Governance: Why Crypto Investors Should Care

By most measures, the 2016 initial coin offering (ICO) for venture fund Decentralized Autonomous Organization (DAO) was a success. Billed as the “largest crowdfunding project in human history,” it raised a record $100 million worth of ethers in less than two days.

DAO was stateless and decentralized, meaning that its operations were not tied to a specific geographic area, and it had a flat organizational structure. DAO token holders could vote on projects for investment and the relationship between them and the overall organization was governed by smart contracts on Ethereum’s blockchain.

But a hack, which exploited security vulnerabilities in its code and resulted in the theft of $55 million worth of ether, foiled its ambitions. The question of what to do with the remaining funds cleaved the Ethereum developer community.

Large investors in the project demanded a hard fork, which would have refunded investors by creating a "withdraw" function in the code. But developers argued for a soft fork, which would have frozen funds and prevented the hacker from cashing in on the stolen ether. Underlying their argument was the "code is law" rule, wherein code pertaining to the original blockchain should remain immutable regardless of hacks.

The money guys won, and a hard fork created Ethereum while the original blockchain continued as Ethereum classic. As of this writing, Ethereum is the second-most-valuable cryptocurrency while Ethereum classic is ranked 64th. Trading in DAO tokens was discontinued.