Hacker may have taken $50m from cybercurrency project

A hacker on Friday siphoned more than $50 million of digital money away from an experimental virtual currency project that had been billed as the most successful crowdfunding venture ever — taking with him not just a third of the venture’s money but also the hopes and dreams of thousands of participants who wanted to prove the safety and security of digital currency.

The attack most likely puts an end to the project, known as the Decentralized Autonomous Organization, which had raised $160 million in the form of Ether, an alternative to the digital currency Bitcoin. While the computer scientists involved in the project are aiming to tweak the code that underpins Ether in a way that will recover the money, the theft is nevertheless prompting a bigger debate about the viability and principles of virtual currencies like Bitcoin and Ether.

“This is one of the nightmare scenarios everyone was worried about: Someone exploited a weakness in the code of the DAO to empty out a large sum,” Emin Gun Sirer, a computer science professor at Cornell University who co-wrote a paper pointing out problems with the project, said Friday.

Central banks and financial firms have been exploring how to use the technology underlying virtual currencies — known as blockchain — to improve their own internal systems. The technology is considered to have advantages in terms of transparency and security. Last week, Janet Yellen, Federal Reserve chairwoman, told central bankers at a trade industry conference that they should accelerate their efforts to explore blockchain.

But the incident Friday provided another reminder of how the code can be just as vulnerable to human greed and mistakes as paper bills.

The DAO was meant to be a standard-bearer for online currency ventures. It was funded by investors from around the world using Ether, which has become popular over the past year. But just before the project stopped raising money in late May, computer scientists pointed out several vulnerabilities in its underlying code — effectively warning that what happened to the experimental consortium would be possible or even likely.

“The DAO is being attacked,” Griff Green, a community organiser with the company that wrote the project’s software, Slock.it, wrote on a chat channel for the project Friday morning. “This is not a drill.”

The money the hacker moved appeared to be frozen Friday as a result of a safeguard previously built into the code. The thief was caught in what might be thought of as a digital version of the airtight double doors that sometimes protect valuable sites (known in security circles as man traps).

Programmers working on the Ethereum network, which hosts Ether, were debating on Friday whether to make a one-time change to the code to recover the frozen money. That faced immediate opposition from many virtual currency purists who were attracted to the technology because of its ostensible freedom from human meddling.

“The strength of blockchain tech is that it is a ledger, a statement of truth,” Bruce Fenton, a board member with the Bitcoin Foundation, wrote Friday. “That ledger is only as good as its resistance to censorship, change, demands or attack.”

If the leaders of the Ethereum project decide to move forward with a change to the code — known as a fork — they will need to win the support of the people who lend their computing power to the network, and who have what amounts to a vote over any changes to the Ethereum software.

The hacking Friday underscored the complicated governance structure employed by cryptocurrencies. These currencies are not run by any company or individual but by the computers of anyone who chooses to support the network.

The DAO was supposed to be a further extension of this concept of group decision-making. Thousands of people around the world financed the project by sending in Ether. The DAO was supposed to act as a sort of venture capital fund, investing in projects that were voted upon by people who contributed money. The attack Friday took place before any projects had been funded.

The specific mechanism the hackers used is known as a recursive call vulnerability — essentially a malicious transaction that moves money away from the DAO into a side fund in an endlessly repeating loop.

The attack led to chaos on the online message boards where DAO investors and Ether users gather.

“How can we help and protect our funds?” one user wrote on the Slack chat channel for DAO investors.

The programmers who wrote the DAO code immediately suggested that investors vote to move their money to another, unrelated project known as Congo Split, primarily to protect their investments.

“The community needs to spam the network so that it can mount a counterattack,” Stephan Tual, an employee with Slock.it, wrote on that company’s website. Programmers with Slock.it wrote the code for the DAO but said they had no formal continuing role with the project.

By the time it was over, the hacker had managed to gain control of 3.6 million Ether — more than a third of the 11.5 million that were there at the beginning of the day.

“The DAO’s journey is over,” Tual said in an email Friday.

The founder and lead programmer on the Ethereum project, Vitalik Buterin, wrote Friday that he supported a change to the code that would reclaim the money from the hacker. But he said he recognised that he might not win the argument.

“I recognise that there are very heavy arguments on both sides, and that either direction would have seen very heavy opposition,” Buterin wrote on Reddit.

Sirer, the Cornell professor, wrote: “There is no good solution here.”