Hard Fork Proposal: What are the Impacts on Ethereum and The DAO?

Rage Review : In order to recover the losses caused by The DAO vulnerability, developers and miners decided to adopt a hard fork solution, adjusting the time to before The DAO was attacked, and DAO token holders can withdraw ether at an exchange rate of 1 ether: 100 DAO. Ethereum co-founder Jeff Wilcke announced a bounty program, where coders can get rewards by discovering vulnerabilities in the code. Once the hard fork solution is implemented, the Ethereum blockchain, which claims to be an unalterable transaction record, will no longer be unalterable. To some extent, code cannot become law.

Translation: Nicole

Last month, unknown intruders stole tens of millions of dollars worth of the digital currency Ether from The DAO, an Ethereum-based smart contract that serves as a funding tool for projects in the ecosystem. Following the incident, developers turned back the clock to before the hack to limit their losses, and now it has come to a critical juncture as network-wide changes are set to take place this week.

For weeks, the impact was mostly confined to social media posts, and for developers, the impact only existed in workspaces and private conversations, and eventually a so-called 'hard fork' solution was figured out. However, now that the code to handle the change has been changed and merged into the main wallet implementation, this is about to change again.

Over the past few days, major exchanges that offer Ethereum trading services have announced their plans to support the hard fork. Generally speaking, the plan is to support the most powerful blockchain, which is determined by the hashrate attracted from Ethereum's distributed network of miners.

So far, digital currency exchanges Poloniex and Kraken, which account for 50% of Ethereum trading volume, have said they plan to temporarily suspend deposits and withdrawals before the fork is implemented.

There are signs that miners are heavily driving the adoption of the hard fork proposal, and major pool operators want their members to evaluate supporting the plan even if they are unwilling to do so.

The stakes for the vote are high, and if the hard fork fails to go through, many early ethereum adopters who bought DAO tokens intend to distribute their $60 million worth of digital currency voting rights to a new organization, which could draw potential regulators into the equation.

On the other hand, if the hard fork is implemented, the Ethereum blockchain, which claims to be an immutable record of transactions, will no longer be immutable. In a sense, code cannot become law.

How we get there

For those of you who don’t know about The DAO, here’s a quick recap of the story so far.

The DAO project was launched in April as a series of contracts to raise funds for Ethereum-based projects and disperse those funds among members for voting. It launched an initial public offering, exchanging ether for "DAO tokens," which allow shareholders to vote on proposals, including supporting a crowdfunding of a project.

The financing amount reached 150 million worth of Ether, and 100 million DAO tokens were distributed.

However, just a month ago, news broke that a vulnerability had been discovered in The DAO’s smart contract, resulting in the loss of 3 million Ether.

Subsequent vulnerabilities were discovered, leading to the loss of even more ether, and eventually token holders implemented a ‘white hat scheme’ to protect remaining funds. This in turn led to retaliation from those who wanted to discover the vulnerability.

The hard fork was necessitated after researchers discovered a security vulnerability that led to the blacklisting of certain addresses associated with The DAO attacker.

How the Hard Fork Scheme Works

Many people say that the Ethereum hard fork caused a “reversal” in the network, and while this is not necessarily false, the details of the public hard fork plan are a bit complicated - here is a detailed introduction.

The hard fork proposal did not unfold the network's transaction history, but instead reconfigured a new smart contract to store The DAO's funds. The only purpose of this new smart contract was to allow the original token holders to withdraw their tokens.

A recent blog post explained the move, with DAO token holders able to withdraw ether at a rate of 1 ether: 100 DAO tokens.

As a result of the re-entry and split deposit mechanism, the additional balance and remaining ether will be withdrawn or distributed by DAO administrators or individuals selected before The DAO collapsed (to provide "breakage security protection" for the organization).

To help ensure that the hard fork does not contain new vulnerabilities, Ethereum co-founder Jeff Wilcke also announced a bounty program to reward people who test the hard fork code. Coders can get rewards by discovering vulnerabilities in the code.

Miners explain their philosophy

On Friday, major mining pools on the ethereum network began opening voluntary polls to gauge contributors’ interest in the proposed hard fork. Mining pools measure sentiment through hashrate, rather than individual miners’ accounts.

While miners’ support for the hard fork proposal has begun to waver, with low voter turnout already open to criticism that the vote does not represent the opinion of the entire network, at least one large mining pool has said they will support the hard fork.

Dwarfpool has a quarter of the total hashrate of the network, and mining pools like Dwarfpool have voting rights, with the majority of participants expressing support. However, Dwarfpool’s hashrate accounted for less than 7% of the vote.

14% of Ethereum’s hash rate voted in a similar poll, with the majority clearly in favor. 23% of Ethpool’s miners voted, with only a small minority opposing the hard fork proposal.

Other miners, including F2Pool, which operates a large bitcoin mining pool, expressed some understanding of the hard fork proposal but indicated they may support it.

The mining pool said in a statement: "In principle, regardless of the team's proposal, we oppose overly hasty or controversial hard forks. We will not run such code in production systems or mine any blocks from hard forks. I think this is universal and can certainly be used for Ethereum. I don't understand why we should adopt such a controversial and risky hard fork solution. I am unwilling to adopt such a hard fork solution unless I have to."

Exchanges develop their own plans

The hard fork is expected to take effect at 1.92 million blocks, which is around July 21, limiting the amount of time that Ethereum exchanges like Poloniex, Bitfinex and Kraken have to implement their plans.

In a blog post, Poloniex said it would temporarily disable deposits and withdrawals for an unknown period of time pending the funds migration process.

“Once the network is stable and the fund migration is complete, we will open deposit and withdrawal services,” the post said.

In an email on Friday, Kraken said it hopes to disable withdrawals on July 19, about an hour before the hard fork takes effect. Trading will remain functional during the fork, after which all ether on Kraken will become on-chain tokens operated by the majority of miners.

According to a Kraken representative interviewed by CoinDesk, early reports indicated that withdrawals would be shut down if the hard fork proposal did not meet standards.

“Once it becomes clear that the winning chain is on the same chain, Ethereum deposits and withdrawals will be available again,” the email said. “We hope that the hard fork process will be smooth and quick, but there is no guarantee of that.”

In its statement, Bitfinex primarily responded to Poloniex and Kraken, announcing its intention to support the strongest changes.

“We will resume deposits and withdrawals only when we are confident in determining the longest valid chain,” the exchange said in a blog post. “In the meantime, exchange trading, margin trading, and guaranteed financing will continue to operate as usual.”