Unchained - Exclusive: Crypto’s Biggest Whodunnit: Who Was Behind the 2016 DAO Attack on Ethereum? - Ep.322

Episode Date: February 22, 2022

While researching for my book, The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze, I found evidence that I believe resolves the biggest whodunnit in crypto: who hacked The DAO? This podcast is coming out in conjunction with an article in Forbes revealing the prime suspect’s identity.    Part 1: Who Attacked the DAO? Here’s the Evidence To document the process of finding the alleged attacker, I wrote an article for Forbes, with which I opened the podcast. In it, I reveal  who, evidence indicates, attacked the DAO how my sources and I uncovered this person’s identity how a previously undisclosed technical capability by Chainalysis helped my sources and I identify the alleged hacker    Part 2: Contextualizing the DAO Attack Forbes’s Steven Ehrlich comes onto the pod to interview me about finding the DAO attacker. Topics what is The DAO, and why is it important?  who are the key players in The DAO’s story how the attacker pulled off the hack what legal questions surrounded the hack why finding the attacker is important the legal implications of identifying the attacker what Laura’s interactions have been with the suspect what the future of DAOs may hold Thank you to our sponsors! Crypto.com: https://crypto.onelink.me/J9Lg/unconfirmedcardearnfeb2021           Beefy Finance: https://beefy.finance   Bosonic: https://bosonic.digital/   Episode Links   Laura Shin https://twitter.com/laurashin   The Cryptopians http://bit.ly/cryptopians  On Amazon: https://www.amazon.com/Cryptopians-Idealism-Greed-Making-Cryptocurrency/dp/1541763017/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=1645037311&sr=8-2 On Barnes. &. Noble: https://www.barnesandnoble.com/w/the-cryptopians-laura-shin/1138980345?ean=9781541763012  On Bookshop.org:  https://bookshop.org/books/the-cryptopians-idealism-greed-lies-and-the-making-of-the-first-big-cryptocurrency-craze/9781541763012   Steven Ehrlich https://www.forbes.com/sites/stevenehrlich/?sh=fb976542ce44  https://twitter.com/Steven_Ehrlich  https://www.forbes.com/newsletters/forbescryptoassetadvisor/    The DAO Hack https://www.coindesk.com/learn/2016/06/25/understanding-the-dao-attack/ https://www.gemini.com/cryptopedia/the-dao-hack-makerdao https://unchainedpodcast.com/how-matthew-leising-confronted-his-suspects-in-the-dao-attacks/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. As I mentioned, I'm revealing big news with the publication of my book today. During the course of reporting The Cryptopians, my sources and I believed we figured out who the Dow attacker is. I have a big article about it out in Forbes today, along with a video. I'm going to read that article now, and at the end of the episode, Stephen Erlick, editor of Forbes,

Crypto Asset, and Blockchain Advisor, will be interviewing me about this find. If you haven't yet, be sure to buy your copy of The Cryptopians. Idealism, greed, lies, and the making of the first big cryptocurrency craze, which you can do at Bitley slash Cryptopians.

The hardcover is great for flipping back and forth to the list of characters in the front and the glossary in the back. The ebook is great for geeking out on the footnotes in which I link to all kinds of blockchain transactions, social media posts and more. And the audiobook works if you find it easier to consume books that way,

and if you want to hear me narrate this with the kind of emotion that my sources relayed to me. Again, you can get your copy of the Cryptopians at Bitley slash Cryptopians. This episode of Unchained is brought to you by Beefy Finance, the multi-chain yield optimizer. Beefy is the easiest way to earn more from your crypto. Deposit funds into Beefy's secure vaults, to auto-compound yield across 12 blockchains. Got crypto?

Choose beefy. Bosonic is the new decentralized financial market infrastructure. Want real best execution? Want to keep your assets at your custodian? Want zero counterparty risk? You need Bosonic. Bosonic ensures fiduciary certainty for institutional digital assets trading.

Buy, earn, and spend crypto on the crypto.com app. New users can enjoy zero credit card. fees on crypto purchases in the first 30 days. Download the crypto.com app and get $25 with the code Laura. Link in the description. One small note before we begin. Because I had to record this in advance of when the article would come out, I used round numbers of $3,000 for the ether price, $40,000 for the Bitcoin price, and $30 for the Ether Classic price. And now for the article. exclusive. Austrian programmer and ex-crypto CEO likely stole $11 billion of ether.

