Many of the banks in the United States received government bailouts and special treatments shortly after the bankruptcy of Lehman Brothers in 2008 because the government believed that if it didn’t intervene, the consequences of many other banks going bankrupt would be dire to the economy. The analogy between what happened with The DAO project on the Ethereum network and the bailouts by the US government during the Great Recession is absolutely remarkable. Banks decided to take big risks even though the models they were using were erroneous and when they did fail, the government came to the rescue, save them, and didn’t punish anyone. All chief executive officers that ran major US banks prior to the Great Recession made tens and sometimes even hundreds of millions of dollars and were able to keep their money.
Even though the blockchain technology is about decentralization, The Dao was “too big to fail” from the point of view of many members of the Ethereum network and community. Several notable figures from the Ethereum Foundation were token holders in The DAO crowdsale and also served as advisors in The DAO project.
A conversation about solutions that the creators of the Ethereum network considered as a way to deal with The DAO hack is impossible without talking about the basics of blockchain networks.
On a blockchain network, miners compile information about transactions into blocks. Then, the network adds new blocks to the existing chain. If different miners create blocks at the same time, the network accepts just one block and rejects all the other ones, so that all nodes on the network have the exact same copy of the blockchain. The only way to rewrite the blockchain would be to have 51% of the nodes agree to do so, which has never happened in the past and which is the exact opposite of one of the main goals of the blockchain network because blockchain technology is about decentralization, transparency and responsibility that go against an authority deciding to rewrite history.
There have been three proposed approached to The DAO hack. The first solution was to do nothing and to stick with the principle of decentralization and responsibility for what happens. The second approach was to do a soft fork, which means adding code to Ethereum software that would make impossible any use of the account where the funds from the hack went but not having any rollback and not reversing any transactions or blocks.
The third approach was a hard fork, meaning reversing some of the blocks on the Ethereum blockchain and returning the money to the original DAO project.
What happened then was really interesting. Someone claimed to be the attacker and wrote an open letter to the Ethereum community. However, there was no way to verify if the person was the attacker or not. In the letter, the attacker said that he didn’t do anything illegal because there was no law preventing him from exploiting the code on the stateless network to which no regular laws apply. The attacker said that the funds were his reward for figuring out how to obtain them. He also threatened legal action against those who would try to undo his work. The attacker did have a right to his opinion because the foundation for the smart contracts is that smart contracts can function without any third-party intervention and whatever happens as a result of an active smart contract can’t be reversed, meaning that no one should be able to change an outcome of the contract.
On July 21, 2016 the Ethereum network completed a hard fork, returning all the stolen funds to the original DAO. This event led to the creation of two blockchains, the one in which the funds were returns kept the name Ethereum and the second one became Ethereum classic.