Ten years after Ethereum’s DAO disaster, it’s time to try again

It’s been a decade since I frantically pounded out a warning letter known as The DAO Moratorium. So urgent was the missive that we pushed the document live before it was complete, allowing anyone who was interested to read along in real time. Even as I and two colleagues typed out the finishing touches, hundreds of viewers appeared as Google’s anonymous wombats, aurochs, and chupacabras. They had come to read our message to the world that warned of critical early vulnerabilities in the codebase of an Ethereum project that left nearly $200 million exposed to hackers.Recommended Video The message was clear: do not use The DAO. The term stands for Decentralized Autonomous Organization, what was then a new crypto-based governance structure, pioneered in large part by the Ethereum community. In this case, the DAO offered a crowdfunding mechanism, designed to let anyone contribute to a pool of capital, and share in a new pool of tokens. At the time, many saw the Ethereum DAO as an inspiring alternative to venture capital. It was in theory. But in practice, it struck me as a system with enormous potential for failure. By the time some of the vulnerabilities we warned about were exploited, 5% of all ether was in a wallet controlled by the attacker, with another 10% at continued risk. How it unfolded At the time of the DAO attack, I was a computer science professor at Cornell University, teaching a cryptocurrency course during the industry’s infancy. The entire bitcoin market value was only about $10 billion, compared to $1.4 trillion today. One evening, in the spring of 2016, I found myself at dinner with Ethereum researcher Vlad Zamfir, in a small French restaurant in downtown Ithaca, New York. Vlad told me about something new: a radical experiment in raising capital. The first red flag I spotted wasn’t technical. It had to do with governance. For starters, DAO participants couldn’t just withdraw their funds. You had to create something called a “child DAO,” go through multiple waiting periods and voting rounds, and then attempt to extract your funds. Such a convoluted voting system I feared, would lead to distorted incentives and catastrophic outcomes. As far back as August 2014, two years before the DAO went live, my colleague Andrew Miller warned of so-called reentrant contracts in the code used to build it, which could allow attackers to drain funds. We decided the risks were too serious to keep private. So that May we began writing the document, A Call for a Temporary Moratorium on The DAO, highlighting the vulnerabilities. Three weeks later, the attack changed crypto history. What happened Imagine an ATM that checks your balance, dispenses the money, then deducts the amount from your account. In a normal ATM, this wouldn’t cause problems. But in the case of the DAO, the hacker discovered a way to make repeated withdrawals before the balance was updated. A bug in the smart contract led the blockchain to believe that, even after numerous withdrawals, the user still had funds available. Roughly $60 million worth of ether was drained from The DAO. Following the attack, a PhD student at Cornell and a member of the Initiative for CryptoCurrencies and Contracts (IC3), Phil Daian, published a detailed account of what happened. The market value of Ethereum was only about $1.5 billion, giving the attacker enough crypto to destabilize the entire ecosystem. The Ethereum community decided to reverse the transaction. On July 20, 2016, a hard fork was…

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