Ethereum Markets Reeling After Security Fault Allows Massive Theft

The DAO, which uses Ethereum for decentralized venture capital investing, targeted in multi-million theft.


The community buying, selling, and caring about the blockchain technology/alt-coin Ethereum is reeling this morning after a security vulnerability allowed a currently unknown thief to steal millions of Ethereum tokens from the DAO, an Ethereum-using decentralized venture capital company. The details of DAO's structure and intentions were explained at Reason last month by Andrea Castillo. Prior to the price of Ethereum beginning to fall today in reaction to the news, it was nearly $80 million dollars worth of Ethereum.


Vitalik Buterin of the Ethereum Foundation reports on what happened and how:

An attack has been found and exploited in the DAO, and the attacker is currently in the process of draining the ether contained in the DAO into a child DAO. The attack is a recursive calling vulnerability,where an attacker called the "split" function, and then calls the split function recursively inside of the split, thereby collecting ether many times over in a single transaction.

The leaked ether is in a child DAO….even if no action is taken, the attacker will not be able to withdraw any ether at least for another ~27 days (the creation window for the child DAO). This is an issue that affects the DAO specifically; Ethereum itself is perfectly safe.

Business Insider has a thorough account, including a discussion of the idea (an idea that I'm told by Jon Holmquist, the marketing director of bitcoin payment company GoCoin, in a phone interview this morning is probably already a non-starter in the community) of making a "hard fork" in the Ethereum blockchain that would essentially take it all back in time to before the theft happened, an idea that is quite controversial:

"You can't rollback and drag the whole of Ethereum into this mess," one community member said in Slack. "The fault is entirely with The DAO and not Ethereum, let the DAO sink and have done with it. Ethereum will recover, there's nothing wrong with Ethereum."

Quartz has more including why these sort of problems are not unique to cryptocurrencies:

there's a pretty good fiat-currency analogy to the DAO hack. The Bangladesh central bank had $81 million stolen from it in an online heist in February, after the SWIFT messaging network, which connects the world's major financial institutions, was exploited by attackers.

While the Bangladesh heist only came to light in March, as government officials began pointing fingers, the DAO theft can be watched in real-time. Here's the DAO's address on an ethereum blockchain explorer called Etherscan, and here's the address to which the apparent hacker is transferring funds. You can see the inflow of DAO funds into the attacker's wallet on this list. The last transfer, for 258 ether, took place about 90 minutes ago.

…..While the code governing the ethereum blockchain doesn't appear to have been compromised, the fact remains that the defenses of one of its largest pool of funds was breached…

The "rollback" scheme is also not unprecedented in the cryptocurrency world:

This isn't as crazy as it sounds. Bitcoin miners have performed at least one rollback, in 2010, to fix a technical glitch. But bitcoin was trading for pennies then, a far cry from the $11.5 billion-worth of bitcoin in circulation today. Ether at current prices is already worth serious money. All the ether in circulation today is valued at $1.3 billion.

Another question is whether a rollback dangerously undermines a cryptocurrency designed to be decentralized and beyond the control of any single party or group. [Stephan] Tual [from the company behind DAO] has an argument against that too. "You need to compare this to a central server of a bank, where they can just change numbers without anyone being aware," he says. "In this case, it's completely different. If all the miners come together and [do a rollback], it's a community action. And it's transparent, completely transparent."

A Reddit thread hooked off of Buterin's suggested fix is a good place to see interested parties debating the matter in its comment thread. The tech details of Buterin's suggestion, which are merely a means of making sure that the tokens sent to the "child DAO" can't be spent, not a full "rollback" of the blockchain:

A software fork has been proposed, (with NO ROLLBACK; no transactions or blocks will be "reversed") which will make any transactions that make any calls/callcodes/delegatecalls that execute code with code hash 0x7278d050619a624f84f51987149ddb439cdaadfba5966f7cfaea7ad44340a4ba (ie. the DAO and children) lead to the transaction (not just the call, the transaction) being invalid, starting from block 1760000 (precise block number subject to change up until the point the code is released), preventing the ether from being withdrawn by the attacker past the 27-day window. This will provide plenty of time for discussion of potential further steps including to give token holders the ability to recover their ether.

Miners and mining pools should resume allowing transactions as normal, wait for the soft fork code and stand ready to download and run it if they agree with this path forward for the Ethereum ecosystem. DAO token holders and ethereum users should sit tight and remain calm. Exchanges should feel safe in resuming trading ETH.

Some more good technical details on what happened to the DAO at Hacking Distributed.

Here is where it seems the vulnerability may have been first publicly discussed.

Holmquist, marketing director at GoCoin, was not panicked about what this might mean for alt-coin or blockchain tech. He analogized it in some respects to the blow bitcoin took when its major exchange Mt. Gox had all its customer's coin stolen in 2014.

He meant this as a calming analogy, as something that the tech and market rolled past and continued to thrive.

But libertarians might note with alarm that Mt. Gox theft lead to some unneeded and harmful regulatory moves to "protect" the Btc market such as New York's BitLicense.

While this may turn potentially regulatory eyes toward the Ethereum market, it's hard to see now what regulatory solution could even potentially help in situations like this.

Getting involved in DAO was obviously and clearly a risky move to begin with. Anyone paying attention to DAO was well aware it was untested and unregulated and that buyers or investors should beware.

Right here at Reason last month Andrea Castillo, reporting on the DAO experiment, wrote: "This kind of corporate arrangement is untried and potentially quite vulnerable to unknown attack or programming errors. It is almost certainly illegal in many places throughout the world. And who in their right mind would entrust their personal capital in a loosely-defined autonomous system with no known creator?" (The article went on to explain why certain people would want to participate in such an experiment despite the risks.

This Reason TV video from Jim Epstein has more on the essentially unregulatable nature of the Ethereum experiment:

Track today's market woes for Ethereum if you wish.

Reason on Ethereum.