Who hacked the Dow in 2016, diverting 3.6 million ether? We identified the apparent hacker, he denies it, by following a complicated trail of crypto transactions and using a previously undisclosed mixer-cracking forensics tool. Ethereum, the second biggest crypto asset, is worth $3,000. $360 billion. Its creator, Vatal Gbuterin, has more than 3 million Twitter followers, has made videos with Ashton Kutcher and Milakunas, and has met with Vladimir Putin. All the most popular trends in crypto over the last several years launched on Ethereum,

initial coin offerings or ICOs, decentralized finance or defy, non-fungible tokens or NFTs, and decentralized autonomous organizations or DAWs, and it has spawned a whole class of blotching imitators, often called Ethereum killers. Ethereum is also the subject of a great mystery. Who committed the largest theft of Ether, Ethereum's native token ever, by hacking the Dow? The Decentralized Venture Capital Fund had raised $139 million in Ether by the time its crowd sale ended in 2016, making it the most successful crowdfunding effort to that date. Weeks later, a hacker siphoned 31% of the eth in the Dow, 3.64 million total, or about 5% of all

eth, then outstanding, out of the main Dow, and into what became known as the Dark Dow. Who hacked the Dow? My exclusive investigation, built on the reporting for my new book, The Cryptopians, idealism, greed, lies, and the making of the first big cryptocurrency craze, appears to point to Toby Honish. a 36-year-old programmer who grew up in Austria and was living in Singapore at the time of the hack. Until now, he has been best known for his role as a co-founder and CEO of 10x, which raised $80 million in a 2017 initial coin offering to build a crypto-depe card, an effort that failed. The market cap of those tokens, which spiked at $535 million, now sits at just $11 million. After being sent a document detailing the evidence pointing to him as the hacker,

Honeesh wrote in an email, Your statement and conclusion is factually inaccurate. In that email, Honish offered to provide details refuting our findings, but never answered my repeated follow-up messages to him asking for those details. To put the enormity of this hack in perspective, with ETH now trading around $3,000, $3.64 million ETH would be worth $11 billion. The Dow theft famously and controversially prompted Ethereum to do a hard fork,

where the Ethereum network split into two as a way to restore the stolen funds, which ultimately left the Dark Dow holding not ETH, but far less valuable Ether Classic, or ETC. The proponents of the fork had hoped ETC would die out, but it now trades around $30. That means the descendant wallets of the Dark Dow now hold more than $100 million in ETC, a high dollar monument to the biggest whodunit in crypto. Last year, as I was working on my book, my sources and I, utilizing, among other things, a powerful and previously secret forensics tool from crypto tracing firm Chainalysis believed that we figured out who did it. Indeed, the story of the Dow and the six-year quest to identify the hacker shows a lot about just

how far the crypto world and the technology for tracking transactions have both come since the first crypto craze. Today, blockchain technology has gone mainstream. But as new applications arise, one of the first uses of crypto, as an anonymity shield, is in retreat, thanks to both regulatory pressure and to the fact that transactions on public blockchains are traceable. Since Honish won't talk me, I can only speculate about his possible motives. Back in 2016, he identified technical vulnerabilities in the Dow early and may have decided to strike after concluding his warnings weren't being taken seriously enough by the creators of the Tao. His 10x co-founder, Julian Hossp, an Austrian medical doctor who now works in blockchain full-time, says of Honish.

He is a person that is super opinionated, always believed he was right, always. looked at from that perspective, this is also a tale of the big brains and big egos that drive the crypto world and of a hacker who may have justified his actions by telling himself he simply did what the faulty code baked into the Dow allowed him to do. In early 2016, the Ethereum network was not even a year old, and there was only one app on it that people were interested in. The Dow, a decentralized venture fund built with smart contracts that gave its token holders the right to vote on proposals submitted for funding. It had been created by a company named Slocut, which instead of seeking traditional venture capital, had decided to create this Dow and then

