Fellow for Cyber-security and Internet Governance, Schoolgebouw of International and Public Affairs, Columbia University
Laatstgeborene Dean does not work for, consultatie, own shares ter or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
The Conversation UK receives funding from Hefce, Hefcw, SAGE, SFC, RCUK, The Nuffield Foundation, The Ogden Trust, The Royal Society, The Wellcome Trust, Esmee Fairbairn Foundation and The Alliance for Useful Evidence, spil well spil sixty five university members.
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Companies around the world are exploring blockchain, the technology underpinning digital currency bitcoin. Ter this Blockchain pulled out series, wij investigate the many possible use cases for the blockchain, from the novel to the transformative.
Ethereum, a network designed to extend blockchain technology to uses beyond crypto-currencies, has bot gaining traction around the world.
Billed spil “a decentralized podium that runs brainy contracts…without any possibility of downtime, censorship, fraud or third party interference,” Ethereum has bot enthusiastically embraced by organisations like Microsoft, IBM and Azure.
How then does the omschrijving of ems of millions of dollars get stolen ter one day, from an individual account?
This is the situation that those affiliated with The DAO (Decentralized Autonomous Organization) awoke to on June 17 spil transactions were made from their Ethereum account to an account whose holder is unknown.
It wasgoed a timely reminder that sometimes “smart” technology acts stupidly. Bitcoin suffered a near-death practice te 2014 when the omschrijving of US$450 million te bitcoins went missing after Mt. Gox proclaimed bankruptcy. Ethereum now faces a similar ogenblik.
Significant lessons about the risks, true capabilities and need for better governance of blockchain networks unluckily have to be learned once again.
How Ethereum and The DAO work
Commenced ter 2014 by teenage programming prodigy Vitalik Buterin, the Ethereum network is unique for its pioneering use of “smart contracts”. Just like regular contracts, terms and conditions are developed and agreed upon by consenting parties. What makes them supposedly “smart” is that, when the conditions of the contract are met, the contracts execute automatically.
The DAO is an online, investor-directed venture capital fund built on the Ethereum blockchain network. The DAO’s aim is to collectively channel investment into fresh projects, similar to the way that crowdfunding works, but using Ether, the crypto-currency that underpins Ethereum. It uses specialised code (based on Ethereum’s Solidity language) to permit its members to execute automated investment decisions.
The DAO has no single leader, however there is a group of overseers who are elected by holders of special DAO tokens (which people purchase with ether). Voting rights are determined by one’s DAO token holdings.
After raising Ten.7 million ether (the omschrijving of US$120 million ter May 2016) te an initial crowdfunding effort, one of the fattest te history, hopes were high for The DAO.
Then, on June 17, keerpunt struck. An unknown person or group of people funnelled out about one-third of The DAO’s ether holdings the omschrijving of inbetween US$45 million and $77 million (the value depends on whether one uses the pre- or post-incident ether market price).
Within days, the market price of ether crashed around 50%. A good overeenkomst of soul searching for both projects has bot underway everzwijn since.
Clever thieves or dumb programming?
Te the fallout of the incident, much wasgoed made about how The DAO wasgoed “hacked”. Upon closer examination tho’, The DAO wasgoed not hacked at all. The attacker(s) used two features of The DAO’s specialised code to siphon out ether te amounts puny enough to not result ter the destruction of their DAO tokens.
Moreover, The DAO’s terms and conditions do not permit theft or fraud. Te brief, it is flawlessly legitimate to do whatever a wise contract’s code permits, even if this is beyond the original intention of those who wrote the code.
Like all technologies, “smart contracts” are dual use and might be used te ways that their creators did not intend. The complexity of the technology only compounds this kwestie.
When considered ter this setting, not only is what occurred above houtvezelplaat (tho’ not te the spirit of The DAO), funnelling money out of The DAO’s account ironically turns out to be a feature, not a bug.
Significant decisions now face the Ethereum community. The fate of the network and the omschrijving of hundreds of millions of dollars suspend te the balance.
Sensibly, a backstop mechanism wasgoed built into the Ethereum network for incidents such spil this one. The account holding the (mis)appropriated funds (a so-called Child DAO) has bot frozen for 27 days and soon the Ethereum community will hold a referendum of sorts, “voting” on what course of activity to pursue. This will determine whether holders of DAO tokens will be able to recoup their lost ether, or see it remained locked ter limbo forever.
Lessons for blockchain enthusiasts
This scene introduces nuance to Ethereum’s pitch on enabling applications to run “without any possibility of downtime, censorship, fraud or third party interference”. Similar claims are made by the promoters of crypto-currencies and blockchains more generally.
Clever contracts may run exactly spil programmed but this does not mean that they will run spil the creators intended. The DAO incident demonstrates how the complexity of thesis contracts is outstripping the comprehension of the people who wish to write them. This ter turn introduces bugs and vulnerabilities, some of which are known, but others will only become known when something goes wrong.
While the Ethereum network’s users might be decentralised, certain features of the network are not. For example, the decision spil to what switches will be made to the code spil a part of the upcoming referendum is determined by a puny group of Ethereum developers. The check on this concentration of control is that 51% of knots te the network vereiste agree to the switches.
However, a 51% threshold is not ideal given the network’s tendencies towards centralisation. The difference inbetween the Ethereum blockchain network vs a referendum is that the former is not “one person, one vote” it is “one knot, one vote”.
For Ethereum, there is no telling how many people control how many knots. This is because the account holders are pseudonymous. What is known is that the distribution of ether holdings is strenuously skewed across accounts. At present, of a total of 440,741 accounts, the top five Ethereum accounts alone wield 25% of the total outstanding ether. Moreover, the distribution of mining is also not uniform. Three mining pools presently occupy more than 50% of Ethereum’s mining capacity. Amassing 51% of the required resources for control becomes relatively lighter under such a configuration. For Bitcoin, where votes are determined by the distribution of mining, and mining is similarly distributed, the capability to spel the network is even greater.
Clever contracts require smarter governance
If blockchains are to be sustainable te the long run, serious consideration of adequate governance mechanisms is needed.
A skewed distribution of mining power and crypto-currency holdings is combined with pseudonymity of account holders and a strong incentive to spel the system. This has all the makings for deceptive, unaccountable, fraudulent, and self interested decision making.
Until hard questions around governance of blockchains are asked, and solutions implemented, wij should brace ourselves for more incidents like that which has befallen The DAO. At stake is not just the fate of projects like Ethereum but the future potential of blockchain technology more generally.