A $50M Hack Tests the Values of Communities Run by Code

By July 12, 2016Ethereum

June 17, 2016 was an important day for the small but dedicated community that has formed around the nascent decentralized technology known as Ethereum, and for the blockchain community more generally. It was the day in which it became apparent (although not to everyone) that social organizations cannot be ruled only and exclusively by code.

The story begins on April 30, 2016 with the launch of TheDAO . TheDAO, which stands for Decentralized Autonomous Organization, is a leaderless collective of investors who vote on what to fund.

TheDAO runs on the Ethereum blockchain, a distributed ledger inspired by the Bitcoin blockchain. Ethereum has its own digital currency, known as Ether. It also features an internal Turing-complete scripting language, enabling people to deploy decentralized applications—also called smart contracts—on top of its blockchain.

In other words, TheDAO is a piece of code, or smart contract, running on the Ethereum blockchain. Anyone who invested Ether into the fund received a particular number of DAO tokens, which enable them to vote on the projects that TheDAO will fund. By the end of May, TheDAO had raised more than $150 million worth of Ether from investors.

On June 17, just a few weeks after its launch, TheDAO was hacked. The attacker exploited a bug in the code, draining it of 3.6 million Ether, worth over $50 million of at the time of the attack.

In the traditional financial system, financial intermediaries have the power to unilaterally revert illegitimate transactions. On a blockchain network, however, after a transaction has been made, it can (theoretically) not be reversed—unless all active nodes of the network agree otherwise.

Given the extent of the attack, some influential members of the Ethereum community, including its inventor Vitalik Buterin, suggested two possible ways of resolving the issue, which both require the cooperation of the Ethereum community: updating […]

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