethereum also currently utilizes Bitcoin’s powerful PoW system to secure it’s blockchain, a blockchain that has manifested the most global and far-reaching crowd-funding platform to-date, ICOs as we call it. Much like Bitcoin’s drug-riddled past, Ethereum has its own controversial preceding. The Decentralized Autonomous Organization (DAO) deployed a smart contract raising $150 million in May of 2016 and at the time becoming the world’s largest crowdsale. The DAO’s grand objective was to incubate new enterprises seeking blockchain advantages in which token holders were cryptographically guaranteed a vote. The proceeding month, the DAO was hacked and $150,000,000.00 vanished.
Within hours, Ethereum’s token, Ether (ETH), plummeted in value as panic and mayhem erupted in the market. Stunningly, a team of white-hat hackers were able to successfully recover a majority of the funds, leaving approximately $50M at the hands of the thief, irretrievable. Ethereum and the greater Cryptocurrency community then separated into two exceedingly passionate and distinguished camps more intense than Bitcoin’s blocksize debate. The dispute mulled over a method to permanently alter the blockchain’s history by changing the code and reversing the hack. Such action defies the very meaning of immutability in a blockchain, although some suggested the action is justifiable if a majority agrees to the modification. Is code law? Shouldn’t consensus-rule determine the outcome? To hard fork or to not hard fork? Before we delve deeper into the history and significance, let us first define what forks are and the two different types.
There are soft forks and there are hard forks. When you have a blockchain for something, you have a digital ledger. This database adheres to rules that are built into how the blockchain functions. These rules are defined by computer code. Forks are changes to the rules.
Soft forks are backwards compatible changes to the rules. Imagine a chain of blocks recording transactions by sticking to a set of rules that all community-members agree on. When a soft fork occurs, not all miners, nodes, or users have to change immediately. A soft fork allows such participants to not comply with the new alteration of rules. They can still operate, remaining on the old set of rules while their transactions would still count on the original blockchain, or legacy chain. Soft forks are widely-viewed, yet still debated as a safer method to changing a blockchain’s rule of conduct. A choice example is SegWit, a soft fork program upgrade to the Bitcoin protocol. Not everyone has to upgrade, but those that do can benefit from SegWit. In the case of the DAO hack, a soft fork was indeed preferred as the first option, but would not entirely solve the fiasco.
Adversely, hard forks are not backwards compatible and the changes to the blockchain set of rules are permanent. Hard forking Ethereum’s blockchain before the hack materialized would correct the issue and recover all stolen funds. It is like a fork in the road, a divergence in the path of the blockchain. Whoever decides to not adhere to the new set of rules, are operating on a separate chain of blocks. For instance, if a hard fork occurs on the Ethereum blockchain and 80% of participants choose the hard forked path, the 20% that decide to go on the other path are now acting on a separate blockchain. Miners that begin to hash on the separate chain and any users that move tokens on the forked chain are not operating on the original chain and thus, we have a divergence. Hard forking became the only course of action if the community wanted all funds to be retrieved, or more specifically, turning back time and erasing the hack from the blockchain as if it never happened.
THE DAO HACK CONSEQUENCE
The Ethereum hard fork brings into question the importance of immutability versus consensus-rule in a blockchain protocol, and therefore how vital these two features are, and will become in our current paradigm shift. As the № 2 Cryptocurrency of this new industry, this event is not to be taken lightly.
Immutable is an adjective as Google defines it: “unchanging over time or unable to be changed”. It can be argued that immutability is a crucial aspect that takes utmost priority, illustrative in real estate transactions, credit scores and criminal records. Immutability wholly equals untamperable and permanent, logged in chronological time. A blockchain maintaining an irreversible element is paramount in the Cryptocurrency movement. Yet in the grand scheme of things, consensus-rule is the very basis of how most nations are governed, symbolic in Democracies and Republics. If a vote were to be held and a majority reached, does consensus rank over immutability? This hard fork debate became the height of the DAO hack debacle, entrusting the twenty-two year old Vitalik Buterin with a billion dollar decision, Ethereum’s total market cap at the time.
