A lot of debate is going on today around the Decentralized Autonomous Organization ("the DAO"). Some pessimists consider the situation around the DAO to be the proof that blockchain is a passing fad and will never be fit for use in financial markets. We believe that there are no fundamental problems with blockchain per se, that the mistakes were not really specific to blockchain and that the industry will use the whole experience to learn how to use blockchain properly.
The DAO was a self-governing investment community managing its assets solely through open and (supposedly) immutable rules embodied in software. It runs on top of Ethereum , a public blockchain platform — which recently split into two nearly identical versions — that aims to provide a programmable transaction functionality superior to bitcoin’s. The key proclaimed benefit of the DAO was its reliance on smart contract technology for deal settlement, supposedly making it immune to human error and malice. Alas, relying on software did not protect the investments made into the DAO, as on June 17 a mysterious actor managed to find a loophole in the DAO’s contracts and to siphon substantial amounts in ether, the cryptocurrency of Ethereum, out of the system.
This story is obviously pivotal for the future of all blockchain-based enterprises. Not surprisingly, most observers are extremely worried. There are some who say that the debacle demonstrates the blockchain as a whole to be a no-go. Others, while more optimistic, state those blockchain-based systems cannot deliver on their key promise — a completely decentralized environment where transaction execution and contract enforcement happen without involvement of any supreme authority. They say that we will always need human institutions outside the "system boundary" of blockchain to protect the interests of transacting parties. As Matt Levine wrote in his Bloomberg […]
