On Ethereum blockchain, in 2016, The DAO, or decentralized autonomous organization, was introduced. Due to a vulnerability in The DAO's code base, hackers took advantage of it after raising $150 million USD via token sales and stole all their ether (ETH). As part of recovery measures for stolen money, Ethereum network eventually had to hard fork in order to retrieve stolen ETH back; but not everyone agreed with this decision and consequently split into Ethereum Classic and Ethereum itself.
Origins Of The DAO
The DAO, founded in 2016, with the purpose of functioning like a venture capital firm under investor direction, raised $150 million USD in ether (ETH). As one of the first prominent projects on Ethereum blockchain (only operational for one year at that point), and one of several notable crowdfunding campaigns developed within three months after launch - however within just three months its foundation - Ethereum Blockchain - had been breached and $60 million worth was stolen, leading it to contentiously split to recover that embezzled money and give back to investors.
What Is A DAO?
Decentralized autonomous organizations, or DAOs, are cooperatives created via blockchain technology that are owned collectively by their members, with rules established and carried out via code. DAOs offer an alternative to central management structures by permitting investors and stakeholders to vote on decisions. Transactions of DAOs are visible on underlying blockchain protocols (typically Ethereum) for ease of monitoring by members. Although The DAO was the pioneering model, decentralized autonomous models continue to have significant ramifications on blockchain applications--particularly decentralized finance (DeFi) platforms--impact.
On April 30, 2016, The DAO made its first debut, beginning with an initial token sale and distribution for Ethereum currency by Ethereum protocol engineer Christoph Jentzsch. These DAO tokens served to facilitate voting on distribution of pooled funds among organizations, companies and technology seeking investment easier; stakeholder were intended to profit either with dividend payments or increases in token value as ownership stakes in profitable businesses were approved for funding proposals by The DAO.
The DAO Hack
The DAO was set to debut after its 28-day token sale, during which tokens would have been "locked up". At that point in history, The DAO was one of the biggest crowdfunding campaigns ever undertaken - it had raised over $150 million from over 11,000 investors by three weeks into token sale alone. Yet observers immediately voiced concerns over security holes within The DAO code; computer scientists in particular voiced these fears that could allow it to be emptied of funds via smart contracts flaws within its wallet smart contracts - while developers worked on solutions but hackers exploited these weaknesses by starting to steal funds directly from The DAO.
In response to this threat, members of the Ethereum community began discussing possible countermeasures against it. Not only would investors lose money if the DAO collapsed; its failure would impose considerable damage upon both its investors and the network itself - 14% of all ETH in circulation was contained by DAO contracts; with just one year under their belts, the Ethereum community and technology faced an existential risk.
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Benefits Of DAOs
An entity or group may decide to pursue the formation of a DAO structure for various reasons. Here are a few benefits associated with this management style:
- Decentralization. Decision-making within an organization no longer rests solely with an overshadowed central authority; decisions instead come from an inclusive collective of members who make their voice heard on organizational matters. Decentralized Autonomous Organizations can devolve authority among far more users as opposed to depending on decisions by an isolated single individual (the CEO) or small committee of people (Board of Directors).
- Participation. Voting at every issue directly and having their vote count directly may make members of an entity feel more engaged and powerful, increasing engagement within an entity and feeling connected with it. A DAO encourages token holders to vote or use tokens however they see fit, even though these individuals might not possess significant voting power themselves.
- Publicity. Voting at any level within an entity allows its members to feel more connected to it and empowered. DAOs encourage token holders to vote or burn tokens according to their individual desires, even though these individuals might not possess considerable voting power.
- Community. Decentralized autonomous organizations (DAO) promote global cooperation towards reaching an agreed-upon goal. Token Holders can communicate with other owners from anywhere around the globe as long as they have internet access.
What Are Some Criticisms Of The Dao?
IEEE Spectrum reported that the DAO was vulnerable to attack vectors and programming errors, making its management potentially challenging and risky. Furthermore, its uncharted corporate law and regulation environments made this venture even riskier; its organizational structure might cause unintended results; investors feared being held liable for collective actions taken by DAO participants.
Concerns were also expressed over whether or not the DAO securities; its operation also raised long-standing issues regarding real-world operations; it may even have had an adverse impact on Ethereum value as contractors and investors needed to convert ETH into fiat money for various uses within its ecosystem.
The Response To The DAO Hack
Vitalik Buterin initially proposed a soft fork of Ethereum network by including code that would effectively blacklist an attacker and prevent them from moving the stolen funds, yet soon afterwards someone who claimed they were the attacker wrote an open letter asserting their money had been acquired legally and per smart contract guidelines; also they threatened legal action if anyone attempted to take control of ether.
Tensions quickly increased when, via a middleman on The DAO Slack channel, an apparent attacker or someone purporting to be them stated their intent of trying to prevent any soft fork by paying Ethereum miners who disobeyed with an offer that included rewards of 1 Million Ether and 100 Bitcoin. This event raised doubts not only regarding technical aspects but also moral/philosophical principles that underpinned Ethereum as well as leadership of this project as a whole.
As part of their efforts towards soft forking, Ethereum community discovered a vulnerability in their update's code that left it susceptible to attacks. After much deliberation and discussion, hard forking became the second solution as investors wanted withdrawal access and this effectively reversed history so as to return Ethereum back before an attack occurred - sparking considerable outrage as blockchain is meant to remain impervious and resistant against changes made through smart contracts or rollback. This caused further contention as blockchains are meant to remain immutable by design.
At first it was uncertain whether the fork would take effect; even though Ethereum developers proposed making changes on their own. Node operators, exchanges, and miners all needed to agree that their software had to update; eventually the hard fork took place at block 192,000 on July 20, 2016, after much contentious discussion in open forums.
The DAO Hack Remedy Forks Ethereum
Although most stakeholders accepted and implemented this change, not everyone supported its implementation. As a result of its hard fork implementation, two competing, now separate Ethereum blockchains were formed; those opposed were most drawn towards Ethereum Classic (ETC), now known as ETC; those in favor were most drawn toward its successor: current-day Ethereum which implemented said fork, altering both their history as well as that of their industry altogether.
Even though The DAO investors received back their investments, the attacker did not suffer financially; after months had passed since their attack on Ethereum Classic chain they still owned tokens valued at approximately $8 Million of ETH in their possession.
In January 2016's DAO hack and subsequent hard fork, which raised significant concerns for Ethereum technology as it developed further, Vitalik Buterin, Etheruem developers and international community were put under great strain; yet in hindsight their actions proved instrumental to keeping blockchain alive during its initial formative stages and the subsequent rise to prominence that has resulted in Ethereum becoming such a key element of global cryptocurrency, blockchain technology and decentralized finance since that eventful event occurred.
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Conclusion
Decentralized autonomous organizations (DAO) are entities created from the bottom up without an authoritative central figure or organization governing it. Members own tokens for voting purposes within their DAO; its goal is to enhance many businesses' traditional management structures rather than depend upon one person or a small group deciding the course of their entity's development.
