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Understanding a Revolutionary and Flawed Grand Experiment in Blockchain: The DAO Attack

Understanding a Revolutionary and Flawed Grand Experiment in Blockchain: The DAO Attack

Muhammad Izhar Mehar (York University, Toronto, Canada), Charles Louis Shier (Harvard Law School, Cambridge, USA), Alana Giambattista (York University, Toronto, Canada), Elgar Gong (York University, Toronto, Canada), Gabrielle Fletcher (York University, Toronto, Canada), Ryan Sanayhie (York University, Toronto, Canada), Henry M. Kim (York University, Toronto, Canada), and Marek Laskowski (York University, Toronto, Canada)
Copyright: © 2019 |Pages: 14
DOI: 10.4018/JCIT.2019010102
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Abstract

In spring 2016, the Distributed Autonomous Organization (The DAO) was created on Ethereum. As with Bitcoin, Ethereum uses a P2P network, where distributed ledgers are implemented as daisy-chained blocks of data. Ethereum's native cryptocurrency, Ethers are spent to execute pieces of code called smart contracts. Investors paid their Ethers for the DAO to operate and received the opportunity to vote on and become investors in venture projects proposed by Ethereum-based startups. Transactions and settlements between investors and startups are executed autonomously. The DAO experiment failed shortly after inception as an anonymous hacker stole over $50M USD worth of Ethers out of the $168M invested. The Ethereum community voted to return (or fork) the state of the network to one prior to the hack, returning Ethers back to investors and shuttering the DAO. However, this action arguably represented as a bailout—ironically, Bitcoin was conceived as a reaction against the 2008 bailout of US banks—and violated the ledger immutability and “code is law” ethos of the blockchain community.
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2. Conceptual Understanding And Literature Review: Blockchain, Digital Currencies And The Smart Contract

The genesis of these innovations that spawned The DAO is a famous white paper from one or a collection of pseudonymous authors who penned the name Satoshi Nakamoto. The paper laid out the framework for Bitcoin, and introduced notions of Blockchain (Nakamoto, 2008). It drew on research in automatic verification systems (Haber & Stornetta, 1991; Massias, Avila, and Quisquater, 1999), cryptography (Merkle, 1980 Menezes, Van Oorschot, and Vanstone, 2009; Schneier, 2007), and distributed databases (Özsu & Valduriez 2011; Bernstein & Goodman 1981). Moreover, Bitcoin to some extent, but especially The DAO is inspired by theories from Economics and Organizational Studies. They include contract agency cost (Ross, 1973; Eisenhardt, 1989), contract theory (Gale & Hedwig, 1995; Bolton and Dewatripont, 2005), auction mechanisms (Edelman, Ostravsky, and Schwartz, 2007; Roth, 2002), theories of innovation (Greenstein, 2015; Moeen & Aggarwal, 2017), and virtual organizations (Handy, 1995; Markus & Agres, 2000).

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