Takeaways: 5 years after The DAO crisis and Ethereum hard fork

Takeaways: 5 years after The DAO crisis and Ethereum hard fork

A vulnerability of a smart contract in one private DAO fund firstly to the leak of cryptocurrency worth tens of millions of dollars (billions as of today) and then to the hard fork of the second-largest blockchain network Ethereum. You can find tons of articles investigating those events, including a wiki page. Even though the purpose here is conclusions, let us refresh in memory 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 founders decided to take as a reference to a general concept of a decentralized autonomous organization, or DAO. The fund claimed from the very beginning that they operate under the terms and conditions of their smart contract that was nothing more than a code of a program deployed on the blockchain. Their website contained no legal terms and conditions, but a notice proclaiming the supremacy of the machine code over any human-readable text to explain this code.

Though, The DAO became infamous due to a vulnerability in their program that allowed an unknown user to drain one-third of their funds. The loss of 3.6 million Ether valued at the time at around $60 million, or around $7.3 billion as of today. In view of negative implications and high public pressure (the fund had more than ten thousand investors) faced by Ethereum, the network leaders decided to introduce a retroactive hard fork of their blockchain.

In the result of the fork, the funds in The DAO were moved to a recovery address, as if the leakage had never happened. Thus, the fund’s users could claim their investments back. There were objectors of the hard fork, and so those who objected continued to use the original Ethereum blockchain, calling it Ethereum Classic (ETC). It operates till these days utilizing the genuine chain of blocks where the Unknown owns the drained funds.

One of the major debates was around the question: Was it a theft at all? The United States Securities and Exchange Commission (SEC) investigated the case and published their report. Even though they did not put it as the main question, their report contained the words “steal” and “attacker” as if it was qualified by default. To this day, there has been no criminal investigation, or at least the authorities failed to address it properly.

Interestingly enough, right after this conduct, the Unknown (let us call them more neutral, not the “attacker”) published an anonymous letter stating that they did not believe it was a wrongdoing or any kind of violating either of law or terms, referencing that infamous statement on The DAO’s site of the prevalence of smart contract. Many commentators in fact supported the conclusion that the Unknown did nothing wrong, as they exploited the legitimate feature of the code, which objectively existed and was even known to the developers as some investigations further showed.

Takeaways

Regardless of who did that, the case still has a lot of unanswered questions that are much broader than it may seem, and much harder, if not speculative. These questions must be addressed by philosophers, governments and blockchain communities in order to move forward.

The case has shown the world how smart contracts might be vulnerable, which makes the whole concept of “Code is Law” questionable (American legal scholar Larry Lessig came up with this concept much earlier than the invention of blockchain). It also showed how retroactivity in blockchain can occur when the majority supports it, despite the broadly referenced feature of blockchain, to remain immutable.

What is the point of it, if alternative forks in history are possible? Do all the merits of technology multiply by zero? What if this is not a flaw but an advantage that we should learn how to work properly? Let us go even further, what if we encountered a new phenomenon in law and governance? Should parallels be drawn to find answers?

Parallel from governance and law . Statute laws adopted in a democratic way (e.g., by elected legislators) reflect the consensus of the majority. Normally, the minority must obey. They cannot violate the law. If code is law, and the blockchain is a “statute” where this law is written and executed in the form of a smart contract, then what is a hard fork? Is it disobedience? Unlikely. Blockchain retroactivity and hard forks are always a possible option. The hard fork is a legitimate way (from the perspective of the code) for the minority to protect their interest and split away from the majority if the ledger is altered or other unwanted changes occur. Hard forks and retroactivity are not breaches or malicious acts — they are normal in this technology.

. Statute laws adopted in a democratic way (e.g., by elected legislators) reflect the consensus of the majority. Normally, the minority must obey. They cannot violate the law. If code is law, and the blockchain is a “statute” where this law is written and executed in the form of a smart contract, then what is a hard fork? Is it disobedience? Unlikely. Blockchain retroactivity and hard forks are always a possible option. The hard fork is a legitimate way (from the perspective of the code) for the minority to protect their interest and split away from the majority if the ledger is altered or other unwanted changes occur. Hard forks and retroactivity are not breaches or malicious acts — they are normal in this technology. Parallel from business . Ethereum itself can be thought of as a kind of business, i.e., miners create and validate blocks and get revenue. If so, how is it possible that the business falls apart? A department cannot become separate from the company just by the will of such a department. However, this can happen based on the decision of the shareholders or the authorities (for example, a court). Normally in companies, functions of governance and production are distinguished, e.g., shareholders and a factory. Thus, who are miners: the authorities or the producers?

