In June 2016 an attacker drained about 3.6 million ether from a large crowd-funded project called The DAO, and the community’s answer split Ethereum into two chains.
What you will learn
Explain what The DAO was and how the attack worked in simple terms.
Describe the two sides of the debate and why both had a point.
Say what the episode taught people about smart contracts.
The lessons
Lesson 1: What was The DAO?
DAO stands for decentralised autonomous organisation. The DAO was the best-known example: a fund run by smart contract code, where people put in ether and then voted on which projects it should back.
It launched in the spring of 2016 and collected a very large amount of ether, making it the biggest crowd-funded project of its time. Many people saw it as a glimpse of how organisations could work without bosses or banks.
But the code had been written quickly and not everyone had been given time to check it carefully. Some developers had warned about problems before the attack.
Remember: The DAO showed the promise of smart contracts and, soon after, their danger.
Lesson 2: The attack
In June 2016 someone found a flaw in The DAO’s code. By exploiting it, they began draining ether out of the fund, about 3.6 million ether in total.
Importantly, the attacker did not break Ethereum itself. They used the contract in a way the builders never intended, but that the code technically allowed. Many people said the code had done exactly what it was written to do.
That is the core risk of smart contracts. A program does what it says, not what its authors meant, and once money is inside there may be no way to take it back.
Remember: Ethereum worked as designed. The mistake was in one program built on top of it.
Lesson 3: The hard fork and Ethereum Classic
The community had to decide what to do. One side argued that the theft was a clear case of something going badly wrong and that the chain should be changed to return the money. The other side argued that a blockchain is only trustworthy if its history is never rewritten, even when the result is unfair.
In July 2016 most of the community supported a hard fork, a change to the rules that is not compatible with the old ones, which moved the stolen funds to a recovery contract. Some people refused to move, and kept running the original chain. It continues as Ethereum Classic, with its own coin, ETC.
Both sides had a real argument. The episode is still discussed as a lesson in how far a community should go to fix a mistake, and in the cost of being wrong.
Remember: There are now two coins, ETH and ETC, because a community could not agree. Neither side was foolish.
Key dates
When
What happened
Why it matters
April to May 2016
The DAO launches and collects funds
The biggest crowd-funded project of its time
June 2016
An attacker drains about 3.6 million ether
A flaw in smart contract code costs a fortune
July 2016
Ethereum makes a hard fork to return the funds
The chain is changed; Ethereum Classic continues on the old path
Key terms: DAO, exploit, hard fork, Ethereum Classic, code is law. Open the glossary
Module quiz
4 questions. Tap an answer to see if you are right and why.
1. What happened to The DAO in June 2016?
The attacker used a flaw in the contract code.
2. Why are there two coins, ETH and ETC?
The old chain continued as Ethereum Classic.
3. Did the attacker break Ethereum itself?
Ethereum worked as designed; the mistake was in one contract.
4. What does this episode teach about smart contracts?
Code mistakes can be very costly.
Do it yourself
Write a short two-sided note. On one side, why reversing the attack was fair. On the other, why a chain should never be rewritten. Then say which risk matters more to you, and why.
Not financial advice. This lesson is history and education only. Prices are rounded and shown only to explain how big the swings were.