There are a lot more people involved in cryptocurrencies today than there were on June 17, 2016. Ether was $20 back then and a lot has changed.
Today’s Ethereum community is concerned with issues related to rapid growth. Currently, pressing matters under debate and development within the ecosystem include Proof-of-Stake, sharding, and scaling. These issues all emanate from the commonly held notion that the time has come to buildout the Ethereum blockchain to meet the necessary speed requirements for supporting networked systems of the future, like the internet of things, as well as to meet continuing demand for further growth. Whereas the Ethereum ecosystem a year ago was enveloped with a different kind of concern altogether, that revolved around surviving a unique culmination of cascading events that unfolded with Hollywood-esque drama. Indeed, Ethereum’s 5000 percent growth this year would not have been possible without first prevailing over the events of The DAO hack.
“The DAO” is a colloquialism. DAOs are decentralized autonomous organizations. The DAO wasn’t the first DAO to exist and it wasn’t the last. It is simply the most famous one – or infamous one – and the reasons for its notoriety are fourfold. Firstly, The DAO was one of the first real-world examples of autonomous governance in action, this is paramount. Secondly, The DAO was the first distributed application (Dapp) with a token on the new Ethereum blockchain. Thirdly, The DAO raised over $150 million in Ether from more than 11,000 participants, making it the largest non-politically affiliated crowdfunded project to date. Finally, within days of launching, The DAO was hacked and drained of nearly 3.7 million Ether valued at the time to be around $70 million. In order to understand how and why The DAO was created in the first place, let alone why it is significant to the Ethereum community, one must first understand the ideology of the developers who built it. The DAO was the logical, albeit inspired, outcome of executable distributed code contracts (EDCCs) specific to Ethereum. In a sense, the creation of DAOs was inevitable. They are a technology extrapolated from EDCCs that can solve many pitfalls of human governance.
The idea behind decentralized autonomous organizations had been touted ever since the advent of cryptocurrencies. As with all technological development, the dots between ideas are easier to connect than the technological breakthroughs needed to bring them to life. The dawning of Ethereum finally provided companies like Slock.it with a sophisticated blockchain platform. Ethereum incorporated a built-in programming interface, from which they could build an entirely new type of digital governance structure. The time was right for blockchain technology to take the next step. Bitcoin had changed the world and inspired the creators of Ethereum to follow suit by seeing value where many did not. By combining Bitcoin’s underlying blockchain technology with an extra top layer of programmable logic via EDCCs, the creators of Ethereum were poised to change the world again by setting blockchains free. No longer would an entire blockchain be used to run a single application. With Ethereum, the world surged forward into a space where a decentralized global computer could run distributed applications on a blockchain. This is why Ethereum is radical. It is a Turing complete blockchain. Slock.it was ready to take advantage of this opportunity by designing and building a standardized set of EDCCs on which DAOs of various types could be based. So, with the blessing of Ethereum’s founder, Vitalik Buterin, along with a myriad of elite crypto community leaders, Slock.it uploaded the 900 lines of standardized DAO code onto the Ethereum blockchain and gave it the placeholder name “The DAO.”
The Dream of The DAO
The DAO was crowdfunded, decentralized, and governed by the direct democratic consensus of its owners, the people who invested into it and bought DAO tokens. As such, many people were ideologically drawn to the governance model that The DAO achieved from interlacing smart contracts together to perform the functions of a business. The DAO was programmed by people to function without human prejudice or disposition. The visionaries behind The DAO saw the potential for such a system to create a new form of sociality, revolutionizing the way people interact. Their reasoning is quite simple: There are an infinite number of ways for a company to swindle you or be swindled. Nearly all of these ways, no matter how technological, involve an element of social engineering through which an actual person is somehow central to whatever is being exploited. Conversely, The DAO was an open and transparent company where no one could ever lie, cheat, or steal.
The DAO was designed to be a decentralized, peer-to-peer, crowdfunding platform. Many investors in The DAO were hoping that the fair, transparent, and democratic attributes intrinsic to The DAO’s operation as a business would somehow begin to permeate outwards into the fabric of the “real” world. The people who created The DAO were undoubtedly already familiar with the ramifications that Bitcoin’s blockchain had created. Ethereum’s blockchain incorporated the same functionalities, plus the added layer of EDCCs, helping to inflate the hype of investors. Computers that mined Ethereum not only authenticated transactions, like on Bitcoin’s blockchain, they also ran executable code. This extra functionality allowed The DAO’s EDCCs to be programmed with complex business logic.
