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A blockchain 'smart contract' could cost investors millions

Peter Sayer | June 21, 2016
By not studying the code implementing a smart contract, investors have exposed themselves to a multimillion-dollar loss

Whether that counts as fraud depends on whether, as an investor, you expected your investment to be handled in the spirit of some kind of social contract or according to the letter of the smart contract.

If not fraud, then how about a hack, as some have called it?

"I'm not even sure that this qualifies as a hack," Cornell University Associate Professor Emin Gün Sirer wrote in a blog post analyzing The DAO's troubles. "To label something as a hack or a bug or unwanted behavior, we need to have a specification of the wanted behavior. We had no such specification for The DAO. There is no independent specification for what The DAO is supposed to implement."

All that is bad enough for The DAO's investors, whose funds are on the way out the door, but it presents an existential problem for Ethereum.

More than one-tenth of all the 81.2 million Ether in existence was invested in that one fund. The resulting crisis in confidence has caused the value of Ether as a whole to collapse, from $20.51 per Ether on Thursday to $11.81 Monday, wiping $700 million off the book value of the Ethereum economy.

To restore confidence and provide an opportunity for The DAO investors to recover their money, the Ethereum Foundation has proposed changing the underlying rules, introducing the equivalent of a constitutional amendment to freeze the account to which The DAO's funds were diverted.

"This will provide plenty of time for discussion of potential further steps, including to give token holders the ability to recover their ether," Ethereum co-founder Vitalik Buterin wrote on the foundation's blog.

The foundation can't impose its solution: It requires those operating the computers that run the distributed system -- the equivalent of bitcoin's miners -- to decide whether to adopt the changed code: If a majority of them do, then the proposal will take effect.

In one sense, Ethereum's founders are damned if they do, and damned if they don't. They can pander to The DAO's investors' interests, interfering in the contract and thus undermining Ethereum's bedrock principle that smart contracts will run exactly as programmed, without third-party interference. Or they can do nothing, standing and watching as The DAO's collapse brings confidence in the rest of the platform crashing down around it.

For The DAO investors in particular, it's the ultimate test of whether they truly want to be part of a decentralized economy, with no central authority to judge and to impose redress.

 

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