5 Reasons Why the DAO Bailout Was Bad for Ethereum

Recently DAO investors were bailed out by hard forking the Ethereum blockchain. Last month an attacker found an exploit in a smart contract holding over $150M worth of ether and was able to drain part of the funds.

In response to the attack, the Ethereum core developers decided to rewrite the history of the ledger, making it so that the attack never happened.

Many in the community were pleased with the refund but the hard fork may have damaged the reputation of their blockchain. 

#1: Immutability Matters

Immutability is the #1 value proposition of blockchains. What this means is that information can be permanently stored on a public ledger without being tampered with. 

Traditionally, ledgers were maintained by trusted fiduciaries but it could never be 100% guaranteed that the data wasn’t altered. Bitcoin created a new system where financial transactions and information can be stored without requiring trust in a third party. Take away this key component of the system and you’ve defeated the entire purpose of blockchains

Ethereum markets immutability as their main selling feature. The opening line of their website states:

Build unstoppable applications

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

The hard fork contradicts the entire value proposition of Ethereum because it proves their applications are:  

  • Stoppable
  • Won’t run exactly as programmed
  • Can be censored
  • Are subject to fraud due to buggy code
  • Can be interfered with by a third party

The DAO marketed itself as a sort of autonomous and unstoppable Titanic, using many catchy phrases on their site: 

…operating solely with the steadfast iron will of unstoppable code.

The DAO is borne from immutable, unstoppable, and irrefutable computer code

The DAO is self-governing and not influenced by outside forces: its software operates autonomously and its by-laws are immutably chiseled into the Ethereum blockchain

The hard fork technically violates the terms and conditions set forth in the DAO…

The terms of The DAO Creation are set forth in the smart contract code existing on the Ethereum blockchain at 0xbb9bc244d798123fde783fcc1c72d3bb8c189413. Nothing in this explanation of terms or in any other document or communication may modify or add any additional obligations or guarantees beyond those set forth in The DAO’s code. Any and all explanatory terms or descriptions are merely offered for educational purposes and do not supercede or modify the express terms of The DAO’s code set forth on the blockchain; to the extent you believe there to be any conflict or discrepancy between the descriptions offered here and the functionality of The DAO’s code at 0xbb9bc244d798123fde783fcc1c72d3bb8c189413, The DAO’s code controls and sets forth all terms of The DAO Creation.

#2: Conflict of Interest 

As the lead core developer for the Ethereum foundation, Vitalik Buterin’s investment and close association with the DAO was a conflict of interest. 

Black’s Law Dictionary defines a conflict of interest as: 

“A real or seemingly incompatibility between one’s private interests and one’s public or fiduciary duties.”

Selling people on the idea of immutable smart contracts and then rewriting the history of the ledger to get a refund for a poor investment decision is certainly a conflict of interest. 

#3: The Crowd Lacks Wisdom

It’s ironic that the DAO claimed to be governed by “the wisdom of the crowd” yet the crowd blindly shovelled millions of dollars into a contract that was riddled with bugs. 

The code should have been extensively audited before going public, yet none of the investors bothered to do so. Individuals often lose their ability to think critically when caught up in the collective hysteria of mob mentality. 

The markets are often driven by dumb emotional money, which is the main reason why bubbles are formed. 

Some would argue that the hard fork was a democratic process driven by the community. While this may be the case, it also violates Ethereum’s agreement made to all its users of “immutable applications”. There are a minority of Ethereum users who disagreed with the hard fork and their trust in the system was violated. 

If the DAO crowd rushed into this application with eyes closed, then it’s entirely possible they’ve rushed into a hard fork without considering the potential long term consequences. 

#4: The Hard Fork Sets a Legal Precedence 

Making your blockchain mutable with a hard fork sets a dangerous legal precedence that could be used as leverage by centralized powers. If it can be done once then it can certainly be done again. 

What’s to stop a government from issuing a subpoena to the core developers to change the history of the blockchain? One could argue that the community and miners would never agree to such a fork but the only thing stopping it would be a political sway of public opinion.  

Once precedence is set to operate your blockchain through a democratic process then social manipulation could be used to alter its conditions. The crowd has already distinguished itself as being highly susceptible to marketing hype. 

There will be more Ethereum contracts in the future and some of them will contain faulty code or be outright scams. Will the DAO be the one and only application worthy of a hard fork? 

#5: The DAO Attackers May Have Succeeded in their Mission

According to this interview, the DAO attack was conducted by a group of people who were politically motivated to hurt Ethereum. 

Although the DAO attackers didn’t get to keep their stolen funds, their mission to discredit and hurt Ethereum may have been a success. This attack did more than just steal ether from a contract, it ruined Ethereum’s main value proposition. 

If not for immutability, then what good are decentralized applications? Building applications on a blockchain is more expensive and complicated than using a centralized server. Without an immutable censorship resistant ledger, a blockchain has very little value to offer.  

 

 

 

 

Rocky

I have a passion for Bitcoin and the crypto markets. I work full-time as a cryptocurrency trader, investor and analyst. I also run a crypto trading school at skillincubator.com
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