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What Does Ethereum's Massive Hack Mean For Bitcoin?


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Last week, on Wednesday, June 15,  to be exact, Ethereum suffered a blow that seriously dented confidence in the currency and ecosystem.  Ethereum, if you didn’t know, has been touted by some as the most likely to emerge from the early days of digital currencies as the “winner,” a VHS to Bitcoin’s Betamax for those old enough to remember that battle.

A fund associated with Ethereum was hacked and Ethers (the currency of the Ethereum network) worth over $60 million at the time were stolen. The story is still developing as I write, with a white hat counter attack on the hacker launched using the same method as the original attack, and now news of a counter-counter attack coming from the original perpetrator. If you find all of this confusing, then you are, I’m sure, not alone, but I will do my best to explain it and the possible implications for Bitcoin in layman’s terms.

The hacking attack was on The DAO, an organization whose name comes from what it is, a distributed autonomous organization. That essentially means that it is a leaderless group, in this case dedicated to raising funds for the development of projects using Ethereum. The hacker exploited a weakness in Ethereum’s system and moved the funds from DAO to a kind of dummy version of the organization, a child DAO. Obviously, only the hacker had the key to that wallet and therefore access to the funds.

The fact that a loose group of Ethereum developers were then able to launch an identical attack to recover the funds and then be attacked once again suggests to me, as somebody who admittedly is not a coding expert, that this a serious flaw in Ethereum, and represents a hole that it will not be easy to close. Maybe somebody much smarter than me will offer evidence to the contrary, but in many ways, even if they are correct, it doesn’t matter much.

Ethereum is complicated enough that it is fully understood by only a small number of people. If projects using the system are to be funded, though, there have to be others outside that group prepared to offer funds, and they must have some confidence in the value of the currency. The problem here is that digital currency, just like the paper version that it may one day displace, is dependent upon faith and confidence for value.

That $20 bill in your pocket is only really worth anything because a lot of people believe it is. The fact that there is millions of dollars worth of Ethereum bouncing around between various accounts now hardly inspires the confidence that a currency needs. As you would expect, therefore, the price of Ethers took a hit on the exchanges as a result of the original attack, then rebounded quickly on the counter and is now collapsing again on the counter-counter. Price, though, is just an indicator of Ethereum’s trust problems.

It would, in some ways be logical to assume that those problems would somehow affect Bitcoin negatively. To the layman, after all, the two digital currencies are very similar. Interestingly, though, as news of the DAO hack broke, BTC/USD continued, and even accelerated, its recent climb. (It has since retraced, including a dramatic drop yesterday, but that is a different story.)

That was in part as a result of a feeling that a major competitor was in trouble, but also out of recognition that Bitcoin was probably not vulnerable in the same way.

Among the advantages over Bitcoin that Ethereum’s proponents touted was that it was easier to make applications for and was faster growing. Bitcoin’s slow pace of development and more cautious approach were seen as disadvantages ... until now. It is a kind of high tech tortoise and hare story, and the tortoise looks like winning this one too.

I, and I suspect many like me that are not real expert coders or developers, see this as a reinforcement of the long term value of Bitcoin, rather than a worry. It could well be that the developers behind Ethereum will win this battle, isolate the stolen funds and institute some kind of a soft fork that will effectively defeat the hacker, but the damage to confidence, and therefore the system’s underlying currency, will remain for some time. For now, I’ll stick with Bitcoin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: News Headlines , Bitcoin , Currencies , Technology



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