BLOCKCHAIN

SECURITY IN
DAOS
 What are DAOs?
THINGS WE
WILL LEARN How do DAOs Work?

TODAY What is Blockchain?

How does Blockchain come

into DAO?

Risks of DAO
How is our topic related to
Distributed Systems?
WHAT ARE DAOS ?
 DAO
A “decentralized autonomous organization (DAO)” is a new way of
mixing up the scene around start-ups and established companies.
Management becomes superfluous. The control over the company takes
away computer coding and the entirety of the shareholders.

DAOs tackle an age-old problem of governance, which political

scientists and economists refer to as the principal-agent dilemma.
This occurs when the agent of an organization has the power to make
decisions on behalf of, or impacting, the principal – another person
or entity in the organization. 
 SOME EXISTING DAOS

Aragon Colony Thetta DAO Framework

Infrastructure for An open-source DAO
Community governed
the future of work: framework.
d e c e n t r a l i z e d
self-organising
organization whose Thetta provides out-of-
companies that run
goal is to act as a the-box modules to build
via software, not
digital jurisdiction. the DAO.
paperwork.
 TRADITIONAL ORGANISATION VS DAO
•All agents of a company have
employment contracts.
•R i g h t s
and obligations are
regulated by legal contracts and
enforced by a legal system which
is subject to the underlying
governing law of the country they
reside in.
•Structured in a top-down manner,
with many layers of management and
bureaucratic coordination.
•Comparatively less transparent.
•DAOs, involve a set of people
interacting with each other
according to a self-enforcing
open-source protocol.
•M e m b e r s
are steered by
incentives tied to the network
tokens.
•N o hierarchical structure,
except for the code.
•Completely transparent and, in
theory, incorruptible.
TRADITIONAL ORGANISATION VS DAO
HOW DO DAOS WORK?
•In the DAO, each action or vote is represented by some form of
transaction in the Blockchain

•Here, the members are represented by the address (in Ethereum, It’s
Ethereum address). These addresses can be owned by a human, a robot,
an IOT device, or even another DAO. This makes it ideal for a fully
automated system to run the full-fledged organization.

•Each member is given a token which represents the shares of the DAO;
these tokens can also be used to vote in the DAO to take a certain
decision.

•The token is nothing but another kind of contract sunning on top of

Blockchain. The more token an address has, the more control he will
have on the DAO.
•In the DAO, since this is nothing but a democracy which is running in
the Blockchain the voting power can be optionally delegated to someone
to whom a member trust more. This is in fact just like voting by proxy
in the real organization.

•It can also raise fund through some crowd sourced funding by issuing
the tokens/shares to anyone who is paying the money to them. This
payment and issuing the shares/token can be done in real time unlike
the more than 60 days process in the real organization.

•Instead of legal contracts managing the relations of the people, in

the Bitcoin Network, all agreements are in the form of open-source
code that is self-enforced by majority consensus of all network
actors.

•DAOs do not have a hierarchical structure, except for the code. Once
deployed, this entity is independent of its creator and cannot be
censored by one single entity, but instead by a predefined majority of
the organisation’s participants.
 SMART CONTRACTS

•S m a r t
contracts are self-executing
contracts with the terms of the agreement
between buyer and seller being directly
written into lines of code.

•Smart contracts permit trusted transactions

and agreements to be carried out among
disparate, anonymous parties without the
need for a central authority, legal system,
or external enforcement mechanism. They
render transactions traceable, transparent,
and irreversible.

“
•Nick Szabo, an American computer scientist
A DAO can be seen as the most who invented a virtual currency called "Bit
complex form of a smart contract,
Gold" in 1998, defined smart contracts as
where its bylaws are embedded into
computerised transaction protocols that
the code of the smart contract,
execute terms of a contract.
using complex token governance
rules.
TIMELINE OF DAO
Proposal of concept by
2013 Daniel Larimer

First implemented in
2014 Bitshares

Smart contracts
introduced by Vitalik
2015 Buterin
Ethereum launched

Complete automation of
2020S organisations
WHAT IS BLOCKCHAIN?
 BLOCKCHAIN

•A blockchain is a time-stamped series

of immutable record of data that is
managed by cluster of computers not
owned by any single entity.

•The blockchain network has no central

authority — it is the very definition
of a democratised system.

•Since it is a shared and immutable

“ The blockchain is an ledger, the information in it is open

incorruptible digital ledger for anyone and everyone to see.
of economic transactions
•A n y t h i n g
that is built on the
that can be programmed to blockchain is by its very nature
record not just financial
transparent and everyone involved is
transactions but virtually
accountable for their actions.
everything of value.
 HOW DOES BLOCKCHAIN WORK ?

•Information held on a blockchain

exists as a shared — and continually
reconciled — database. This is a way
of using the network that has obvious
benefits.

•The blockchain database isn’t stored

in any single location, meaning the
records it keeps are truly public and
easily verifiable.

•N o centralised version of this

information exists for a hacker to
corrupt.

•Hosted by millions of computers

simultaneously, its data is accessible
to anyone on the internet.
 WHY THE
HYPE?
A blockchain  carries  no transaction cost. The blockchain is a simple yet
ingenious way of passing information from A to B in a fully automated and
safe manner.

One party to  a transaction initiates the process by creating a block. This
block is verified by thousands, perhaps millions of computers distributed
around the net.

The verified block is added to a chain, which is stored across the net,
creating not just a unique record, but a unique record with a unique history.

Falsifying a single record would mean falsifying the entire chain in millions
of instances. That is virtually impossible.
 WHY THE HYPE?

The blockchain is
It is not owned
transparent so by a single
one can track the 1 2 entity, hence it
data if they want is decentralized.
to.