EDCCs are the basic components of DAOs and the simplest form of decentralized automation. EDCCs are essentially tiny computer programs that perform multiparty computations on the Ethereum blockchain. They are mechanisms that allocate, according to a pre-programmed formula, digitized assets between two or more parties. They are unbiased programs with no agenda except the faithful execution of their code. People can trust the code because it cannot be altered or do anything that it isn’t programmed to do. Generally speaking, EDCCs are attractive to developers because they are analogous to what a computer itself is good for: performing calculation based tasks. A program is given an input and it will faithfully perform its duties to return an output. EDCCs work the same way, and because they live on the Ethereum blockchain, their records are decentralized for everyone to verify, again creating trust. This concept of EDCC generated trust is fundamental to understanding how The DAO was born and why the astronomical financial windfall that funded it was driven by ideological reasons.
The DAO Dream Deferred
As described in Christoph Jentzsch’s whitepaper Decentralized Autonomous Organization to Automate Governance, “A DAO is activated by deployment on the Ethereum blockchain. Once deployed, a DAO’s code requires Ether to engage in transactions on Ethereum.” At this point, Ethereum had established itself as the proud successor not only to Bitcoin’s idea of a cryptocurrency, but as the new vanguard for blockchain technology itself. Jentzsch estimated that around $5 million would be raised during the approximate month (April 30, 2016, to May 28, 2016) that The DAO was funded by Ether investments from around the world. The actual total was closer to $150 million, with people believing in the idea of The DAO so much that they invested in it without seeing it work first. During this initial creation phase, many proposals were circulated within the Ethereum ecosystem about what The DAO should do once it is activated after funding. As the merits of various suggestions were discussed, it quickly became evident to The DAO’s shareholders that the most community support had rallied behind a proposal to hire the very company that created The DAO, Slock.it. After initial funding was complete, and stakeholders had decided on a course of action, The DAO officially went live on the Ethereum blockchain on May 28, 2016.
The DAO shareholders, being on the precipice of a perceived economic revolution, decided to double down on the Ethereum blockchain technology that enabled its existence to begin with. They were going to reinvest in the infrastructure of their own technological ecosystem. The DAO would use its funds to hire Slock.it to design and manufacture a special type of digital lock that would help to establish the sharing economy. Moments of clarity were seldom during this exciting time and a few investors commented on potential conflicts of interest between Slock.it and The DAO. However, because DAO-developed technology, including quality assurance practices, was still so new and The DAO was already operating in a legal gray area, these concerns were drowned out by the excitement of the moment.
Voices of dissent did try to make their concerns heard. On June 10, 2016, Christian Reitwiessner posted a blog outlining an antipattern in Solidity, the programming language of EDCCs, which put the contracts at risk of attack. The Ethereum community had officially been put on notice. Slock.it founder and at-the-time CCO of the Ethereum Foundation, Stephan Tual, attempted to calm the ecosystem after a solution was believed to be found for what came to be called the “recursive call bug.” The “No DAO funds at risk” memo posted June 12, 2016, has since become infamous. The most prominent objection came only two days before the end of The DAO’s initial funding and activation. Cryptocurrency researchers Dino Mark, Vlad Zamfir, and Emin Gün Sirer drafted A call for a Temporary Moratorium on “The DAO.” This memo outlined several growing concerns that potential attack vectors could be exploited against The DAO because of the very way its EDCCs were designed. Their arguments were based in game theory and did not address actual bugs in The DAO’s EDCCs. Still, in spite of these high profile researchers calling for caution, no one did anything to halt what was slowly starting to feel like a runaway blockchain train. Patches and dummy hacks were explored. Other DAOs took action to secure their funds and test their systems. The deployed codebase supporting The DAO, however, could not be changed so quickly.
On June 17, 2016, the worst case scenario that had been building in the minds of concerned investors happened. A hacker used a similar exploit to the recursive call bug and began draining The DAO of funds via outmaneuvering another bug in the splitDAO function. An international team was roused and sprang into action, coordinating efforts online and eventually working in conjunction with several major cryptocurrency exchanges to essentially freeze the stolen funds in the EDCC where the hacker had hidden them. A countdown began to restore the stolen Ether before the hacker could access it again. The Ethereum ecosystem was suddenly faced with a $150 million existential crisis of confidence.
