Blockchain networks tend to support principles, like open access and permissionless use, that should be familiar to proponents of the early internet. To protect this vision from political pressure and regulatory interference, blockchain networks rely on a decentralized infrastructure that can’t be controlled by any one person or group. Unlike political regulation, blockchain governance is not emergent from the community. Rather, it is ex ante, encoded in the protocols and processes as an integral part of the original network architecture. To be a part of a community supporting a blockchain is to accept the rules of the network as they were originally established.
In a blockchain transaction, you don’t have to trust your counterpart to perform their obligations or properly record transactional data, since these processes are standardized and automated, but you do have to trust that the code and the network will function as you expect. And just how immutable are blockchain ledger entries if the network becomes politicized? As it turns out, not very.
Consider the case of the DAO. Short for decentralized autonomous organization, a DAO is software designed to manage the fiduciary obligations of holding and disbursing blockchain assets without any human involvement. The code that was developed for the (confusingly named) The DAO application was called a “smart contract,” and ran as a DAO application on top of the Ethereum blockchain. The DAO issued tokens through its smart contract and traded them for Ethereum’s blockchain tokens, which are called ether. This token sale was done through a widely marketed crowdfunding campaign, raising more than $150 million in ether value.
The original vision of the Ethereum creators was that computer code should, quite literally, be treated as law in their community and serve as replacement for legal agreements and regulation. The DAO creators embraced this vision and noted that participants should look exclusively to the application’s code as dispositive on all matters. The code was the contract and the law for The DAO. Unfortunately, The DAO’s smart contract was flawed: It allowed a DAO token holder who exploited a bug in the code to siphon off one-third of the value held in the application (roughly $50 million) to their own account. This withdrawal of funds, while unexpected, did not violate either Ethereum’s or The DAO’s rules, naïve as they may have been. Nor does it appear to have violated any laws.
More at: Who Controls the Blockchain? – Harvard Business Review
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