Friday, September 29, 2023

The $55 Million Mistake That Vitalik Buterin

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Ethereum is the most successful blockchain in existence. There, I said it.

I wish I’d been the first, but Bloomberg writer and author of “Out of the Ether” Matthew Leising beat me to the punch.

It’s not just Ethereum’s lofty goal of creating a radically new decentralized internet that makes it better than Bitcoin. It’s what it’s already been able to accomplish in six short years:

  • Ethereum pioneered Smart Contracts (digital transactions that can eliminate middleman services like Uber, Airbnb, and lawyers, to name a few).
  • Ethereum created a successful dApp (decentralized app) ecosystem. The most important altcoins and NFT ecosystems are built on Ethereum’s blockchain today.
  • Ethereum created ICOs (Initial Coin Offerings) as a means for developers to fund their own projects. This is how an ICO Works: Create a dApp, give yourself and other creators your own cryptocurrency (e.g. Chainlink), and if the project is a success the value of that crypto will go up paying you automagically.
  • It’s spawned competition with cryptocurrencies like Polkadot, Cardano, and Tron, to name a few.
  • Ethereum — more specifically a group of Ethereum developers — created the DAO (Decentralized autonomous organization)

That last one also ended up being Ethereum’s greatest mistake.

What is The DAO?

Ethereum works like the internet; it enables other developers to build decentralized applications on top of it. In 2016, one such application was created — the DAO.

In essence, it was an investor-directed venture capital fund. Anyone who supported the crowdfunding campaign for this app could vote where funds were then allocated towards. Everything was community-run.

It predated makeshift funds like Reddit and the GameStop fiasco. It also had far fewer memes about apes going to the moon.

Because Ethereum is an open-source network anyone can see the code used to build its dApps. This means if you made a mistake in the code, a hacker can exploit it and ruin your program, or worse, steal tons of money. Hacks against dApps still happen today (more than $3 billion was lost last year alone).

Unfortunately, the DAO had a mistake in its code. Line 666. The irony of that number led to conspiracies that the DAO hack was an inside job. To this day no one knows for sure who’s responsible.

Meanwhile, lead programmer for the DAO, Christoph Jentzsch, was under tremendous pressure as the crowdfunding for the DAO grew to $150 million. No one expected their idea to be this successful. The whole Ethereum community was behind it.

And then shit hit the fan.

The End of Ethereum

What started off as the brainchild of 19-year-old crypto junkie Vitalik Buterin quickly became the fiercest cryptocurrency behind Bitcoin. Ethereum attracted some of the best programmers in the world including Charles Hoskinson and Gavin Wood, the creators of Cardno and Polkadot respectively.

Ethereum was a big bet on paper — it still is — but its founders were certain of its future. Many of them came from libertarian backgrounds and were tired of government intervention, moreover, the dogmatic authoritarian hand of big tech.

They wouldn’t stand by while their society went morally bankrupt. However, once the DAO attack broke, everything went into jeopardy.

“There were so many fears,” Griff Green, an Ethereum programmer expressed in an interview. “Does this destroy Ethereum? Does this destroy DAOs? What’s going to happen to all this money?”

The DAO was Ethereum’s most important application. In “Out of the Ether” Leising writes “it’s not overstating it to say that the DAO made Ethereum.”

And now a hacker was destroying all of it.

Essentially, the hacker (which soon became more than one) found a way to take money, and before the program updated how much it had left, they could ask for more. It’s like going from bank teller to bank teller asking for $1,000 dollars without them actually subtracting it from your overall fund.

These hackers kept doing this until a group of white-hat hackers called the “Robin Hood Group” decided to steal the money to protect it from the bad hackers (hence the name Robin Hood).

It was a Mexican standoff that turned into the largest digital heist in existence.

The $55 Million Mistake

Vitalik Buterin and the rest of the Ethereum co-founders had two choices: Freeze the hacker’s tokens and in turn, make them valueless (what is known as a soft fork). Or, play God and rewrite the code, give everyone back their funds, and act like this never happened.

It’s easy for a centralized corporation like Visa or Goldman Sachs to make that decision. But a decentralized application like Ethereum is never supposed to get involved.

In a way, as Gavin Wood describes it, the hacker acted within the rules of Ethereum. He saw exploitable code and exploited it. In an open letter to the DAO and Ethereum Community, the attacker even claimed their “reward” was legal and threatened to take legal action against anyone who tried to invalidate their work.

Now, was bad code and losing all their money in a hack what the DAO supporters expected when they funded it? No, and this is where the problem lay.

Vitalik knew the more controversial option was a hard fork. To directly involve himself and other founders would go against a core principle of Ethereum.

“These applications will exist without any possibility of downtime, censorship, fraud or third-party interference,” as it states in Ethereum’s official documentation.

With community support behind him, however, Ethereum hard forked in the summer of 2016. It created Ethereum Classic in the process, a version of Ethereum where the hack happened.

What Does This Mean For Ethereum Today?

The irony of a bailout was not lost on the Ethereum community.

“It turns out we have a lot in common with central banks,” said Vinay Gupta, a former London-based strategist at Consensys, one of the most popular development firms working on Ethereum. “Maybe not at the technical or legal level, but at a political level, people in our community expect us to be able to make things better for them.”

Gavin Wood believed that the fork was the most important financial case in crypto-economics since the creation of Bitcoin itself.

Although this blemish will forever stain Ethereum’s legacy, it’s mostly forgotten about today. When the DAO attack happened Ether was trading for around $10. Now it just broke records for crossing over $2,100.

Maybe the future is just too exciting for Ethereum to lose over one mistake. Furthermore, many in the community justify the attack as a “one-off.” But many more believe that it was Vitalik and company’s only decision.

The right one.

“The Ethereum community has been amazingly science-driven, open and forthright,” wrote Emin Gün Sirer, the Cornell professor who contributed the most research in the aftermath of the DAO hack. “The civilness of their response should be a shining example to other communities.

#wazirxwarriors #eth #india

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