Associated Incidents
Ethereum burst onto the virtual currency scene almost a year ago. It’s similar to bitcoin, but with a key difference. In addition to supporting its own digital currency, ether, it also supports smart contracts, agreements written in computer code that execute automatically when conditions are met.
Though it garnered significant attention from the start, Ethereum’s biggest moment came in April 2016, with a radical experiment called the Distributed Autonomous Organization, or the DAO. Created by German blockchain startup Slock.it, the DAO had an ambitious goal—to build a humanless venture capital firm that would allow the investors to make all the decisions through smart contracts. There would be no leaders, no authorities. Only rules coded by humans, and executed by computer protocols.
Launched on April 30th, it took off like a runaway train. By May 21, it had raised $150 million from roughly 11,000 investors, in what’s considered the biggest crowdfunding effort in history.
For Ethereum, the backbone of the project, it was a major vote of confidence in its nascent technology.
Then it got hacked.
On June 17th, someone started siphoning money out of the DAO. People were watching in real time as the money was stolen—like a live video feed of a bank robbery. By the end, the hacker, who has said that he was simply taking advantage of a technical loophole in the DAO, had amassed $50 million in ether, based on current exchange rates.
While the core developers who designed and run Ethereum didn’t really have anything to do with the DAO, they were left to deal with the mess. The seven of them, led by Vitalik Buterin, decided to hack the hacker.
They managed to stop the theft and move the funds into another smart contract where they currently sit. But that’s only a temporary stopgap: the way the code of DAO was written, there is a question of whether the original hacker can still lay claim to the funds. Fixing this would require more intervention from the core developers.
Whether to do so has created an existential question for Ethereum. One of its underlying tenets is that it’s a decentralized platform, meaning the power lies almost exclusively with all of its users. By stepping in to fix this problem, it would completely undermine that objective. This has led to a heated debate between those who want to return the funds and the “code is king” purists who say that the the power of smart contracts lies in their immutability.
The intervention that’s being weighed is called a “fork.” It’s a decentralized network’s version of a reset button. It would entail rolling back the entire Ethereum network to a previous day. Doing so would basically eliminate the DAO, and move all the money into a smart contract that can only reimburse investors.
The initial proposal was a soft fork. This would entail a majority of the Ethereum miners (those who verify transactions on the network) voting on the roll back. Unfortunately, a security flaw was found in the voting process, which eliminated this option.
That leaves a hard fork, where the core developers of Ethereum unilaterally make the decision to essentially create a new version of the network with different rules than the original. Then, miners, exchanges, and other major apps that are built on it need to decide if they want to a part of the new version of Ethereum or the original. Hence, the idea of a fork.
“The Hard Fork is a delicate topic and the way we see it, no decision is the right one. As this is not a decision that can be made by the foundation or any other single entity, we again turn towards the community to assess its wishes in order to provide the most appropriate protocol change,” Ethereum cofounder Jeffrey Wilcox wrote in a blog post Friday (July 15).
The community seems unanimous—according to Ethereum’s publicly available Github code, a hard fork is tentatively scheduled for July 20.
But, after all this turmoil, several questions remain:
What happens to the banks working on smart contracts?
Ethereum’s greatest promise lies in its ability to offer smart contracts, which are basically small programs, built on its blockchain. Financial institutions believe smart contracts offer a way to cut costs and speed up trading and settlement. Big banks like Citi and J.P. Morgan, along with clearinghouses like the Depository Trust & Clearing Corporation, have been building and testing ways to trade credit default swaps with smart contracts, for instance.
Analysts think smart contracts, if developed sufficiently, could eventually replace lawyers and judges in some cases. “Doing so in principle removes the potential for parties to have a dispute: both parties are held to whatever outcome the smart contract determines,” writes Houman Shadab, a professor at the New York Law School who specializes in the area.
An Ethereum hard fork, however, could be a spanner in the works. If contracts held to be inviolable can effectively be overturned by a collective decision to run new software, w