​Ethereum Hack Causes Value To Drop 25 Percent; Investor Debate Looms

Ethereum Hack
Author: Jennifer HongBy:
Staff Reporter
Jun. 18, 2016

The value of Ethereum has fallen about 25 percent after a hack that exploited a loophole in its code that siphoned away more than $56 million of money from its users.

Ethereum has been called the “World Computer” because of its dual function as a currency and a coding platform, iNews Today reports. The Bitcoin rival is thought by many to be the next evolution in digital financial systems. The system has grown quickly, and gained millions of dollars in support from its users.

But on Friday, Ethereum faced its first major challenge in the form of an attack from hackers. Now, Ethereum is at a crossroads, since the only way to return the funds might be to violate the core principles of not just Ethereum, but all blockchains.

Ethereal hack in DAO withdrawal code worries future investors

Ethereal hack in DAO withdrawal code worries future investors

On Friday at 03:34:48 UTC, a user (or multiple users) began exploiting a broken function in the Democratic Autonomous Organization (or DAO)’s withdrawal code by using a hack. A DAO is a bit like a crowdsourced investment fund that is governed by code, Coin Desk reported.

Users can invest money into the fund, which is then tracked by the internal ledger, the Ethereum blockchain. In return, investors in the DAO get tokens that give them voting rights on what the organization does with its money. When investments turn a profit, users can decide on whether to distribute the money as a reward in the form of ether, or put the money back into the central fund.

The user leveraged a bug that allows them to withdraw multiple instances of ether from a single amount of DAO token-a bug which was said to be fixed on Monday.

You have to give credit to the transparency of the blockchain network. Other users participating in the DAO noticed the withdrawals early into the attack, but they had no way to stop it. Ether was withdrawn in 258 ETH chunks and eventually totaled 3,641,694 ETH, currently worth $56 million, before there were measures put in place to halt the thief, the Financial Times reported.

Trading is now closed at the major ether exchanges since the hack, and due to the mechanics of the DAO, stolen funds are trapped in another, smaller DAO controlled by the attacker (what’s known as a “child DAO”) for 27 days. Now, the community and creators have some time to catch their breaths, and determine the reaction of the entire Ethereum system.

These events have put the fundamental promises of the blockchain system into question. The thief would be stopped by what is known as a “soft fork,” a software patch that would block the withdrawal of the funds from the child DAO. Vitalik Buterin, Ethereum’s creator-who’s also sometimes the focus of a cult of personality-had to step in and design the change.

What are the next steps?

There are mounting calls for a “hard fork” in the Ethereum code, especially from the creators of this DAO, Slock.it. This fork would roll back changes to the ledger and return the money from the thief. Other solutions would have them keep the money.

Stephan Tual, Founder and COO of Slock.it, went to Twitter to make the case for the rewind of the system to restore the money.

But that goes against the principle of immutability, one of the features and benefits of the blockchain system. Proponents of the blockchain’s use in the form of smart contracts point to the fact that you can’t change a contract after it’s been decided upon by the network-this is what gives the blockchain the radical transparency that’s lauded by advocates.

Once something happens, it’s on record forever.

It’s worth noting that some critics have already come out as saying that the entire smart contract system-the code that governs the DAO-was foolish and doomed to fail. Dogecoin creator Jackson Palmer noted on Twitter that the DAO’s collapse was “inevitable,” and linked to an article on social sharing site Steemit that described smart contracts as “incredibly dumb.”

“Unlike normal contracts which can be interpreted by smart people,” the post states, “smart contracts are interpreted by computers. Computers are dumb. They can only do what they are told.”

Dogecoin

The design of the DAO uses a quorum voting structure where 20 percent of stakeholders need to agree on any decisions that change the network. If the ledger can be modified in this circumstance, what’s stopping future decisions from being recalled?

NASDAQ said that debate looms since the $50 million heist.

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