Implementing a soft fork as an attempt to fix this hack was not an option, as it would create further problems by providing an additional attack vector for the hacker(s). A hard fork must occur in order to recover all funds. Vitalik Buterin and the Ethereum Foundation decided to give a mere twelve-hour notice for a vote to take place on the resolution of hard forking where voters included ETH token holders, miners, and nodes. Voters needed to specifically vote nay to hard forking as abstaining was not an option. The decision to make the default choice as yay to hard forking is controversial at worst, calculated at best. The result was an overwhelming 89% super-majority yaying to a hard fork on block #1,920,000, which is prior to the incident occurring in the blockchain ledger. Conclusively, all funds from the DAO were never hacked and on block #1,920,001 Ethereum Classic (ETC) was born.
It must be mentioned that Ethereum’s blockchain or code was not specifically at fault. The DAO’s smart contract was the vulnerability and central point of failure, cited by many prominent members in the community as potential security flaws before the hack. Why their warnings were not heeded is not the objective of this article. Ethereum hard forking to recover investors’ funds gives us a fascinating insight that code is not law for Ethereum and further, that consensus-rule trumps immutability in this particular instance. The question then becomes is consensus-rule more important than immutability and whether this is the case for all future scenarios. Events that occur in likewise disastrous fashion begs of a hard fork option, dangerously administering the well-known slippery slope. On each respective blockchain, Ethereum and Ethereum Classic are now simulating the aftermath of the hacker’s doing. Albeit hard fork, slippery slope, or nada, a blockchain is an agreed upon digital database after all. How it is agreed upon, is up for vote.
On my previous post, a first responder commented that hard forks consequentially alter the underlying asset. This is only true of the chain that hard forked. As a matter of fact, approximately $50M are still in the hands of the thief on the ETC chain. Technically speaking, ETH serving as the original chain is a fallacy that many individuals in the Cryptocurrency space fail to realize. Practically however, ETH has persevered through its infamous past, demonstrated in the multitude of powerhouse companies joining the EEA. ETC’s 100% immutability is an attractive attribute that unfortunately pales in comparison to ETH’s corporate backings. To sum it up, hard forking from a crypto asset does not actually alter the legacy chain — there will still only ever be 21M BTCs and the rules stay intact on the original blockchain i.e. it is the forked chain that alters. Bitcoin hard forks have been quite the headline as of late. I envision that these hard forks will occur similar to bell curves and this is only the beginning.
From the Ethereum hard fork debate to the Bitcoin blocksize civil war to the questionable flippening, the Cryptocurrency industry is as riveting as it is toxic, where individuals are so entrenched in their coin’s camp that all else are unwarranted and non-factors. Ethereum Classic vs Ethereum, Bitcoin vs Bitcoin Cash, Ethereum vs Bitcoin, these are false dichotomies. Each crypto asset features their own niche and may coexist to capture market share from traditional sectors. Ethereum Classic may be better suited for fields that value immutability and Bitcoin Cash may be better served as electronic cash. Ethereum’s core design is to be a platform for developers to create dApps, enabling entrepreneurs to tokenize the economy in a variety of markets that are still inefficient, such as pulling a preliminary title report in real estate transactions, a certified process that still takes two to three business days on average. On the other chain, Bitcoin’s purpose is to become the decentralized, incorruptible, non-manipulative, unseizable, deflationary, neutral and ultimate store of value. At the time being, Bitcoin and Ethereum are compliments, not competitors. Tribalism reeks in this field, one of the heavy downsides because the market is still immature and the sentiment of individuals too emotional, myself included. Through all this necessary chaos and adversity as a means for growth, we are sparring each other only in preparation for a greater fight that has yet to come upon us. We must not forget who the real enemy is.
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Clarence Lam - Systems Administrator
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