The DAO, which emerged in 2016, garnered considerable attention for being one of the earliest autonomous organisations (DAOs). However, a major security breach resulted in a significant loss of Ether. This unfortunate event emphasised the significance of understanding the beginnings, goals, and potential consequences of DAOs.
The DAO Hack: How It Started?
The DAO utilised the ETH platform to provide a decentralised version of Airbnb, which was made possible through the “smart locks” technology. Over 11,000 members contributed to its 28-day funding window, resulting in funding of over $100 million in April 2016. However, the code had some loopholes that caused significant damage to The DAO. This issue remained addressed after the crowd sale was concluded.
In 2016, an individual with an unknown identity stole funds worth $70 million, equivalent to 3.6 million ETH, from the platform. This security breach was made possible by a loophole that the individual discovered, enabling them to transfer ETH from The DAO to a “child DAO.” As a result, the price of ETH plunged dramatically from over $20 to under $13 overnight.
Laura Shin, a Forbes journalist, reported that a former TenX co-founder named Toby Henish was involved in a hack. The blockchain analytics company Chainalysis found out about this. Henish moved funds to four trading platforms and converted them into Grin, a cryptocurrency that prioritises privacy. An employee could trace an IP address and login credentials back to Henish.
Henish used the nickname ‘tobyai’ on various social network accounts. He had connections with Slock. the company that developed the DAO project. Despite being accused by Forbes, Henish denied any involvement in the hack and dismissed the allegations.
Outcomes and Insights
The attacker claimed their actions were legal and cautioned that those who tried to seize the funds would face legal repercussions. Consequently, the community split, with the attacker proposing a collective incentive to convince ETH miners to reject the proposed soft fork.
The DAO’s funds were moved to a new smart contract after the Ethereum network’s history was reversed using a hard fork. This choice was controversial, as some argued it contradicted the fundamental principles of decentralisation and immutability. However, those favouring the decision believed it highlighted the community’s ability to swiftly adapt and handle intricate issues.
On July 20th, 2016, a hard fork caused a division in the Ethereum community. While most stakeholders accepted the new version of Ethereum, a small group decided to continue using the original Ethereum Classic (ETC).
The DAO hack has focused on security measures and regulatory frameworks in the decentralised finance industry. The vulnerabilities of smart contracts were exposed, and concerns were raised regarding the compatibility of crowdfunding and token offering spaces with regulations.
The Bottom Line
The blockchain industry witnessed the birth of new concepts in governance after The DAO’s collapse. Decentralised autonomous organisations championed more efficient mechanisms.
Smart contract auditing and validation services have improved security, protecting users’ assets and reducing vulnerabilities. The Ethereum platform has established itself as a leading platform for dApps and DeFi protocols. The experience gained from DAO has increased awareness of regulatory compliance in the blockchain industry.
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