Bitcoin came first, they are “King of the Hill.” Ethereum is number two in the cryptocurrency/blockchain world. But it is of course not an apples-to-apples comparison. Ethereum does have its cryptocurrency Ether on its blockchain. But it is much more than a distributed currency. By providing a global runtime environment consisting of thousands of distributed nodes that runs decentralized applications on the Blockchain, namely the Ethereum Virtual Machine, it is indeed transformative. Smart contracts are what these applications are called. Transactions trigger and execute functions on the smart contracts. Ethereum is powered by so-called gas, which is what a transaction needs for accessing the processing power of the Blockchain. Without gas, a transaction would come to a quick halt.
But the word contract could be somewhat confusing. There are some similarities to legal agreements. But end of the day, smart contracts are packages of code running on the EVM. Currency is just one of the applications that Ethereum makes possible. There are certainly many more. Limited only by the imagination so long as the applications are based on decentralization and shared memory. Voting, prediction, social media, asset sharing, the list goes on. The cool part is these smart contracts are totally automated, no middleman needed. Once deployed, they are unstoppable. Like a runaway train! Facebook, Twitter, and Uber are examples of organizations that could potentially get replaced by these decentralized apps on the Ethereum Blockchain. A step ahead of apps are decentralized autonomous organizations (DAOs) that are entire organizations that run on the Blockchain, controlled completely by code. They deliver on their goals with silent, purposeful efficiency. No vexing human resource management issues to deal with!
So long as they don’t get hacked. Which is what unfortunately happened to the first DAO, “The DAO.” When launched, it took off with a bang. The idea was to have token holders who become members of the DAO by investing Ether in it. Backed by its corpus of crowdfunded Ether, the DAO would get to develop proposals that are voted on by token holders. It became a wild success. To the tune of 13 million Ether. At $20 per Ether (which was about the price back then), the DAO was worth $260 million. At today’s price of about $300, it would have been worth approximately $3.9 billion! Lots of value riding on what was about 1,000 lines of code.
Unfortunately, it didn’t get to make it thus far. A hacker found a way to drain its funds using a vulnerability in its code. SplitDAO was the function in the DAO’s code that enabled token holders to exit at any time with their share of the Ether. By repeatedly calling this function and withdrawing Ether without allowing the logic to update the Ether balance each time, the hacker could get away with much, much more than his due share. He took off with as much as 3.6 million Ether (about 28% of the DAO corpus). As the Ether price soon dropped to $13, the heist became worth about $50 million.
Being a public blockchain, the developers could see the hack unfolding after it was discovered and the child DAO where the funds were going to (they called it the “Dark DAO”), they just couldn’t do anything about it right away. You could call it a robbery happening in broad daylight. Fortunately, there was an approximately 30-day moratorium on the withdrawn amount, which provided a window to consider suitable remedies.
What followed was a series of fascinating counter measures. First off, a white hat hack was carried out to move the remainder of the DAO funds to new child DAOs. Otherwise, it was quite probable that the hacker would have made off with the entire booty. Next on the list was a soft fork that would blacklist any transactions/blocks that referenced the Dark DAO. That would have stopped the hacker from moving his funds as that would have been a blacklisted transaction. Unfortunately, the soft fork would also have enabled DDoS attacks that would execute compute intensive transactions and end with a call to the Dark DAO, providing a free ride for the hacker as no gas would be charged, being a blacklisted transaction. Miners would be forced to run and discard them without getting any transaction fees in return.
Ultimately it came down to a contentious hard fork that much like a time machine rolled back the blockchain to a point in time before the hack (as if it never happened) and moved all DAO funds to a new DAO with just a withdraw function. Investors thus could get back their funds.
But the hacker did have the last laugh, in a way. Another group of Ethereum users refused to go along with the hard fork and preserved the old blockchain with the hack and all. Enter the Ethereum Classic blockchain. They were considered renegades by the Ethereum Foundation who expected the parallel fork to wither away and die without its support. But it did unexpectedly gain some miner support. A competing currency was born, Ethereum Classic ETC. Today we have ETC and ETH, both in operation. ETC is trading at about $13. Market cap is in the range of $1.2B. Whereas ETH is at ~$300, market cap of $28 billion, so it is way higher. The hacker was able to hang on to the stolen funds in ETC.
For Ethereum, the future looks intriguing and exciting. It certainly appears to have brushed off the effects of the DAO hack and surged ahead. More changes are on the anvil to make the platform production ready. Scaling up the number of transactions, decentralized storage. Thus, ushering in a decentralized world. No more middlemen looking to take their share of influence and wealth. As the number two player, Ethereum sure is trying hard to make this new world a reality.