DAO (Decentralized Autonomous Organization) | DAO Hack

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Decentralisation is one of the core attractive features of cryptocurrencies and blockchain technology in general. This means they are not controlled by a single institution like a government or central bank, but instead are divided among a variety of computers, networks, and nodes. In many cases, virtual currencies make use of this decentralised status to attain levels of privacy and security that are typically unavailable to standard currencies and their transactions. Inspired by the decentralisation of cryptocurrencies, a group of developers came up with the idea for a decentralized autonomous organization, or DAO, in 2016.

Key Takeaways

  • The DAO was an organization created by developers to automate decisions and facilitate cryptocurrency transactions.
  • In June 2016, due to programming errors and attack vectors, hackers attacked the DAO, accessing 3.6 million ETH.
  • Digital exchange currencies de-listed the DAO token in September 2016.

How Decentralized Autonomous Organization Works?

The DAO was an organization that was designed to be automated and decentralized. It acted as a form of venture capital fund, based on open-source code but devoid of a typical management structure or board of directors. To be fully decentralized, the DAO was unaffiliated with any particular nation-state, though it made use of the ethereum network. It can be defined as an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a central government. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles.

Why make an organization like the DAO?

The developers of the DAO believed they could eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process. Fueled by ether, the DAO was designed to allow investors to send money from anywhere in the world anonymously. The DAO would then provide those owners tokens, allowing them voting rights on possible projects.

A DAO’s financial transactions and rules are recorded on a blockchain. This eliminates the need to involve a third party in a financial transaction, simplifying those transactions through smart contracts. The firmness of a DAO is a smart contract. The smart contract represents the rules of the organization and holds the Organization’s storage. No one can edit the rules without people noticing, because DAOs are transparent and public. Up to today we are used to companies backed by legal status, a DAO may perfectly function without it as it can be structured as a general partnership.

The DAO launched in late April 2016 thanks to a month-long crowdsale of tokens that raised more than $150 million in funds. At the time, the launch was the largest crowdfunding fundraising campaign of all time.

What is DAO in Ethereum?

The Ethereum network is a network of computers running the Ethereum blockchain. The blockchain permits individuals to exchange tokens, known as ether, presently the second preferred cryptocurrency behind Bitcoin. Ethereum additionally permits individuals toacess and operate a variety of smart contracts and use the ethereum platform to build blockchain based services and dApps. Individuals then execute these programs by paying ether as a transaction fee.

DAO means Decentralized Autonomous Organization. Its goal is to systematise the principles and decision-making equipment of a corporation, eliminating the requirement for documents and other people in governing, making a structure with localised management.

DAO Hack on Ethereum

While programmers were performing on fixing this and different issues, associate degree unknown assailants began victimising this approach to start out exhausting the DAO (Decentralized Autonomous Organization) of ether collected from the sale of its tokens.

By Saturday, 18th June, the assailant managed to empty around 3.6Million ether into a “child DAO” that has an equivalent structure because of the DAO. The worth of ether born from over $20 to beneath $13.

Several individuals created tries to separate the DAO to forestall a lot of ether from being taken, however, they could not get the votes necessary in such a brief time. As a result the designers did not expect this abundant cash, all the ether was in a very single address (bad idea), and that we believe the assailant stopped voluntarily once hearing concerning the fork proposal. In fact, that attack, or another similar one, may continue at any time.

Smart Contracts

Smart contracts are computer programs that can automatically execute actions according to the terms of a contract or agreement. They are designed to reduce the involvement of intermediaries, and lower down enforcement costs. The code itself is supposed to be the final word arbiter of “the deal” it represents. However, in fact, that is an associate degree dreamer (crypto-anarchist) perspective.

Before the attack, a lot of lawyers increased their considerations that The DAO overstepped its crowdfunding mandate and ran afoul of securities laws in many countries.

Lawyers additionally pointed to its creators as doubtless accountable for any issues that will occur, and several others expressed concern that token holders of The DAO have accepted responsibility they were seemingly unaware of.

The DAO exists in a very grey area of law and regulation. Because the kid DAO has an equivalent structure, limitations, and vulnerabilities. Because the parent DAO, the ether during this freshly created kid DAO cannot access for twenty-eight days, as that’s the initial funding amount.

Everyone will see the ether during this kid DAO – any tries to money in it can trigger alarms and investigations. It may be that the assailant can never get money or pay one ETH of it.

