Toss of the Bit­coin

Cana­di­ans have poured mil­lions into blockchain, but many don’t know what they’re buy­ing

The Walrus - - CONTENTS - By Joshua Oliver

In late april 2016, a new ven­ture cap­i­tal firm be­gan ac­cept­ing in­vest­ments. Its pro­file was un­usual: it had no em­ploy­ees, no man­agers, noof­fice. It ex­isted only on the in­ter­net and was com­posed en­tirely of com­puter code. The ven­ture raised more than $150 mil­lion in less than a month.

This was The DAO, the world’s first de­cen­tral­ized au­ton­o­mous or­ga­ni­za­tion. Its pro­gram­mers had a sim­ple idea: In­stead of reg­is­ter­ing a le­gal cor­po­ra­tion — with its pon­der­ous fil­ings, an­nual meet­ings, and share­holder agree­ments — what if they just built a dig­i­tal sys­tem wherein in­vestors would vote on how to spend funds, and ev­ery­thing else would be han­dled seam­lessly by the soft­ware? What if they could au­to­mate a cor­po­ra­tion?

The DAO was an ex­per­i­ment us­ing blockchain, a type of com­puter pro­gram by which in­for­ma­tion can be both shared and se­cured — and which ex­perts say will revo­lu­tion­ize busi­nesses in ev­ery field. “We view blockchain as hav­ing the po­ten­tial to change all of tech­no­log­i­cal in­ter­ac­tions the same way that the in­ter­net changed com­mu­ni­ca­tion in the nineties,” said Manav Gupta, chief tech­nol­ogy of­fi­cer of IBM Cloud Canada.

Blockchain has be­come fa­mous thanks to its most well-known ap­pli­ca­tion: the dig­i­tal cur­rency Bit­coin. In con­ven­tional cur­ren­cies, a few banks and the is­su­ing gov­ern­ment keep track of who owns how many dol­lars or Eu­ros or di­nars — whereas in cryp­tocur­ren­cies like Bit­coin, that ledger is avail­able to all of its mem­bers. Blockchain makes this level of trans­parency pos­si­ble by cre­at­ing a ledger that is tam­per-proof (since en­tries show­ing who owns how much of the cur­rency can­not be al­tered), ac­cu­rate (with a process for val­i­dat­ing new en­tries), and fraud-proof (by au­then­ti­cat­ing cur­rency ex­changes). This was the tech­nol­ogy The DAO would use to pro­tect ev­ery­body’s money.

As in­vest­ments came pour­ing in, how­ever, ob­servers no­ticed bugs in The DAO’S code, in­clud­ing one that en­dan­gered mem­bers’ funds. Pro­gram­mers had, in a sense, built a very strong safe with­out check­ing whether the lock worked. There was a scram­ble to fix the faults, but ev­ery change had to be ap­proved by a vote of the ven­ture’s roughly 11,000 mem­bers. In ad­di­tion to crowd­fund­ing in­vest­ment, The DAO crowd­sourced governance — and it was too slow. With the share­holder vote on how to fix the vul­ner­a­bil­i­ties still pend­ing, hack­ers ex­ploited the faults to ap­pro­pri­ate more than $50 mil­lion with one key­stroke.

Ex­cited by the novel tech, The DAO’S back­ers didn’t use com­mon busi­ness sense when they vet­ted the com­pany. And they’re not alone. Con­vinced that blockchain is “the next big thing,” in­vestors world­wide put more than $2 bil­lion into other blockchain star­tups in the first ten months of 2017, with some money go­ing to shady play­ers. This spring, in­ves­ti­ga­tors found that In­dian com­pany Onecoin had at­tracted at least $38 mil­lion with vague plans to use blockchain to sell, among other things, “ed­u­ca­tion ma­te­rial.” It turns out the com­pany didn’t have any blockchain tech­nol­ogy and hardly any prod­ucts. Au­thor­i­ties around the world are now pur­su­ing its ring­leaders.

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