1/ Let’s start by looking at the weirdest thing in the world of blockchain -- The DAO -- a once $200m VC crowdfund that has fallen on hard times.
2/ The DAO is quite a crazy instrument: Anonymous users send money into the fund, then vote on proposals for what to invest in. Sound amazing?
3/ The DAO was devastatingly hacked on the 17th of June, ⅓ of its assets were stolen, and its entire capital pool exposed to further theft (more on this later).
4/ What enabled the DAO to exist? A next generation blockchain/smart contract platform called Ethereum.
5/ Bitcoin gave us the blockchain - a synchronization mechanism in which thousands of computers agree on the balance in your Bitcoin account.
6/ Ethereum lets you build programs - smart contracts - which run on a blockchain.
7/ Because the Ethereum blockchain network is made of thousands of machines all over the world, if a fire or flood wipes out some servers, it's no big deal: everything is still there.
8/ Ethereum programs are so reliable and secure in fact that they can (in theory) be used to manage large sums of money and automate business processes.
9/ Imagine an apocalypse-proof, programmable bank vault.
10/ If the vault is properly secured, a clear set of criteria may be established for accessing its contents
11/ ... and the ability to put huge amounts of money under the control of entirely trustworthy automated systems opens doors like e-governance quite a bit wider.
12/ With regard to software bugs though, you don’t need a global catastrophe to wipe out $200 million if you accidentally left the back door of The DAO’s vault wide open.
13/ DAO stands for Distributed Autonomous Organization. There are some variations on the verbiage but it is an established blockchain concept.
14/ Distributed -- not centrally located or controlled, Autonomous -- runs on its own, Organization -- means of coordinating human behavior.
15/ “The DAO” was created by a small team, Slockit, as a funding mechanism for their Internet of Things project.
16/ A voting system controlling a funding pool is essentially what The DAO was.
17/ Better marketers than software engineers, Slockit spun enthusiasm for the DAO concept into a crowdfunding frenzy.
18/ The 28 day funding period ended with a total of about $150million in The DAO’s coffers.
19/ A subsequent rise in the value of Ether, the native cryptocurrency of the Ethereum network raised the total value held to about $220 million.
20/ There is a software development maxim: “given enough eyeballs all bugs are shallow,” and the hacker who could find a hole in The DAO’s code could in theory claim the $220 million.
21/ As history has it, the bug was found. The hacker initiated a program which steadily drained the funds held in The DAO (high level explanation, technical explanation)
22/ Vitalik Buterin, the Inventor of Ethereum quickly suggested that it might be a good idea for everyone to change their blockchains to ignore the event, effectively erasing it from history.
23/ In response the attacker stopped. As if burdened by more cash than they could carry, they waddled away, pockets bulging, leaving most of the money behind.
24/ The attack precipitated a collapse in the price of Ether. A suspiciously well-timed short position placed on a cryptocurrency exchange closed a $1 million profit in a day.
25/ Members of the Ethereum foundation began draining the funds from the now ruptured DAO in a “White Hat” attack, placing the funds in a more secure “child DAO”.
26/ An unknown assailant, possibly the same attacker, attacked the child DAO. it was master hacker vs. master hacker. The DAO Wars were on.
27/ To end these shenanigans, a piece of code designed to freeze the funds was distributed to the network operators (miners). They have frozen The DAO’s funds.
28/ Another piece of code designed to allow the stolen funds to be returned to The DAO token holders will be released for voluntary inclusion too.
29/ Lessons: Be careful when you invest. Creating computer programs to secure money is hard. $200 million is a lot of money for an honesty box, even if it has a padlock.
30/ Expect to see better considered DAO-like structures emerging in the future.
31/ This one taught the world what not to do, but at the same time gave us a glimpse of what incredible things might be possible.
32/ Consider getting involved in the blockchain world. These introductory guides will get you up to speed: Bitcoin & blockchain, Ethereum & Smart Contracts .
33/ It’s not all avantgarde organizational structures either. These technologies have the potential to affect every industry, disrupting old structures and creating opportunity.
34/ For example, German utilities company RWE has recently partnered with Ethereum startup Transactive Grid to allow the direct sale of surplus pro-sumer generated energy to local businesses and consumers.
35/ Brazillian materials provider, BVRIO, is using a blockchain registry protocol, Regis, to track the exact makeup of their materials. Specifically preventing illegally logged timber from entering their supply chain.
36/ Provenance use cases like this are creating new premium product categories in industries where environmental and human rights abuses have occurred in the past.
37/ See what’s going on over at blockchain venture production studio Consensys Systems, and sign up to our newsletter, here