Blockchain's Wake-Up Call: The DAO Hack and the Evolution of Security

Once upon a time, in the world of blockchain technology, there were brave travelers embarking on a grand journey toward global decentralization and freedom. These travelers, much like the projects developed on the blockchain, had their own unique starting points and faced various trials and tribulations along the way. But they all shared a common destination: "Decentralization."

Success didn't come easy for these adventurers. They had to make sacrifices and overcome countless challenges. One remarkable example was the DAO hack, a scandal that rocked the blockchain community and taught us valuable lessons about security and design.

But before we dive into the scandal, let's quickly recap what DAOs are. DAO stands for Decentralized Autonomous Organization, which is like a smart contract managing the operations of an organization. It all started with Dash in 2014, followed by the groundbreaking "DAO" project in 2016, and other successful examples like Maker DAO and Wyvern DAO.

Among these projects, the name "DAO" became etched in the memories of security researchers and crypto enthusiasts alike. It was a thrilling initiative by the team behind the German startup Slock.it, aiming to revolutionize how Ethereum projects were funded. The DAO acted as an investment vehicle, allowing investors to research and fund proposals through voting.

The DAO quickly gained popularity, setting a record for the largest crowdfunding campaign at the time. It raised over $150 million during its token sale, which accounted for roughly 16% of the total ether supply back then. Just imagine ether was trading at around $12, and the DAO's contract reached a staggering $250 million market capitalization when the price spiked to $20 before the attack.

Such immense popularity attracted both security researchers and hackers. On May 27, 2016, the first security analysis of the DAO code was published by Emin Gün Sirer, a Cornell professor, and Vlad Zamfir, an Ethereum researcher. The report identified seven attack vectors that could jeopardize the DAO's weak mechanism design and voting system.

Let's take a quick look at these seven attack vectors, some of which could have resulted in honest investors losing their hard-earned capital:

1. The Affirmative Bias: The voting system displayed a bias towards "yes" votes, suppressing negative sentiment during the voting process.
2. The Stalking Attack: An investor leaving the DAO could be blocked from withdrawing funds if a malicious entity transferred a majority of the funds to a sub-contract, enabling ransom and blackmail.
3. The Ambush Attack: A large investor could sway the outcome of a vote by making a last-minute large "yes" vote, leaving little time for others to react.
4. The Token Raid: A manipulative large investor could create panic and selling pressure to lower token prices, ensuring a bigger share of the DAO.
5. The Extra Balance Attack: A whale investor could scare token holders into leaving the DAO, increasing the extra balance and boosting token value.
6. The Split Majority Takeover Attack: This attack questioned the curators' ability to detect a large voting bloc seizing control and favoring their own interests.
7. The Concurrent Tie-down Attack: This attack trapped voter shares in a proposal with a long voting period while a concurrent proposal with a shorter period emerged.

Unfortunately, the report came too late, and the DAO launched on May 28, 2016, with its tokens trading on major exchanges like Poloniex and Kraken.

Two weeks later, panic ensued as one of the graduate students, Philip Daian, discovered a critical flaw in the DAO's smart contract. They realized that the rewards could be moved to a split DAO multiple times due to a violation of the withdrawal scheme. However, it was too late to rectify the issue.

Five days later, on June 17th, a hacker exploited this vulnerability and swiftly drained 3.6 million ether from the DAO, equivalent to about 30% of its holdings. In response, a group of white hat hackers, led by Ethereum Wallet's lead developer Alex Van de Sade and Ethereum evangelist Griff Green, formed the "Robin Hood group." They planned to protect the remaining 70% of funds by using the same vulnerability to "steal" them and distribute them back to rightful owners.

But the black hat hacker struck back with a stalking attack, continuously tracking the Robin Hood group's splits and preventing them from securing the remaining funds. Meanwhile, Vitalik Buterin, the co-founder of Ethereum, proposed a high-level solution: a hard fork.

In order to fix the DAO problem, the Ethereum community needed to convince the majority of the network's nodes to adopt a hard fork, which would reinterpret history and ensure the attack never occurred. This sparked an ideological split, with some advocating for immutability and non-interference, while others favored the hard fork to address the challenges faced by the young network.

Ultimately, the majority voted for the hard fork, which took place on July 20 at block 1,920,000. The fork included a fix for the DAO, allowing investors to retrieve their funds. The original unmodified chain, which was expected to fade away, gained supporters and became Ethereum Classic, a valid second Ethereum chain with its own valuable digital currency.

To this day, the identity of the attacker remains unknown, with only traces of one of their addresses (0xF35e2cC8E6523d683eD44870f5B7cC785051a77D) left behind.

In conclusion, the DAO hack was a pivotal moment in the blockchain world. It taught us that the early days were filled with uncertainty and limited knowledge about smart contract codes and protocols. However, the community has come a long way since then, with established security best practices and design patterns that help vet smart contracts and prevent similar issues. Today's Ethereum community is well-equipped to tackle challenges and safeguard the ecosystem as it continues its journey toward #decentralization .