. Ethereum itself can be thought of as a kind of business, i.e., miners create and validate blocks and get revenue. If so, how is it possible that the business falls apart? A department cannot become separate from the company just by the will of such a department. However, this can happen based on the decision of the shareholders or the authorities (for example, a court). Normally in companies, functions of governance and production are distinguished, e.g., shareholders and a factory. Thus, who are miners: the authorities or the producers? Parallel from criminal law and justice . There are opposite opinions on whether the Unknown committed a crime or legitimately exploited an undeclared possibility of the code. The DAO has never introduced terms and conditions in human, spoken language and declared that the smart contract defines the terms. Thus, there is no official contract in a traditional sense, so we can define a breach. Any human words to describe that code would be someone’s interpretation. Those who do not think that it was a crime emphasize that “nobody put a notice of trespass.” The poor design of the smart contract could not protect the fund. Users were free to act at their discretion, while there were no legal prohibitions. People are not punished for drinking from a creek if 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 their report, but no criminal investigation was found through further government reports.

. There are opposite opinions on whether the Unknown committed a crime or legitimately exploited an undeclared possibility of the code. The DAO has never introduced terms and conditions in human, spoken language and declared that the smart contract defines the terms. Thus, there is no official contract in a traditional sense, so we can define a breach. Any human words to describe that code would be someone’s interpretation. Those who do not think that it was a crime emphasize that “nobody put a notice of trespass.” The poor design of the smart contract could not protect the fund. Users were free to act at their discretion, while there were no legal prohibitions. People are not punished for drinking from a creek if 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 their report, but no criminal investigation was found through further government reports. Parallel from 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 way of justice and return of property. In a civilized society, it is classified as a crime as well. There are police, prosecutors, courts and marshals set up for exactly that. Was it a phenomenon of new blockchain justice, based on a specific form of digital democracy?

. If it was a crime, then what was the hard fork? Was it a mob law? Stealing “back” is not a legitimate way of justice and return of property. In a civilized society, it is classified as a crime as well. There are police, prosecutors, courts and marshals set up for exactly that. Was it a phenomenon of new blockchain justice, based on a specific form of digital democracy? Parallel from anarchy. If it was neither a crime nor an act of justice, then what? Maybe it was a pure form of market competition, where no authorities and state power exist. Then, there is a word that describes this and that is anarchy, which can be defined as “the state of a society being freely constituted without authorities or a governing body,” or in this case, cryptoanarchy.

All these questions are yet to be further explored. Doing so will ensure the development of a better public policy towards blockchain technology and a better strategy for future DAOs.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Market Wrap: Bitcoin Holds Above $30K but Price Chart Looks ‘Ugly’

Bitcoin bounced to around $32,200 after touching a 2.5-week low early Friday near $31,000.

The largest cryptocurrency by market value may have been buoyed by a CoinDesk report that Bank of America has approved trading in bitcoin futures for some clients, according to Edward Moya, senior market analyst for Oanda.

“This is a big commitment for America’s second-largest bank and signals that interest in trading cryptocurrencies is here to stay,” Moya wrote in an email. “On Wall Street, if one bank sees opportunity in doing something risky, the rest will easily justify following suit.”

Latest prices

Cryptocurrencies:

Traditional markets:

S&P 500: 4327.1, -0.75%

Gold: $1810.9, -1.01%

10-year Treasury yield closed at 1.299%, compared with 1.303% on Thursday

Analysts said bitcoin might be prepping for a price breakout – higher or lower – after trading in a range between roughly $30,000 and $40,000 for the past eight weeks.

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The big concern is a drop below the psychological level of $30,000 might trigger additional selling as options traders look to square positions.

“There is a big move coming,” blockchain analyst William Clemente III wrote Friday in Anthony Pompliano’s newsletter.” Theoretically, we could be looking at this big move in the next few days but could take up to those full three weeks.”

