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The DAO: The Greatest Crypto Tale Ever Told

Jenny Rudd tells the story of how a German theoretical physicist called Christoph Jentzsch set up a US$150 million investment fund and how it changed the course of Ethereum.

21 November 2022

In November 2015, Christoph Jentzsch put a kettle on stage and showed the assembled developers how he could use his phone to make a transaction on the Ethereum network which unlocked a smart lock on the kettle, turning it on. Steam filled the air. The crowd was impressed.

Jentzsch was the co-founder at Slock.it, which created Slocks (smart locks) which would be locked and unlocked by making transactions on Ethereum. You could Slock your house, car or bike and rent them out. All the profit would go to the owners of the asset, and not to a centralised body acting as the marketplace, like Airbnb.

A decentralised investment fund

The Slock.it team crowdfunded to raise capital for their start-up. As superfans of decentralisation, they built the first ever decentralised investment fund, so that Slock.it and the many other start-ups cropping up in the ecosystem could apply for funding. All the financial transactions and rules were encoded on the Ethereum blockchain and enacted by smart contracts. It was a decentralised autonomous organisation: the DAO.

Investors would ether the smart contract address to buy DAO tokens. The tokens would allow the investor to vote on projects and start-ups. Successful applicants would have funds released to them via the smart contracts. And the investors would benefit from the rewards if the projects returned a profit. The DAO itself would just store the ether and make transfers.

The Slock.it team thought that, all going well, the fund would raise a few million dollars. But on its release in 2016, it went mental. Millions of dollars were pouring into the DAO’s smart contract every day. When the crowdsale ended, the DAO had US$150 million worth of ether in its smart contract: 14 per cent of all ether in existence.

An attack – and an ethical dilemma

Then things went horribly wrong. A few months after the event day, a weakness was found in the DAO code that was exploited, allowing the attacker to drain ether from the main DAO into their own ‘child’ DAO account.

The core Ethereum team was hastily assembled alongside the DAO’s team to solve the problem, and the community was consulted on a response to the attack. The attacker couldn’t withdraw funds from the child DAO for 28 days, so the team had that time to decide.

The response of the community was polarised. There were the code-is-law group of hardcore decentralists. Their view was that the attacker hadn’t done anything wrong. They had acted on the code, and that any attempt to interfere or change the code in any way undermined the DAO’s premise of decentralisation and immutability of smart contracts. It would go against everything blockchain stood for. It would mean that Ethereum was not censorship resistant, the smart contracts would not be immutable as had been claimed, and that stepping in to give the money back went against the core values of Ethereum.

Then there were others who felt the ether thief shouldn’t get away with it and that the investors should get their money back. Suggestions were varied, like a soft fork where miners wouldn’t process transactions from the DAO, or a replica attack where funds would be drained from the DAO by ethical hackers, giving the investors’ funds back. These people were concerned that Ethereum might fail if the DAO failed, and that it felt wrong to allow the attacker to steal everyone’s money.

There was no easy solution.

Crypto is so much more than just headlines about scams

The attacker suddenly stopped after they had drained about a third of the ether in the fund. No-one’s sure why. After consultation with the network, a group of ethical hackers decided to return the ether to its rightful owners. An online poll was held, and although only holders of 5 per cent of total ether voted, 80 per cent wanted a hard fork. On 20 July 2016, a new Ethereum blockchain started, and all the DAO funds were restored to their owners.

A few hours later, developers were amazed to see the old blockchain, after lying dormant, had blocks added to it. Miners were using their own money and time, with no rewards, to keep mining. The hardcore decentralists were determined to prove that the machine was unstoppable. The coins from this ‘old’ blockchain were renamed Ethereum Classic, and its value today is around $15.

This story should start some great conversations about centralisation versus decentralisation and the benefits of both. What it also highlights to me is that there is such a disparity between the image of cryptocurrency that’s reported in the press, with words like scam, Ponzi scheme and money laundering in headlines, and the reality of people working in it. Jentzsch, his brother and friends were motivated to make things fairer in the investment industry by trying something new. I’m with Jentzsch.

Jenny Rudd is an investor and analyst who is passionate about using business to create equality for women.aimsure.co.nz

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