How a $64M hack changed the fate of Ethereum, Bitcoin's closest competitor

Picture this: A thief steals millions of dollars by hacking into an investment fund. What if you could just hit the undo button and get that money back?

That was the dilemma that the creators of Ethereum,an upstart digital currency platform, recently faced.

Founded in 2015 by a group of researchersled byRussian-CanadianVitalikButerin then only 19 years old its currency, ether,is the second-most valuable digital currency after bitcoin.

But the currency suffered a blow recentlyafter a hacker siphoned $64 million worth of ether from investors. In the wake of the hack,Buterindecided to turnbackthe clockthrougha software updateand resetthe entire systemto its previousstate i.e.,before the hack. The reset createdaso-called hard fork, which splitEthereuminto two parallel systems.

Buterin assumed most users would move to the reset platform, butthe forkproved divisive and a small group of userscontinued using the old system, dubbing it EthereumClassic andarguing Buterinhad no right to reset the platform. That hasconfused cryptocurrency investors and cast a pall over the future of Ethereum.

It alsoopened up arift between the currency's creators, who were the ones to alterthecode andrender the stolen currencynull and void,and dissenterswho argued against anyinterventioneven in the face ofanOcean's Eleven-styleheist.

Smart contracts

Whilebitcoinis the best-knowncryptocurrency, there are, in fact, hundreds of digital, decentralized payment systems that issue andtrade digital currenciesonline.

Each operateson ablockchain, a digitalledgerthat keeps track of all transactions in transparent, peer-to-peer fashion.

Whilebitcoindid away with paper currency and a central banking authority, more complex transactions, such as setting up regularcoupon payments on a bond, might still require the assistance of a lawyeror other thirdparty.

Ethereumeliminates this need by incorporating code that allows transactions to occur throughso-called smart contracts, whichtakeautomatic effectonce mutually agreed-upon conditions have been met.

"An auction might automatically transfer deeds of ownership to the highest bidder after a certain time has elapsed, or afather's contract might automatically send his son a set amount of money every year on his birthday,"explains Business Insider's Rob Price.

Something that was founded by a 19-year-old university dropout in Torontoturned into this $1-billion platform.-AlexTapscott, technology writer

Like bitcoin, etherhas grown in popularity beyond internet discussion boards and small tech start-ups. Technology and financial companies from Microsoft to Deloitte havetaken an interest in it.

"Something that was founded by a 19-year-old university dropout in Toronto, Canada, leveraging the resources of developers all over the world, turned into this $1-billion platform," said AlexTapscott, techwriter and co-author of the bookBlockchainRevolution:How the Technology Behind Bitcoin Is Changing Money, Business, and the World.

The hackand the fork

But before long, the digital currencyfell victim to an all-too-human problem: theft.

In April, a group of Ethereum userslaunched what is known as adecentralized autonomous organizations, or DAO, essentially a digital venture capital firm powered by ether. DAO members were supposed to vote on future Ethereum-related projects.

The DAO raised more than $160 million worth of ether from about 11,000 investors. Some have called it the biggest crowdfunding project ever.

But on June17, before anyone could do anything with the DAO, someone found a vulnerability in the DAO's code (much like finding a legal loophole in a sloppily written real-worldcontract),and siphoned3.6 million ether from the fund.

Ether's value tanked from a high of $27.60 to $18 immediately after the hack. It hassince dropped further to $14.

• Bitcoinsworth $94M stolen in hack onBitfinexexchange
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The total value stolen, depending on whether you calculate it before or after the hack, ranges from $64 million to $101 million.

Ethereum'screators weren't directly responsible for the DAO, but since the amount stolen from it represented 15 per cent of all ether in circulation, they locked the stolen funds in a "child DAO" a sort of digital escrow preventing the thief from cashing out.

Buterinand his team carried out the hard forkin theblockchain,rolling back the systemto a day before the DAO was formed andreturning the stolen ether to the original owners.The thief was essentiallyleft with etherunrecognizedby the larger community.

"Anything to do with the DAO was reverted," Anthony DiIorio, a co-founder of Ethereumand CEO of Decentral, aToronto-basedblockchain company and bitcoin dispensary, told CBC News. "The contract was changed so that people could get their funds out."

EthereumClassic

The hard fork was completed on July 20, but tosome users, the move was akin to censorship.

Instead of using the post-forkcurrency, a small but vocalminority kept using the old one, whichcurrently trades for about $2.

To these adherents, "code is law," DiIoriosaid. They believe smart contracts should be immutableeven if the intent of changing the codewas to restore millions of stolen ether to the rightful owners.

Tapscottcallsthat aversion tointervention of any kind even by the platform's own creators "very naive."

"They confuse governance with government, and governance of any kind with authoritarianism," he said."There are lots of global resources out there that aren't owned or controlled by anyonethat have complex governance structures like the internet."

Can Ethereum and Ethereum Classic coexist?

Tapscott says the co-existence of two Ethereum chains "causes confusion as to which isthe 'real' Ethereum, which is bad for investor and developer confidence."

"'The more the merrier' is a fine philosophy for ideologues and traders, but for people who actually want to run or build smart contracts, two chains are a mess," investor Jacob Eliosoff told cryptocurrency news site Coindesk.

In a separate op-ed, he argued that if this fragmentation continues, "the technology we love will never reach a wider public."

Cryptocurrencyusers appear to agree, asEthereumClassic's price plunged more than 23 per cent in the last week,according toCoindesk.

The debate around the forking of the Ethereumplatform resembles one that raged within the Bitcoin community a few months ago when some Bitcoin developers proposed increasing the size of the blockchainso that the system could process moretransactions at afaster rate.

• Bitcoin feud over expansion threatens to destabilize currency

Still,Tapscott remains bullish on the future of blockchain technology, regardless of the ultimate fate of ether, bitcoin or any single digital currency.

"Ethereumis one tiny fraction of the entireblockchainuniverse, and the universe is barrelling ahead on all fronts," he said.