The breakout looks more likely to be to the downside, based on the look of bitcoin’s price chart, according to Mati Greenspan, founder of the cryptocurrency and foreign-exchange analysis firm Quantum Economics.

“Bitcoin’s chart looks really ugly at the moment,” Greenspan wrote in his newsletter. “The downward slope that has materialized over the last few days gives the appearance that gravitational forces are calling for a retest of the red-line support at $20,000, the previous all-time high. In technical terms, this is known as capitulation.”

Circle and crypto investors

Earlier this month, Circle, the company behind the fast-growing dollar-linked stablecoin USDC, announced plans to become a public company at a $4.5 billion valuation, via a deal with a special-purpose acquisition corporation (SPAC).

Charlie Morris, founder of ByteTree Asset Management, speculated this week the deal could end up luring more investors to cryptocurrencies.

It’s “unquestionably the starter stock for the cautious,” Morris wrote July 14 in his weekly newsletter.

Big investors might find the stock hard to resist due to USDC’s fast growth: The stablecoin’s supply has soared to more than $25 billion, from about $3.9 billion at the start of the year. “It’s clear to the eye this company is growing like a weed,” Morris wrote.

What might make the new shares more attractive for portfolios is that USDC “powers crypto, yet has none of the volatility, making it a natural haven in comparison to the asset managers or miners whose fortunes are linked to crypto prices,” according to Morris.

But that might just be a camel’s nose under the tent:

“The old world will end up owning all of these stocks regardless, and that is why index funds always amuse me. They just buy whatever is stuck in front of them, meaning that investors who are trying hard to avoid crypto will end up owning it. Before long, everyone will be invested in crypto and crypto stocks, whether they like it or not, and Circle’s listing will be a crowd pleaser.”

The outstanding amount of the dollar stablecoin USDC has surged this year to more than $25 billion. Source: Coin Metrics, CryptoCompare, CoinGecko

What’s up with tether?

The parabolic growth in the market cap of stablecoin giant tether (USDT) suddenly came to a grinding halt at the end of May, just as bitcoin’s price was coming off its all-time highs.

According to analysts and market participants who spoke to CoinDesk’s Muyao Shen, the sudden pause reveals that the most traded cryptocurrency in the world is seeing its dominance threatened by three unprecedented challenges combining in a perfect storm to rattle the stablecoin.

China’s crackdown on cryptocurrencies and money laundering has choked off the fiat on-ramp to crypto markets through over-the-counter brokers, while listless bitcoin prices have reduced the incentive to invest: “Tether’s market in Asia is mostly through OTC merchants, and with less cash going into the market there is less demand for tether,” Rachel Lin, former vice president and founding partner at Singapore-based crypto investment firm Matrixport, told Shen.

The rising star of the stablecoin market is increasingly USDC. “I think USDC has a chance to compete in the stablecoin market in Asia against tether,” said Justin Sun, who helms the Tron blockchain.

More questions have been raised recently by regulators and governments around the world about USDT and other stablecoins. “The market is infused with bearish sentiment and traders are looking for a reason,” said Noelle Acheson, head of market insights at crypto prime broker Genesis Global Trading, a CoinDesk sister company. “It’s FUD (fear, uncertainty and doubt) season, and tether’s vulnerabilities are almost always a part of that conversation.”

An executive from Tether, while acknowledging the demand for USDT has fallen, argued the trend is not exclusive to the token.

“Demand for tether ebbs and flows, and has been impacted by lower demand in recent weeks,” Paolo Ardoino, chief technology officer at Tether, said in a written response via a spokesperson.

USDT’s market cap vs. bitcoin’s price Source: Glassnode

Altcoin roundup

Thorchain loses 4K in ether in attack: Thorchain suffered an attack on the crypto trading protocol that drained about 4,000 ETH, worth about $7.7 million based on ether’s price as of press time. The company tweeted that it would provide a “more detailed assessment and recovery steps” soon. Administrators wrote earlier that the network had been halted while developers investigated the extent of the breach. “While the treasury has the funds to cover the stolen amount, we request the attacker get in contact with the team to discuss return of funds and a bounty commensurate with the discovery,” the administrators wrote on Telegram.

