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The Story of the DAO — Its History and Consequences

One of the near incredible concepts to be successfully implemented through blockchain technology is the DAO, a decentralized autonomous arrangement. Decentralized autonomous organizations are entities that operate through smart contracts. Its financial transactions and rules are encoded on a blockchain, effectively removing the need for a central governing dominance — hence the descriptors "decentralized" and "autonomous."

The Decentralized Democratic Organisation (known as The DAO) was meant to operate like a venture capital fund for the crypto and decentralized space. The lack of a centralized dominance reduced costs and in theory provides more command and access to the investors.

At the beginning of May 2016, a few members of the Ethereum community announced the inception of The DAO, which was too known as Genesis DAO. It was congenital every bit a smart contract on the Ethereum blockchain. The coding framework was adult open source by the Slock.It team but it was deployed nether "The DAO" name by members of the Ethereum community. The DAO had a cosmos period during which anyone was allowed to send Ether to a unique wallet address in exchange for DAO tokens on a 1–100 scale. The creation flow was an unexpected success as it managed to gather 12.7M Ether (worth effectually $150M at the time), making it the biggest crowdfund ever. At some bespeak, when Ether was trading at $twenty, the total Ether from The DAO was worth over $250 million.

In essence, the platform would let anyone with a project to pitch their idea to the customs and potentially receive funding from The DAO. Anyone with DAO tokens could vote on plans, and would so receive rewards if the projects turned a profit. With the financing in place, things were looking up.

The DAO's Great Start Gone Wrong

However, on June 17, 2016, a hacker found a loophole in the coding that immune him to drain funds from The DAO. In the showtime few hours of the attack, 3.6 meg ETH were stolen, the equivalent of $seventy 1000000 at the time. In one case the hacker had washed the harm he intended, he withdrew the set on.

In this exploit, the attacker was able to "ask" the smart contract (DAO) to requite the Ether back multiple times before the smart contract could update its balance. Two primary issues made this possible: the fact that when the DAO smart contract was created the coders did non have into business relationship the possibility of a recursive telephone call and the fact that the smart contract first sent the ETH funds and then updated the internal token balance.

Information technology's important to understand that this bug did not come from Ethereum itself, merely from this one application that was congenital on Ethereum. The code written for The DAO had multiple flaws, and the recursive telephone call exploit was one of them. Another way to expect at this state of affairs is to compare

Ethereum to the Internet and any application based on Ethereum to a website — If a site is not working, it doesn't mean that the Internet is not working, it simply says that one website has a trouble. The hacker stopped draining The DAO for unknown reasons, even though he could have continued to exercise so. The Ethereum community and team chop-chop took control of the situation and presented multiple proposals to deal with the exploit.

Notwithstanding, the funds were placed into an business relationship discipline to a 28 twenty-four hours holding menstruation and so the hacker couldn't complete his getaway. To refund the lost coin, Ethereum hard forked to send the hacked funds to an account available to the original owners. The token owners were given an exchange rate of 1 ETH to 100 DAO tokens, the same rate every bit the initial offering.

Unsurprisingly, the hack was the commencement of the end for the DAO. The hack itself was contested by many Ethereum users, who argued that the hard fork violated the basic tenets of blockchain applied science. To make matters worse, on September 5, 2016, the cryptocurrency exchange Poloniex delisted DAO tokens, with Kraken doing the same in December 2016.

All of these problems stake in comparison to the United States Securities and Exchange Commision (SEC) ruling that was released on July 25, 2017. This report stated:

"Tokens offered and sold by a "virtual" organization known as "The DAO" were securities and therefore subject to the federal securities laws. The Report confirms that issuers of the distributed ledger or blockchain engineering-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws."

In other words, The DAO's offering was field of study to the aforementioned regulatory principles of companies undergoing the initial public offer process. Co-ordinate to the SEC, The DAO violated federal securities laws, along with all of its investors.

The Ongoing Impact of The DAO'south Rise and Fall

Though The DAO project has since folded, its impact is ongoing. Electric current blockchain development teams continually looked to The DAO'due south example for guidance — for what non to do.

First, The DAO teaches a valuable lesson about the importance of establishing secure blockchain platforms. The DAO's hack was not due to a trouble inherent on the Ethereum blockchain; it came from a coding loophole exploited by an intelligent hacker. Had the lawmaking been written correctly, the hack could have been avoided.

Second, the SEC's ruling on The DAO has encouraged blockchain startups to come up with ways of avoiding security registration and federal regulation. One of the ways companies practice this is past using the SAFT method. If tokens take legitimate utilitarian value on a blockchain platform,

they violate a component of the Howey case, and therefore cannot be listed as securities or regulated by the SEC.

Without the DAO, who knows what lessons would still demand to exist taught.

This story is published in The Startup, Medium'southward largest entrepreneurship publication followed past 298,432+ people.

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Source: https://medium.com/swlh/the-story-of-the-dao-its-history-and-consequences-71e6a8a551ee

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