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What was the DAO Hack?

Last Updated : 04 Jul, 2022
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Blockchain is distributed decentralized ledger so there is no involvement of third-party organizations or Governments. But to maintain privacy and security, organizations are often required. So DAO was set up. Here we will discuss the following topics:

  1. What is a DAO?
  2. History of DAO.
  3. The DAO Hack.
  4. Response To DAO Hack.
  5. DAO Hack Remedy Forks Ethereum.
  6. Soft Fork Proposal.
  7. Response To Soft Fork Proposal.
  8. Hard Fork Proposal.
  9. Response To Hard Fork Proposal.
  10. Who Is At Risk?

Let’s start discussing each of these topics in detail.

What is a DAO?

DAO is an organization that allows implementing rules. These rules are encoded as a computer program and are not owned by the government. In DAO lots of people collectively own and manage. The advantage of DAO is even if the user does not believe other users, they can trust the rules as it is a programmed version and 100% transparent. The rules are executed by the algorithms if certain conditions are met. The characteristics of DAO are:

  • Decentralization: It is a highly decentralized authority. Here neither third parties nor the Government is involved.
  • Transparent: The DAO organization is fully transparent as the protocols are 100% programmed.
  • Autonomous: The DAO has the right to make their own decisions.
  • Open Source: It is an open-source platform. Any user can contribute to this platform.

History of DAO

DAO stands for Decentralized Autonomous Organization. It is a decentralized organization to facilitates cryptocurrency transactions without any managers or board. It made use of the Ethereum network. The DAO was developed in such a way that it allowed investors to invest their money. In return, the organization would provide them with tokens that allowed the investors to vote rights on many projects. The organization was launched in late April 2016 as tokens were sold for a month long. There were more than 11000 investors. By the end of May 2016, more than $150 million in funds were raised.

The DAO Hack

Hackers attacked DAO because it was vulnerable. It allowed the hackers to drain almost one-third of ether. There was a token sale for 28 days. Many investors invested money and DAO raised 15 million ethers, But before the end of the token sale, one of the onlookers was concerned about vulnerability. There was a bug in smart contract wallets. While the programmers were fixing the bug issue, the attacker exploited other loopholes in the code and started to steal funds. He attacked by making a small contribution and requested withdrawal using a recursive function. In this way, the attacker was able to draw almost 3.6 million ether.  At that time 3.6 million ether was equivalent to 70 million dollars and the price of ether dropped from $20 to $13.

Response To DAO Hack

The DAO Hack resulted in financial losses. It also posed a threat to upcoming Ethereum and Blockchain technologies. The hack also put a question mark on the security of Ethereum. 

  • The Ethereum community was tensed and held many discussions.
  • The failure of DAO had a negative impact on cryptocurrency as investors were afraid to invest money.
  • Ethereum founder Vitalik Buterin proposed a soft fork proposal that allowed them to blacklist the hacker so that no further funds were siphoned. 
  • In response to this proposal, attackers claimed that they had done it in a legal way in accordance with the smart contract. The attackers were ready to take legal action.

DAO Hack Remedy Forks Ethereum

The majority of the investors agreed to the Hard Fork Proposal and it was implemented. Those who didn’t agree with the proposal led to the division of the blockchain. The pre-forked version is known as Ethereum Classic(ETC). Some of the consequences are:

  • The history of Blockchain was altered due to the hard fork proposal. 
  • The attacker did not lose all the money despite the restoration of funds to their respective owners. It is estimated that $ 8.5 million were in their possession. 
  • The DAO Hack and the Hard fork proposal shook the entire community.
  • The DAO realized the importance of Blockchain security. 

Soft Fork Proposal

A fork is a change made to previous versions of Blockchain protocols. Soft Fork is the change that is made so that it is compatible with the previous versions of the blockchain. The nodes that are still not updated will be valid in the blockchain network. This method is a safer alternative as the old versions can also work with the newer ones.

  • Vitalik Buterin introduced a soft fork proposal. 
  • It allowed them to insert a code snippet that would blacklist the attackers from performing any further transactions. 
  • On the other hand, this proposal reduced the amount of ether. 
  • In response to the soft fork proposal, the hackers tried to prevent the soft fork proposal by bribing the miners. This also put a question on the moral ethics of the miners. 

Response To Soft Fork Proposal

The proposal’s aim was to blacklist the attacker. The attacker proposed that they had done the ‘work’ in a legal manner and also threatened to take legal steps if required. 

  • Almost 80% of the miners voted for the soft fork proposal. 
  • Although the proposal reduced the price of ether, it allowed them to get all the lost money. 
  • Before the Ethereum community could apply the proposal a bug was again discovered in the code. 
  • Once again the decision was withheld as the bug wasn’t resolved.

Hard Fork Proposal

The hard fork proposal is the proposal that allowed the community to make a permanent divergence from the original Blockchain. It makes it compulsory that all nodes in the Blockchain should be updated to the latest version. All miners should adhere to the new rules. The consequences of the proposal are as follows:

  • It leads to the separation of the Blockchain so that the two versions are not compatible with one another.
  • Doing the divergence, it allowed the investors to withdraw their original money. 

Response To Hard Fork Proposal

This proposal had the capacity to withdraw all the cryptos and transfer them to a new smart contract. The function of this smart contract was: to withdraw. The consequences are as follows:

  • The reaction was mixed as Blockchain was supposed to be immutable and rolling back to a different Blockchain was against the law. 
  • Lots of discussions among Miners, community members, etc were held. Voting was done.
  • The majority of the miners about 89% agreed to the hard fork proposal. Finally, this proposal was accepted.
  • This proposal was implemented in the 1920000th block that is on 20 July 2016.

Who is at Risk?

Although the investors got back their money still there are many people who are at risk due to this hack:

  • Attacker: The attacker stole lots of money. So he has to think twice about how to invest the money. He has to pay a huge amount of tax for the huge amount. He also has to keep his identity secret so that the community cannot take any legal action against him.
  • Miners: Those who mine the blocks are also at risk. They may or may not get money due to these hacks. Also, it was pointed out by hackers that they could bribe the miners so as to stop the implementation of the Soft Fork Proposal. This also puts a question mark on their honesty. Also, DAO token holders could sue them if they do not vote for the community proposal.
  • Ethereum foundation: The hack exposed several vulnerabilities of the foundation. The foundation should focus more on their testing of Blockchain networks. 
  • Investors: The biggest risk is for the investors. Although after the hack they got back their money it is possible that they might not get back their money again.

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