Thorchain suffered an attack on the crypto trading protocol that drained about 4,000 ETH, worth about $7.7 million based on ether’s price as of press time. The company tweeted that it would provide a “more detailed assessment and recovery steps” soon. Administrators wrote earlier that the network had been halted while developers investigated the extent of the breach. “While the treasury has the funds to cover the stolen amount, we request the attacker get in contact with the team to discuss return of funds and a bounty commensurate with the discovery,” the administrators wrote on Telegram. Binance halts support for stock tokens: Crypto exchange Binance said it will no longer support tokens linked to stocks, barely three months after it made them available on its trading platform. Binance announced Friday that stock tokens are unavailable for purchase on its website effective immediately, and support for such tokens will end on Oct. 14, with all positions closed the following day. The embattled exchange, which has been facing regulatory headwinds, said the move will allow it to focus on other products.

Crypto exchange Binance said it will no longer support tokens linked to stocks, barely three months after it made them available on its trading platform. Binance announced Friday that stock tokens are unavailable for purchase on its website effective immediately, and support for such tokens will end on Oct. 14, with all positions closed the following day. The embattled exchange, which has been facing regulatory headwinds, said the move will allow it to focus on other products. FOX token’s rally: Following ShapeShift’s announcement that it would transform into a decentralized autonomous organization (DAO), its governance FOX token rose 300% to $1.16 in several hours. While the cryptocurrency has retraced to $0.55 in the past 24 hours, it’s still up almost 200% this week – a stellar performance considering the broader market lull. Analysts stand divided on whether the rally represents an ever-intensifying search for yield or investors cheering ShapeShift’s early-mover advantage as a DAO.

Relevant news

Other markets

Most digital assets on CoinDesk 20 ended lower on Friday.

Notable winners as of 21:00 UTC (4:00 p.m. ET):

Cryptocurrency Prices Today on July 5: Bitcoin, Ethereum in green; Uniswap’s volume grows 50% in 24 hours

Bitcoin (Image: Reuters)

Cryptocurrency prices continue to be in the mix of green and red on July 5. The global cryptocurrency market cap is $1.44 trillion, a 1.18 percent increase over the last day while the total crypto market volume over the last 24 hours is $64.92 billion, which makes a 6.97 percent increase.

Uniswap is trading in the green. Its volume has grown more than 50 percent in the last 24 hours. However, it is still far away from its peak in May, when its price was more than double the present price.

The volume of all stable coins is now $50.19 billion – 77.32 percent of the total crypto market 24-hour volume. Bitcoin’s price is currently $35,821.92 and its dominance is currently 45.04 percent, a decrease of 0.47 percent over the day.

This comes after the Coinsbit India announced India’s biggest ever airdrop on April 9. Since then, 665,550 KYC verified users receiving CIN worth $200 each in the first round, PTI reported.

Now, the company has also launched its own 5-level referral program with staking opportunities. Staking cryptocurrency a less resource-intensive alternative to mining which involves holding funds in a wallet to support the security and operations of a blockchain network. It is the act of locking cryptocurrencies to receive rewards. Coinsbit India Staking lets you earn rewards by holding and ‘staking’ coins on the exchange to enjoy 3 percent monthly rewards.

S. No. Name Price 24h % 7d % Market Cap Volume(24h) 1 Bitcoin BTC $34,582.54 0.34% 0.64% $648,361,103,706 $25,497,705,973 2 Ethereum ETH $2,269.97 3.35% 15.40% $264,466,477,655 $19,074,527,295 3 Tether USDT $1.00 0.01% -0.05% $62,357,960,571 $44,241,389,403 4 Binance Coin BNB $301.49 2.68% 5.20% $46,260,613,243 $1,425,087,226 5 Cardano ADA $1.43 2.97% 8.01% $45,737,799,531 $1,870,865,423 6 Dogecoin DOGE $0.24 -0.54% -4.97% $31,619,926,439 $999,986,719 7 XRP XRP $0.68 2.01% 6.49% $31,408,845,487 $1,962,947,165 8 USD Coin USDC $1.00 0.01% -0.04% $25,509,335,765 $1,621,161,565 9 Polkadot DOT $15.77 3.43% 5.17% $15,057,863,752 $772,899,496 10 Uniswap UNI $20.46 7.70% 20.52% $12,079,867,050 $551,140,137

As off 7.28 am on July 5, these are the prices of 10 largest cryptocurrencies (data from https://coinmarketcap.com):