Is The DAO really DOA?

Monday 20 June 2016

A hack has drained millions of ETH from The DAO, destroying its value. Is the Next Big Thing already over?

The DAO launched to immense fanfare, collecting over $100 million in ETH - one in every seven Ethereum in existence. It is an intriguing and exciting project. Decentralised Autonomous Organisations are designed to enable shareholders to vote collectively upon proposals, removing centralised points of failure in the decision-making process. It’s like a company run entirely by its owners, entirely for their benefit.

And yet there are problems with idea - not least that the so-called wisdom of crowds is not that wise. BitShares’ Dan Larimer explained some of the potential issues in this post; BitScan has offered its own opinions too. 

What no one seems to have foreseen is what happened on Friday. This post appeared on Steemit: ‘There is an attack going on against “theDAO”. A recently discovered recursive-split attack can be used to to initiate ether-sends before the contracts burns them. Buy this the contract will hand over ETH that you shouldn't have control over.’

The value of DAO plummeted, rapidly losing two-thirds of its market cap, with Ethereum also being dumped. DAO started at 0.00025 BTC on Poloniex; within 90 minutes it hit 0.00008. Ethereum lost 30% of its market cap in the same period. Deposits and withdrawals were disabled, but the damage was done.


Critics will say this was an accident waiting to happen (and they would be right)

In terms of impact, it’s too early to say - but there are three obvious casualties here.

  1. The DAO. At the time of writing, it’s not clear how bad the damage will be and whether it has been possible to stem the haemorrhage of ETH from The DAO. (You can check here: The DAO’s main account started with around 12 million ETH.) Whatever, The DAO is now insolvent. If it has enough ETH left to survive, it will have suffered a massive loss in confidence - and for good reason. It will likely never recover fully.
  2. Smart contracts. Aside from the crash in price, this episode will likely have a knock-on effect for confidence in Ethereum, and smart contracts more generally (Lisk also crashed on the news, despite having nothing directly to do with it). There will be questions about how safe decentralised applications really are and how well designed and coded Ethereum and The DAO are. Expect misunderstandings to abound. There is also the question of millions of stolen ETH overhanging the market. The community has been talking about a fork to rollback the blockchain - which would 'solve' the problem but be potentially disastrous for future confidence in a supposedly decentralised and immutable blockchain.
  3. Crypto in general. We were emerging from our Wild West phase and gaining mainstream respect and attention. This won’t change that, but it will turn a spotlight back on some of the shadier aspects of cryptocurrency. Inevitably, some of those who hear about this will take it as a reason to back off or throw mud.

Crypto moves fast and tomorrow will be business as usual. Just for a moment, though, it felt like we were back in 2014. There’s still a way to go, folks.

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