The DAO Hack Explained: Unfortunate Take-off of Smart Contracts
Smart contracts brought distributed autonomous organizations, aka “DAO”s, to our life. A DAO is another computer code through which a set of smart contracts are connected together and function as a governance mechanism.
In this story I will explore the most famous DAO project, the DAO, and its effects on the smart contract environment. While reading the explanations, it must be borne in mind that all these discussions took place in online platforms such as GitHub and Reddit. Therefore, it is not possible to make definitive statements or give exact figures on all arguments used in these discussions.
1. The Creation of the DAO
The most infamous DAO project was the DAO created by the Slock.it and went live on 30 April 2016. It was a virtual venture capital fund that is governed by the investors of the DAO. The idea was the following: Funds raised from the investors, the token holders, are pooled. Token holders can become contractors by submitting proposals for funding of their project by using the DAO funds. There was a curator examination, which was just an identity verification conducted by one of curators who were selected among the respected members of the Ethereum community. Once the proposal passed the curator’s check, it would be voted on by the investors. If a proposal is approved by a quorum of 20% of all tokens, the DAO automatically transfers Ether to the smart contract that represents the proposal. Any Ether generated from the proposals funded by the DAO would be returned to participating investors as rewards.
During the initial offering took place in May 2016, the only requirement for being an investor was to invest Ether into the system. In exchange, participants were given DAO Tokens, 100 DAO Tokens for 1 Ether, which give voting rights to be used during the selection of projects that would be funded. The DAO raised 12.7 million Ether, which was equal to more than 150 million USD back then and became the biggest crowdfunding project until its time. However, on 16 June 2016, the DAO got hacked.
2. Infamous ‘Split’ Function and the Child DAO
The governance mechanism embraced by the DAO was similar to the governance of…