Toss of the Bitcoin
Canadians have poured millions into blockchain, but many don’t know what they’re buying
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.