The blockchain is
immutable, so no
one can tamper
The data is with the data
cryptographically that is inside
stored inside. 4 3 it.
PILLARS OF BLOCKCHAIN

Decentralisation

Transparency

Immutability
HOW DOES BLOCKCHAIN COME INTO DAO?
 Blockchain Smart Contracts

Blockchain and smart contracts are

BACKBONE governance technologies that have the
OF DAO potential to provide higher levels of
transparency while reducing
bureaucracy with self-enforcing code.
They can minimize existing principal-
agent dilemmas of organisations and
subsequent moral hazards.
Tokens of distributed networks hereby
provide incentives to automatically
align interests in the absence of
third parties.
T h e b l o c k c ha i n - b a s e d
DAO system works in a
fully decentralized way
and is immune to both
outside and inside attacks.
RISKS OF DAO
 THE RISKS

Participation of all
Startups trying to
shareholders is a
operate as DAOs are in
problem.
need of a legal
Just like in the real framework and
world, a lack of extensive knowledge of
voting participation the same.
has been documented.

The legal status of

this type of business
organization has not
been decided on by
lawmakers. Currently
the term for such an
organization is a
“general partnership”.
Difficulty of changing
the code of a DAO or
the smart contracts
once deployed in the
blockchain.
MORE ABOUT THE RISKS

•Startups need to know which kinds of

regulations apply in which jurisdiction
when selling cryptographic tokens, that
may in some form represent a stake in
future profits.

•They need a workable legal contractual

framework, which allows DAOs to be
embedded into our current institutional
framework.

•Both of those open problems are tough

because they require a lawyer’s intuition
in a field, that is extremely new and
diverse.
 THE BIGGEST RISK

Once the codes of the DAO

and the smart contracts are
deployed on the blockchain,
debugging cannot be done.
 THE DAO HACK, EXPLAINED

2
1
A solution was an
ability of a DAO to
Creators of the DAO split in two.
wanted to introduce a
protection for the By submitting a
minority: special form of
proposal, the
3
The idea was to make minority, along with
the minority able to other token holder
retrieve their funds who voted for this
when a proposal they The split procedure
second special
do not want to be a can be initiated by
proposal, could take
part of gets approved any token holder at
their Ether into a
despite their any time regarding
new DAO, which is
objection. their own Ether.
called the child DAO.
 THE DAO HACK, EXPLAINED
4 5
A coder found a loophole in
this procedure. Once a split
function is called, the code
was written in a way to
retrieve the Ether first and
update the balance later.
6 7
The attacker(s) managed to
recursively call the split
function and retrieved their
funds multiple times before
getting to the step where
the code would check the
balance.
Additionally, it was not
checking whether there was a
recursive call, which is an
expression used to indicate
a function that calls
itself.
On 16 June 2016, the
attacker managed to retrieve
approximately 3.6 million
Ether from the DAO fund
abusing this loophole, which
is known as a “recursive
call exploit”.
THE DAO HACK, EXPLAINED

•Since the hack was too big to let go, the

hard fork proposal was voted and accepted by
majority of the Ethereum community.

•By doing so, the funds would be returned, and

regulators would be kept out. The hard fork
was completed on 20 July and the funds were
returned to the investors.

•Ironically, victims of the hack were able to

get their funds back since the so-called
immutability was not absolute.
 LESSONS LEARNT FROM THIS INCIDENT
The DAO can be considered as the
first big-scale application of
Ethereum-based smart contracts.
The heist not only triggered a
general suspicion against the
Blockchain technology but also it
heated the debate on the
requirement of regulation.
It was a real example how things
could get bad in a world based on
computer programs.
Additionally, it also showed us
that the human judgment, the
element smart contracts trying to
get rid of, is not always bad.
Our daily transactions might get
extremely complex and computer
programs, due to their
deterministic nature, are not in
a state to mimic all of them, at
least not for now.
HOW IS OUR TOPIC RELATED TO DISTRIBUTED SYSTEMS?
 THE RELEVANCE

Understanding distributed systems is

e s s e n t i a l i n o rd e r t o u nderst a nd
blockchain because basically
blockchain at its core is a distributed
system.

More precisely it is a decentralized

distributed system.
 THE RELEVANCE Blockchain technologies introduced
the concept of a secure digital
ledger, which could track all
interactions of its members across
the Internet.

The main challenge in distributed system

design is coordination between nodes and
fault tolerance.
It uses a technique called trusted
time-stamping to combat against
This has been an area of active research counterfeit transactions.
for many years and several algorithms and
mechanisms have been proposed to overcome
these issues.

Distributed systems are so challenging to

design that a theorem known as the CAP To eliminate corruption and the need
to involve a third party
theorem has been proved and states that a
intermediary, a distributed database
distributed system cannot have all much
is held by all users of the
desired properties simultaneously. This
blockchain.
is strange because somehow blockchain
manages to achieve all these properties.
LET’S CONCLUDE !
 DAO

Presently a DAO
structure could
A SOLUTION completely replace the
functions of companies
FOR SOME such as Dropbox,
Kickstarter, Uber and
Amazon and remove their
human managers.
 DAO

Not all humans are in

agreement with this
THE FUTURE possible change but it
is undeniable that a DAO
is a business model of
the future.
 BLOCKCHAIN

Blockchain helps to
guarantee the validity
of a transaction by
A VALIDATION recording it not only on
a main register but a
connected distributed
system of registers, all
of which are connected
through a secure
validation mechanism.
 FOOD FOR THOUGHT

“
“ The blockchain does one thing: It replaces
third-party trust with mathematical proof that
something happened.

- Adam Draper
 THE TEAM

Tamanna Ali Devasya Dave Bhoomika Jethwani

16070122003 16070122013 16070122009
THANK YOU