It’s entirely attainable that the assailant had an outsized short position on ether at the time of the attack that he or she then paid out once ether had been cut roughly in 0.5. The assailant might already create his cash, notwithstanding the ether sitting within the kid Decentralized Autonomous Organization.

There are things the Ethereum Foundation may do that could also be ready to nullify the ether during this DAO. That is wherever things get difficult.

Criticisms of the DAO

By May 2016, the DAO held a massive percentage of all ether tokens that had been issued up to that point (up to 14%, according to reporting by The Economist).3 At roughly the same time, however, a paper was published which addressed several potential security vulnerabilities, cautioning investors from voting on future investment projects until those issues had been resolved.

Later, in June 2016, hackers attacked the DAO based on these vulnerabilities. The hackers gained access to 3.6 million ETH, worth about $50 million at the time.4 This prompted a massive and contentious argument among DAO investors, with some individuals suggesting various ways of addressing the hack and others calling for the DAO to be permanently disbanded. This incident also figured prominently in the hard forking of ethereum that took place shortly thereafter.

DAO was vulnerable to programming errors and attack vectors. The fact that the organization was charting new territory in terms of regulation and corporate law likely did not make the process any easier. The ramifications of the structure of the organization were potentially numerous: investors were concerned that they would be held liable for actions taken by the DAO as a broader organization.

The DAO operated in murky territory about whether or not it was selling securities, as well. Further, there were long-standing issues regarding the way that the DAO would function in the real world. Investors and contractors alike needed to convert ETH into fiat currencies, and this could have impacted the value of ether.

In July 2017, the Securities and Exchange Commission (SEC) issued a report, which determined that the DAO sold securities in the form of tokens on the ethereum blockchain, violating portions of US securities law.8

Traditional Organizations vs DAOs

1. In traditional companies, all agents of a company have legal employment contracts that regulate their relationship with the organization and with each other. DAOs, on the other hand, involve a set of people interacting with each other according to a self-enforcing open-source protocol. Members of a DAO are not bound together by a legal entity, nor have they entered into any formal legal contracts. There is only one governing law – the protocol or smart contract – regulating the behaviour of all network participants.

2. As opposed to traditional companies that are structured in a top-down manner, with many layers of management and bureaucratic coordination, DAOs provide an operating system for people and institutions that do not know nor trust or even know each other. Instead of legal contracts, all agreements are in the form of open-source code that is self-enforced by majority consensus of all network actors. DAOs do not have a hierarchical structure, except for the code. The exact majority rules are defined in the consensus protocol or the smart contract, and will vary from use case to use case.

3. A DAO can be formalised by a smart contract. The more centralised governance rules are, the more it resembles a traditional company. In a more decentralized setup, the governance automatically steers behaviour with tokenized incentives and disincentives.

4. DAOs are open-source, thus transparent and, in theory, incorruptible. All transactions of the organization are recorded and maintained on a blockchain. Interests of the members of the organization are – if designed correctly – aligned by the incentive rules tied to the native token. The Bitcoin Network can be considered to be the first true decentralized and autonomous organization, coordinated by a consensus protocol which anybody is free to adopt.

Future of DAO

What does the future hold for the DAO? The DAO as originally envisioned had not returned as of mid-2020. Nonetheless, interest in decentralized autonomous organizations as a broader group continues to grow. In 2021, The Maker Foundation, an icon in the crypto industry as the original champion of DAO, announced that it was officially turning operations over to MakerDAO (creator of the DAI stablecoin) and would dissolve by the end of the year.9

While there are many lingering concerns and potential issues regarding legality, security, and structure, some analysts and investors believe that this type of organization will eventually come to prominence, perhaps even replacing traditionally structured businesses.

Dash

The popular digital currency Dash is an example of a decentralized autonomous organisation because of the way it is governed and the way its budgeting system is structured. It may only be a matter of time before additional DAOs enter the field. Dash is an open source cryptocurrency. It is an altcoin that was forked from the Bitcoin protocol.

Conclusion

In this article we learnt about Decentralized autonomous organization operating on a blockchain, we discussed how they operate and what part Ethereum plays in it. We also learnt about a cyber hack that occurred on the ethereum platform and discussed the criticisms DAOs have received since their inception. Followed by reviewing how Traditional organisations differ from DAOs in terms of governance and management.

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