A weak point of a smart contract in a private DAO fund first through the leak of cryptocurrency worth tens of millions of dollars (as of today billions) and then through the hard fork of the second largest blockchain network Ethereum. You can find tons of articles investigating these events, including a wiki page. Even if this is a question of conclusions, let us recall what happened five years ago.
The DAO was a startup that ran an investment fund in Ether (ETH) and operated as a smart contract on Ethereum. The DAO is a proper name that the founders chose to refer to a general concept of a decentralized autonomous organization or DAO. The fund claimed from the start that it was operating under the terms of its smart contract, which is nothing more than code of a program deployed on the blockchain. Their website did not contain any legal terms, but rather a notice proclaiming the supremacy of machine code over any human readable text explaining that code.
However, the DAO became notorious for a security flaw in their program that allowed an unknown user to siphon off a third of their money. The loss of 3.6 million ethers was around $ 60 million then or around $ 7.3 billion today. Given the negative impact and high public pressure (the fund had more than ten thousand investors) Ethereum was 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 never happened. Thus, the users of the fund could demand their investments back. There were objections to the hard fork, and so those who objected continued to use the original Ethereum blockchain and named it Ethereum Classic (ETC). It works to this day using the real blockchain where the unknown owns the funds that have drained away.
One of the big debates centered around the question: Was it a theft at all? The US Securities and Exchange Commission investigated the case and published its report. Although they did not ask this as the main question, their report included the words “steal” and “attacker” as if by default they were qualified. To date, there has been no criminal investigation, or at least the authorities have failed to properly deal with it.
Interestingly, the stranger (let’s call him more neutral, not the “attacker”) posted an anonymous letter immediately following this behavior stating that he did not believe it was wrongdoing or any kind of violation of any law or regulation this infamous statement on the DAO website about the proliferation of smart contracts. In fact, many commentators supported the conclusion that the unknowns did nothing wrong, as they were exploiting the legitimate property of the code that objectively existed and was known even to the developers, some research further showed.
Regardless of who did this, the case still has many unanswered questions that are far broader than it may seem and far more difficult, if not speculative. These are the questions philosophers, governments, and blockchain communities need to ask themselves in order to move forward.
The case showed the world how vulnerable smart contracts can be, which makes the whole concept of “Code is Law” questionable (American legal scholar Larry Lessig developed this concept much earlier than the invention of the blockchain). It also showed how retroactivity can occur in the blockchain when the majority supports it to remain immutable, despite the widespread feature of the blockchain.
What good is it if alternative branches in the story are possible? Do all the advantages of the technology multiply by zero? What if this is not a blemish but an advantage that we should learn to work properly? Let’s go further. What if we encountered a new phenomenon in law and governance? Should parallels be drawn in order to find answers?
- Parallel to governance and law. Statutory laws passed democratically (e.g. by elected legislators) reflect the consensus of the majority. Usually the minority has to obey. You can’t break the law. If code is law and the blockchain is a “law” in which that law is written and executed in the form of a smart contract, what is a hard fork? Is it disobedience Unlikely. Blockchain retroactivity and hard forks are always a possible option. The hard fork is (from the point of view of the code) a legitimate way for the minority to protect their interests and to split off from the majority if the ledger is changed or other undesirable changes occur. Hard forks and retroactivity are not violations or malicious acts – they are normal with this technology.
- At the same time out of business. Ethereum itself can be thought of as a kind of business, i.e. miners create and validate blocks and generate income. If so, how is it possible for the business to fall apart? A department cannot be separated from the company simply by the will of such a department. However, this can be based on the decision of the shareholders or the authorities (e.g. a court). A distinction is usually made in companies between governance and production functions, e.g. B. Shareholders and a factory. So who are miners: the authorities or the producers?
- Parallel to criminal law and justice. Opinions differ as to whether the stranger has committed a crime or legitimately taken advantage of an undeclared opportunity in the Code. The DAO never introduced terms and conditions in human spoken language, stating that the smart contract defines the terms. So there is no official contract in the traditional sense, so we can define a violation. Any human word describing this code would be someone’s interpretation. Those who do not believe it was a crime stress that “no one has reported trespassing.” The poor design of the smart contract failed to protect the fund. The users could act at their own discretion, there were no legal prohibitions. People are not punished for drinking from a stream when there is no sign of private property. Hence, contractual and private laws did not protect it. Interestingly, the SEC used the words “attacker” and “steal” in its report, but no criminal investigation was found in other government reports.
- Parallel to a mob law. If it was a crime, then what was the hard fork? Was it a mob law? “Stealing back” is not a legitimate route to justice and property return. In a civilized society, it is also classified as a crime. This is exactly what the police, public prosecutors, courts and marshals are set up for. Was it a phenomenon of the new blockchain justice based on a certain form of digital democracy?
- Parallel to anarchy. If it wasn’t a crime or an act of justice, what then? Perhaps it was a pure form of market competition in which there are no authorities or state power. Then there is a word that describes this and that is anarchy, which can be defined as “the state of a society which constitutes itself freely without any authority or governing body,” or in this case cryptoanarchy.
All of these questions need further investigation. This will ensure the development of better public policy regarding blockchain technology and a better strategy for future DAOs.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should conduct their own research in making their decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Oleksii Konashevych is a Ph.D. Scholarship holder of the EU government-funded Joint International Doctoral Degree in Law, Science and Technology. Oleksii worked with RMIT University’s Blockchain Innovation Hub and researched the use of blockchain technology for e-governance and e-democracy. He also works on real estate tokenization, digital IDs, public registers and e-voting. Oleksii co-authored a law on e-petitions in Ukraine, worked with the country’s presidential administration, and headed the nongovernmental e-Democracy Group from 2014 to 2016. In 2019, Oleksii was involved in drafting a bill on combating money laundering and tax issues for crypto assets in Ukraine.