The DAO - Divine Idea Ruined By A Human ?

The Blockchain is in the news all over be it print media, electronic media, tech companies or the banks’ boardrooms, the senates, the parliaments and in the White House too. For all those who are not aware of Blockchain: In short, Blockchain is a tamper-proof peer-to-peer distributed ledger of all the transactions. Blockchain came into existence in 2009 with Bitcoin at its center stage. Over the last few years, Blockchain has rather taken the center stage and has convinced almost every major financial & technology company, and country, across the globe to research on it for its implementation across a wide array of platforms. Ethereum is one of the most talked about blockchain platform after Bitcoin.The difference between Bitcoin and Ethereum is that the latter is more application friendly and smart contracts can be easily coded over Ethereum vis-a-vis Bitcoin. The divine idea, a code based organization without human intervention, The DAO, was built using Ethereum and implemented as a smart contract on Ethereum’s Blockchain.

The DAO or Decentralized Autonomous Organization is a code based and leaderless investment vehicle that crowd-sourced the largest equity funding worth almost US$150 Million. The purpose of the vehicle was to fund different projects that approach it and the funding is entirely based on the voting of investors of the DAO. From the DAO website: The DAO is borne from immutable, unstoppable, and irrefutable computer code, operated entirely by its members, and fueled using ETH (ether, a currency of Ethereum) which creates DAO tokens. Just after the completion of funding, few security experts asked for a moratorium on DAO citing fundamental flaws in the code and the mechanism of voting itself. Core developers of DAO instead went ahead and then in a few weeks, it was ‘hacked’ by an unknown attacker by using DAO’s code, just the way it was supposed to function. DAO was the face of the widely popular Ethereum. Ethereum was perceived to be more robust and advanced version of Bitcoin and was giving tough competition to Bitcoin off lately. However, the recent loopholes and vulnerability in its code is somewhat giving sense to the working groups and advocates of the blockchain, that it's too early to conclude on the immutability of Blockchain and therefore, moratorium on public funding of blockchain based projects is necessitated.  

While the definition/properties of Blockchain makes it an ideal adoption in the real world, the certainty over exploitable loopholes is very difficult to establish. Recent sophisticated attack on DAO and ‘theft’ of approx USD 50 mn equivalent worth of ether is a prime example of the problems associated with the technical code. While the code itself is not a problem, it is the descriptions (for eg: immutable, unstoppable, and irrefutable code) of the contracts built out of code. The funny thing is that the developers of DAO used the same splitting function to withdraw the rest of the funds from DAO which the attacker used. Executing the inbuilt functions of code doesn’t make the recent attack a theft or a hack. While from the legal standpoint, the law won’t agree with the intent of the attacker and will call the attack as theft, but the technical code/developers of the smart contract don’t have any right to call it as ‘theft’ especially when there is no human intervention at all. It is very important to note that investors should put their money after understanding the code, and not to go just by the definition/ marketing material, as the technical code prevails all other things in case of a smart contract, as it happened in case of DAO.

The core developers of DAO and Ethereum are working relentlessly to bring out a plausible solution to DAO mess. There are only three possible ways: (a) do nothing and let the attacker use the funds (b) a soft fork, which means to freeze the attacker’s account and so the funds (c) a hard fork which essentially means to roll back everything including existence of The DAO. The soft fork is already rejected due to a new vulnerability associated with it. Now the option is to do nothing or a hard fork. The first option is bad from the investors’ point of view, not just for DAO, but for the future blockchain projects also. Hard fork will allow returning the funds to the original investors, but it jeopardizes the entire existence of decentralized system and the ideology of it. It has been ascertained by now that Blockchain has immense potential to positively disrupt the traditional means of doing transactions, but an attack like DAO and the possible solutions thereof certainly calls for a cautious approach to the entire ecosystem.   

The entire episode of The DAO, which is not yet over, teaches us that though humans built the code, a code on its own cannot drive humans.

Disclaimer: The author owns small holdings of Bitcoin and The DAO.