Understanding a Revolutionary and Flawed Grand Experiment in Blockchain: The DAO Attack
17 Pages Posted: 11 Aug 2017 Last revised: 19 Jul 2019
Date Written: November 26, 2017
In spring 2016, The Distributed Autonomous Organization (The DAO) was created on Ethereum. As with Bitcoin, Ethereum uses a P2P network, where distributed ledgers are implemented as daisy-chained blocks of data. Ethereum’s native cryptocurrency, Ethers, are spent to execute pieces of code called smart contracts. Investors paid their Ethers for The DAO to operate, and received the opportunity to vote on and become investors in venture projects proposed by Ethereum-based startups. Transactions and settlements between investors and startups executed autonomously. The DAO experiment failed shortly after inception as an anonymous hacker stole over $50M USD worth of Ethers out of $168M invested. The Ethereum community voted to return (or fork) the state of the network to one prior to the hack, returning Ethers back to investors and shuttering The DAO. However, this action arguably represented a bailout—ironically, Bitcoin was conceived as a reaction against the 2008 bailout of US banks—and violated the ledger immutability and “code is law” ethos of the blockchain community.
Keywords: Blockchain, digital currency, Bitcoin, Ethereum, decentralized autonomous organization
JEL Classification: M15, L86
Suggested Citation: Suggested Citation