The year 2016 saw The DAO attracting interest for being one of the pioneering autonomous organisations (DAOs). However, a major breach led to a considerable financial loss in Ether, emphasising the necessity of being aware of the origins, purposes, and potential consequences of DAOs.
Let’s explore some facts from the 2016 DAO attack and its significant impact on traders’ wallets.
Defining DAO
A DAO is a blockchain-based cooperative that operates through smart contracts, enabling collective decision-making and resource allocation based on consensus. DAOs, like "The DAO," are built on ETH-like blockchain networks, facilitating value exchange and supporting smart contract execution.
The process begins with a group of individuals creating smart contracts, which run the organisation autonomously without human intervention. An initial funding period allows people to purchase tokens representing ownership in the DAO.
Once the funding period is over, members can submit proposals for how to spend the funds, which are then voted on by the token holders, giving them a say in the organisation's decision-making process. Ethereum, the second most popular cryptocurrency after BTC, currently performs over a million daily transactions.
How It Started
The DAO was created on the ETH platform to provide a decentralised version of Airbnb through its "smart locks" technology. It received over $100 million in funding from over 11,000 members during its 28-day funding window in April 2016. However, the DAO faced a major setback due to vulnerabilities in its code, which were not addressed until after the crowd sale.
In June 2016, a hacker drained funds worth approximately $70 million (3.6 million ETH) from the platform. This attack was possible due to a loophole discovered by the attacker that allowed them to transfer ETH from The DAO into a "child DAO," causing the price of ETH to drop from over $20 to under $13 overnight.
Despite attempts to split The DAO, concerned parties could not gather enough votes quickly. Lawyers raised concerns about The DAO's compliance with securities laws across multiple countries and potential liabilities for the creators and token holders of The DAO.
A new child DAO was created with the same structure, limitations, and vulnerabilities as its parent, but the funds in this child DAO cannot be accessed for 28 days.
Forbes journalist Laura Shin reported that former TenX co-founder Toby Henish was involved in the hack. This was discovered through blockchain analytics company Chainalysis. Henish sent funds to four trading platforms and exchanged them for privacy-oriented crypto Grin, and an employee found the IP address and login credentials linked to him.
Henish used the nickname 'tobyai' across multiple social networks and had connections to Slock.it, the creator of the DAO project. Henish denied any involvement in the hack and refuted Forbes' accusations.
Consequences And Lessons
The Ethereum community faced a moral and philosophical dilemma following the DAO hack, which led to a proposal for a soft fork to blacklist the attacker and prevent future attacks.
However, the attacker claimed their actions were legal and threatened legal action against anyone trying to seize the funds. This led to a division within the community, and the attacker offered a collective reward to bribe ETH miners not to comply with the proposed soft fork.
In response, the community pursued a hard fork to roll back the Ethereum network's history before the attack and reallocate the DAO's funds to a different smart contract. This decision was controversial, with some arguing it violated core principles of decentralisation and immutability. However, proponents believed it demonstrated the community's ability to adapt and address complex issues swiftly.
On 20th July 2016, the hard fork was implemented, resulting in a split within the Ethereum community. Most stakeholders adopted the new version of Ethereum, while a minority chose to continue using the original Ethereum Classic (ETC).
The DAO hack highlighted the importance of security and regulation in the decentralised finance space, exposing vulnerabilities of smart contracts and raising concerns about regulatory compliance in the crowdfunding and token offering space.
Final Takeaways
The DAO's demise sparked innovation in the blockchain industry, with decentralised autonomous organisations promoting efficient governance systems.
Smart contract auditing and validation services have improved security, preventing vulnerabilities and protecting users' assets. ETH has become a leading platform for dApps and DeFi protocols. Lessons from DAO have raised regulatory compliance awareness in the blockchain space.
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