The DAO

The DAO was a decentralized investment fund that ran as a set of smart contracts on the Ethereum blockchain in 2016. Investors sent ether to the contract in exchange for DAO tokens, which gave them votes on which projects the fund should back. It was meant to show that an organization could operate entirely through code, without managers or a legal company, and it became one of the largest crowdfunding efforts of its time.

The DAO is remembered mainly for its failure. In June 2016 an attacker exploited a weakness in its code to drain around 3.6 million ether, about a third of its funds. The Ethereum community's decision to reverse the theft through a hard fork split the network in two, creating today's Ethereum and Ethereum Classic. In 2017 the US Securities and Exchange Commission used the case to warn that tokens sold to investors could be securities. The DAO gave its name to the broader idea of a decentralized autonomous organization (DAO).

Imagine a group of thousands of strangers pooling money into a vending machine that acts as an investment club. Each person's coins give them voting tokens. When someone proposes a project to fund, members vote, and if enough agree, the machine pays out automatically. There is no boss and no bank, only the machine's built-in rules.

The problem was that the machine had a design flaw. Someone discovered that by pressing a button in a particular way, they could make it hand out money again and again before it updated its records of how much they were owed. They used this to empty a large share of the club's money into their own compartment. Because the rules were written in code that everyone had agreed to, people argued bitterly over whether taking the money was theft or simply using the machine as designed.

The DAO's code was written largely by members of the team behind Slock.it, a German start-up, and released as open-source software. It went live at the end of April 2016, and a token sale ran for about four weeks, raising roughly 12 million ether from thousands of participants, worth around 150 million US dollars at the time.

• Tokens and votes. DAO tokens were issued in proportion to the ether contributed and carried voting rights over funding proposals.
• Curators. A group of well-known community figures acted as curators who checked the identity of those submitting proposals and maintained a whitelist of recipients.
• Splitting. Members who disagreed with a decision could "split", moving their share of ether into a new child DAO. Funds moved this way were locked for a period before they could be withdrawn.

Before any projects were funded, developers and researchers raised concerns about security flaws. On 17 June 2016 an attacker exploited one of them in the splitting function. The contract sent ether to the attacker before updating its record of the attacker's balance, and the attacker's contract called back into The DAO repeatedly during that gap, a technique now known as a reentrancy attack. About 3.6 million ether moved into a child DAO controlled by the attacker.

Because of the holding period built into child DAOs, the attacker could not immediately withdraw the funds. Volunteer developers, sometimes described as white hat hackers, used the same flaw to move much of the remaining ether out of reach. The price of ether fell sharply as the community debated what to do.

Proposals included a soft fork to freeze the attacker's funds, which was abandoned after a flaw was found, and a hard fork to move the drained ether into a recovery contract from which DAO token holders could reclaim their ether. Supporters argued that the theft threatened trust in Ethereum and that the young community had a duty to fix it. Opponents argued that changing the blockchain's history violated the principle of immutability, summed up as "code is law".

After a non-binding vote by ether holders favoured intervention, the hard fork was activated at block 1,920,000 on 20 July 2016. Most users, developers and exchanges followed the new chain, which kept the name Ethereum and the ticker ETH. A minority kept running the original chain without the change; once exchanges listed it, it became known as Ethereum Classic, trading as ETC. The split remains one of the best-known cases of a chain split.

On 25 July 2017 the SEC published a report of investigation concluding that DAO tokens were securities under US law, applying the Howey test for investment contracts. Investors had put in money expecting profits from the managerial efforts of Slock.it and the curators. The SEC took no enforcement action, but the report, released during the boom in initial coin offerings, signalled that token sellers could be subject to securities law and shaped later regulation.

The DAO's collapse made smart contract security a central concern for Ethereum developers, leading to new coding practices, tools and the growth of the smart contract audit industry. Reentrancy remains a standard item on security checklists. The episode also showed that a supposedly code-governed system still relied on human judgement in a crisis, and it continues to inform debates about governance, legal liability and the limits of decentralization.