HISTORY OF BLOCKCHAIN: THE DAO HACK
Blockchain protocol engineers have come a long way in fixing and creating protocols that can withstand the never-ending issues and vulnerabilities of blockchain to ensure that whatever protocol they are offering is not only beneficial but most importantly, secure. As always, we should explore history as the famous sayings go, “Those who don’t know history are destined to repeat it.”
DAO stands for decentralized autonomous organization, it was launched just a few years ago, in 2016 with the intention to act as an investor-directed venture capital firm. It is a blockchain based “organization” that is collectively owned by its members, with rules set and executed through code. DAOs replace centralized management structures with a techno-democratic approach wherein decisions are voted upon by investor-stakeholders. DAOs are built on top of blockchains (often Ethereum) and their transactions are visible on the underlying blockchain protocol. Today, DAO models remain highly significant in blockchain-related use, particularly amongst decentralized finance (DeFi) platforms. After collectively approving funding proposals, stakeholders could be in a position to profit from their investments by reaping dividends or benefiting from a token price increased by representation in ownership of successful companies.
In this article, we will be talking about THE DAO (a project launched in 2016), it was one of the earliest crowdfunding efforts and high-profile projects built on the Ethereum blockchain with a fundraised worth of $150 million USD, from 11,000 investors. Unfortunately, not even three months after the DAO was launched on the then one-year-old Ethereum blockchain, the DAO was hacked due to vulnerabilities in its codebase.
There was a concern that a bug in the DAO’s wallet smart contract would be able to be drained and in an attempt to fix the said bug, the hacker began to tap funds and exploit the vulnerability by taking off one-third of the DAO’s funds to a subsidiary account. While the affected community debated on how to manage the hack as not only it has caused a financial loss for investors but also distrust of the Ethereum network and blockchain itself. By September 2016, the value token of the DAO, known by the moniker DAO, was delisted from major cryptocurrency exchanges (such as Poloniex and Kraken) and had, in effect, become defunct.
After multiple proposals to deal with the exploit and even with a proposal from Vitalik Buterin, the founder of Ethereum blockchain, to soft fork the Ethereum network, adding a snippet of code that would effectively blacklist the attacker and prevent them from moving the stolen funds, to refund the lost funds, Ethereum decided to hard forked and send the hacked funds to an account available to their original owners, although this was not a decision agreed by all parties, which resulted in the network splitting into two distinct blockchains: Ethereum and Ethereum Classic. The token owners were given an exchange rate of 1 ETH to 100 DAO tokens, the same rate as the initial offering.
The hack however is only the beginning of the end for the DAO. Around July 2017, the United States Securities and Exchange Commission (SEC) ruled that the tokens offered and sold by the DAO were securities and are subject to federal securities laws. In conclusion, the DAO violated federal securities laws, along with ALL OF ITS INVESTORS.
With the hack, current protocol engineers have taken the DAO as an example of what not to do. The DAO explains the significant importance of establishing a secure platform, it was caused by a coding loophole, which could have been avoided. In many ways, incidents like these were essential in further setting up healthy blockchain ecosystems and platforms, as protocol engineers learned the risks of designing and deploying untested or unsafe protocols while stakeholders and investors learned the doomed effects of investing in the protocols.
Which protocols do you think offer the most secure ecosystem? Leave your comments down below! Until then, keep yourself safe and we’ll see you in the next article.
—
—
References:
1. https://www.gemini.com/cryptopedia/the-dao-hack-makerdao#section-what-is-a-dao
2. https://medium.com/swlh/the-story-of-the-dao-its-history-and-consequences-71e6a8a551ee
3. https://coinmarketcap.com/alexandria/article/a-history-of-the-dao-hack