After the hack occurred, while the funds were still frozen, several options were proposed to fix what had gone wrong. Some people wanted direct and immediate counter-attacks, some people were in favor of “soft forking” the Ethereum blockchain through a series of complex code changes, but ultimately, Vitalik Buterin exercised leadership and touted the merits of a clean break – a severe “hard fork.” This hard fork is the catalyst that created the two different Ethereum cryptocurrencies: Ethereum (ETH) and Ethereum Classic (ETC).
The State of Ethereum
The DAO was Ethereum’s trial by fire. At the time, naysayers against the hard fork were adamant that if Ethereum decided to try to rewrite history, it would be doomed. A year later, however, Ether is valued at nearly 5 times its market high from before The DAO attack. The market has given back confidence to the ecosystem by seemingly recognizing The DAO incident as a positive. Just as blockchains create trust in data, the Ethereum ecosystem has created trust in itself by pragmatically solving a problem regarding hundreds of millions of dollars, using a never before issued code upgrade to negate a theft that had already happened, and return the stolen funds to their rightful owners. The market apparently views this in an extremely positive light. Triumphing over The DAO debacle has allowed Ethereum to grow significantly. Several milestones have already been reached and an ambitious roadmap for future growth has been planned out.
Since The DAO, Ethereum market capitalization has grown significantly. Its current valuation is less indicative of its triumph over The DAO hack and more representative of the space Ethereum is helping to grow, both as a technology and as a cryptocurrency. The creation of the ERC20 token and the Enterprise Ethereum Alliance are steps to not only increase the utility of the Ethereum blockchain, but to bring the advantages of its technology to mainstream industry. “The flippening,” another facet of measuring Ethereum’s growth since The DAO attack, describes the potential for Ethereum to one day surpass bitcoin. Several mainstream financial experts have already endorsed the idea. Adding to these growth metrics is the Ethereum Name Service (ENS), which simplifies the names of wallet keys, much like the Domain Name Service (DNS) of internet 2.0 converted long Uniform Resource Locators (URLs) into recognizable internet addresses.
“With the hindsight of a year, I think the Ethereum Foundation and community made the right decision to fork. It taught a valuable lesson to this industry: sometimes a fork is okay. In Ethereum’s case, there was a disagreement that couldn’t be settled socially… and the blockchain allowed it to be settled technically. Now, both sides have their own chain, and while it was really messy for a few weeks, both assets are worth more than Ethereum was prior to the fork. Forks shouldn’t be done lightly, or often, but they need to remain a possibility for when a disagreement between large factions simply can’t be settled.”
Pessimists continue to argue that Ethereum has devolved into an incubator for token offerings. This notion cannot be entirely dismissed. The outlandish valuations garnered by some companies with no more than a whitepaper and a website give many people reason to pause and cry “Ponzi scheme.” This point of view is extremely short sighted, however. One doesn’t have to be a technologist or a futurist to understand the power of disruptive technologies. Just look at the dotcom bubble that burst during the advent of the internet. Investors inflated the initial valuations of fledgling companies with ill-informed, speculative investments that were often based around little more than the word “Internet.” Today’s token offering boom is nearly identical, except the buzz word of the time has become “blockchain.”
Moreover, the technology behind The DAO was sound and performed the way it was supposed to. The attacker hacked The DAO in a game-theoretical sense and outmaneuvered the network. It was not Ethereum’s technology or the code itself that was hacked. It was only exploited by a still-unknown bad actor. Future EDCC standards based on sound quality assurance testing will marginalize the possibly of future exploits significantly, if not entirely.
Those with eyes to see the underlying value of the Ethereum platform perhaps glimpse more of the future than the pessimists, and they certainly remember more of the past. Rather than being an incubator for overblown token offerings, Ethereum is, like the Internet before it, an incubator for innovation. The ecosystem is so robust and the potential of the platform is so promising that even poorly defined use cases can launch their ideas in the space. Ethereum is a platform where any idea is accepted but only the best will be encouraged and rise to the top.
The promise that characterized the early days of Ethereum hasn’t been lost. In fact, it may have inadvertently been enhanced by The DAO. A stronger, more mature and robust ecosystem exists now. The DAO was a galvanizing obstacle that the ecosystem as a whole created and overcame together. The robust architecture and Turing completeness that sets Ethereum apart as a platform will continue to inspire developers and thought leaders across the world to build the innovative applications of tomorrow. When a future group of human beings sits down to discuss implementing a DAO as their chosen institution of governance, they will undoubtedly have greater wisdom and tools with which to create, and their DAO will, in some small measure, have The DAO to thank for that.