• New software change would stop hackers from withdrawing funds
  • Criminals siphoned money from DAO blockchain last month

Scrambling to stop hackers from making away with stolen funds, the community involved in the cryptocurrency experiment Ethereum has voted to implement a major software change that would thwart the thieves and help the blockchain regain momentum.

Late last week, those involved in Ethereum voted to adopt the change, which is designed to stop hackers from walking away with more than $50 million in stolen funds. Expected to be implemented before July 21, the so-called hard fork will effectively return most of the money to its rightful owners -- investors in the Decentralized Autonomous Organization, a crowd-sourced venture-capital fund that uses Ethereum to run. Hackers last month used a bug in the DAO’s code to siphon out a chunk of its money.

The hard fork, if it is implemented by the majority of the computers running Ethereum, may still result in some of more than 10,000 DAO contributors not getting all their money back. It also still has to be proved to be bug-free. A previous, less dramatic software update was axed recently after it was found to have security holes. Moreover, any software update will be disruptive: Cryptocurrency exchange Kraken plans to temporarily halt withdrawals and deposits of Ether -- the cryptocurrency running on Ethereum -- before the hard fork activates on Wednesday, the company said.

QuickTake: Bitcoin and the Blockchain

But if it goes through without major hitches, the hard fork could help Ethereum regain its footing and put an embarrassing episode behind it. Ether’s price rose last week on news of the hard fork’s implementation, before losing some of its momentum this week.

“I don’t believe the DAO episode will dissuade companies from developing around Ethereum because it is by far the most advanced public blockchain in terms of potential capabilities,” Gil Luria, an analyst at Wedbush Securities, said last week. “I do believe the episode has pushed out the timeline for potential applications until there is more visibility into the possible fork, permanent governance and some period of stability.”

Public Ledger

Ethereum is a popular example of a blockchain, a public ledger for securely recording transactions. Its promise lies in creating ledgers that are immutable and trustworthy, making it unnecessary to employ intermediaries and making transactions cheaper. That immutability is now in question: Transactions recorded on a blockchain -- such as a hacker transferring stolen funds into his account -- can be reversed, if such a reversal is approved by the majority of the community, as the hard fork shows.

The hack could also change the way other DAOs -- decentralized projects that run on Ethereum -- are structured and run. While they were envisioned as governed entirely by votes of its members, that could change, so someone in authority could perhaps stop a potential hack faster. Future DAOs could also undergo more scrutiny.

“I still think DAOs are very promising, but I also think that it will take more time before we get to seeing large-scale DAOs in production; each individual project will go through extensive review and a ‘training wheels’ phase with some centralized control before being fully let into the wild,” Vitalik Buterin, a co-founder of Ethereum, said in an e-mail last week. “I also expect more continued research on the best DAO governance models to put in place.”

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