A smart contract vulnerability in a private DAO fund was caused first by a tens of millions of dollars’ worth of crypto leak (to date, billions of dollars) and then by a hard fork of the blockchain network, the second largest Ethereum. You can find numerous articles investigating these events, including a wiki page. Although the goal here is to finish, let’s remember what happened 5 years ago.
DAO is a startup that operates an investment fund in Ether (ETH) and acts as a smart contract on Ethereum. The DAO is the proper name the founders chose to refer to the general concept of a decentralized autonomous organization or DAO. The foundation has stated from the start that it is working under the terms of their smart contract, which is nothing more than the code of a program deployed on the blockchain. Your website has no legal terms, but has a notice that proclaims the predominance of machine code over any human readable text for the interpretation of that code.
Even so, The DAO became famous for a bug in their program that allowed an unknown user to spend a third of their money. The loss of 3.6 million ethers was worth about $ 60 million then, or about $ 7.3 billion today. Due to the negative impact and high public pressure (the fund has more than ten thousand investors) that Ethereum has been exposed to, the network leaders decided to introduce a retrospective hard fork on their blockchain.
As a result of the fork, funds in The DAO have been moved to a recovery address as if the leak had never occurred. This enables the users of the fund to reclaim their investment. There are those who oppose the hard fork and so the opponents continue to use the original Ethereum blockchain and call it Ethereum Classic (ETC). It still works to this day with a real blockchain on which Unknown has exhausted funds.
One of the big debates centered around the question: Was it a theft? The US Securities and Exchange Commission investigated the incident and published its report. Although they did not make it the main question, their report included the words “steal” and “attacker” as if it was a standard candidate. To date there has been no criminal investigation, at least the authorities have not dealt with it properly.
Interestingly, shortly after this behavior, strangers (let’s call them more neutral, not an “attacker”) posted an anonymous letter saying they did not believe it was wrongdoing or any kind of violation of any law or condition on the country DAO site on the popularity of smart contracts. In fact, many commenters have supported the conclusion that Unknown did nothing wrong, as they exploit a legitimate function of the code, exist objectively, and are even known to developers, as surveys show.
Regardless of who did it, the case still has a lot of unanswered questions that are much broader than thought and much more difficult, if not more speculative. These questions need to be addressed by philosophers, governments, and the blockchain community to move forward.
The incident showed the world how vulnerable smart contracts can be, challenging the entire concept of “Code is Law” (American legal scholar Larry Lessig coined the concept. This concept was much earlier than the invention of the blockchain). It also shows how retrospective activity can occur on the blockchain if the majority prefer it, although the widely referenced characteristic of the blockchain remains unchanged.
What is its purpose when historically alternative fork sets are possible? Are all values of the technology multiplied by zero? What if this is not a disadvantage but an advantage that we should learn to do the right thing? Let’s go further: what if we encountered a new phenomenon in law and governance? Should draw in parallel to find the answer?
All of these questions remain unexplored. This will ensure the development of better public policy regarding blockchain technology and a better strategy for future DAOs.
Oleksii Konashevych is a doctorate. Member of the International Joint Doctoral Degree Program in Law, Science and Technology, which is funded by the EU government. Oleksii has partnered with RMIT University’s Blockchain Innovation Center to explore the use of blockchain technology for e-governance and e-democracy. He also worked on encryption of real estate titles, digital IDs, public registrations and electronic voting. Oleksii co-authored the legislation on e-petitions in Ukraine, worked with the country’s presidential administration, and headed the NGO e-Democracy Group from 2014 to 2016. In 2019, Oleksii participated in the drafting of a bill to combat money laundering and tax problems with cryptocurrency investments in Ukraine.
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