open it up for crowdfunding, with the expectation that its own project would be one of those funded by the Dow. Slocut's team thought the Dow might attract $5 million. Yet when the crowd sale opened on April 30th, it took in $9 million in just the first two days, with participants exchanging one ether for 100 Dow tokens. As the money poured in, some on the team felt queasy, but it was too late to cap the sale. By the time the funding closed a month later, 15,000 to 20,000 individuals had contributed. The Dow held what was then 15% of all ether, and the price of the cryptocurrency was steadily rising. At the same time, a variety of security and structural concerns were being raised about the Dow, including one that would, ironically, later proved to be crucial to limiting

the hackers' immediate access to the spoils. That problem? Withdrawing funds was too hard. Someone wanting to retrieve their money had to first create a child Dow or split Dow, which required not only a high degree of technical knowledge, but also waiting periods after each step, and the agreement of anyone else who moved funds into that child Dow. On the morning of June 17th, Eath reached a new all-time high of $21.52, making the crypto and the Dow worth $249.6 million. One American Griff Green woke up that morning in Mitvaida, Germany, he was staying in the family home of two brothers who were Slackett co-founders,

he had a message on his phone from a Dow Slack community member, who said something weird was happening. It looked like funds were being drained. Green, Sloket's first employee and community organizer, checked. There was indeed a stream of 258th, or then $5,600 transactions leaving the Dow. By the time the attack stopped a few hours later, 31% of the ETH and the Dow had been siphoned out into the Dark Dow.

As awareness of the attack spread, ether had its highest trading day ever, with its price plummeting 33% from $21 to $14. Soon, the Ethereum community pinpointed the vulnerability that enabled this theft. The Dow's smart contract had been written so that any time someone withdrew money, the smart contract was sent to the money first, before updating that person's balance. The attacker had used a malicious smart contract

that withdrew money, 258 eth at a time, then interfered with the updating of the contract, allowing them to withdraw the same ether again and again. It was as if the attacker had $101 in their bank account, withdrew $100 at a bank, then kept the bank teller from updating the balance to $1, and again requested and received another $100.

Even worse, once the vulnerability became public, the remaining 7.3 million eth in the Dow was at risk of a copycat attack. A team of white hat hackers, that is, hackers acting ethically, formed and used the attacker's method to divert the remaining funds into a new child Dow. But the attackers still had about 5% of all outstanding ETH, and even the rescued ether was vulnerable, given the flaws in the Dow. Plus, the clock was ticking down to a July 21st deadline, the first date when the original hacker may be able to get at the funds they had diverted into the Dark Dow. If the community wanted to keep the attacker from cashing out, they would need to put tokens in the hacker's Dark Dow, and then in any future split-dows or Child-Dows, the unknown hacker created. Under the rules of the Dow Smart Contract, the attacker couldn't withdraw funds if any

else in their split-dow objected. Bottom line, if the white hats ever missed their window to object, the attacker would be able to abscond with the funds, meaning this informal group would have to be constantly vigilant. Eventually, after much bickering on Reddit, on a Slack channel, over email, and on Skype calls, an Ethereum founder, Booteran publicly weighing in, and after it seemed that a majority of the Ethereum community supported the measure,

Ethereum decided to hard fork. On July 20th, the Ethereum blockchain was split into two. All the ETH that had been in the Dow was moved to a withdrawal contract, which gave the original contributors the right to send in their Dow tokens and get back ETH on the new blockchain. The old blockchain, which still attracted some supporters and speculators, carried on as Ethereum Classic. On Ethereum Classic, the Dow and the Dow attack loot in the form of 3.64 million ETC remained. That summer, the attacker moved their ETC a few hops away to a new wallet, which remained dormant until late October when they began trying to use an exchange called Shapeshift to cash

the money out to Bitcoin. Because Shapeshift didn't at that time take personally identifying information, the attacker's identity was not known, even though all their blockchain movements were visible. Over the next two months, the hacker managed to obtain 282 bitcoins, then worth $232,000, now more than $11 million. And then, perhaps because ShapeShift frequently blocked their attempted trades, they gave up cashing out, leaving behind $3.4 million Ether Classic, or ETC, then worth $3.2 million, and now worth more than $100 million. That might have been the end of the story, an unknown hacker sitting on a fortune he couldn't cash out. Except last July, one of my sources involved in the Dow rescue, a Brazilian named Alex Vandasand, a.k.a. reached out, saying the Brazilian police had opened an investigation into the attack on the

Dow, and whether he might be a victim, or even the hacker himself. Vandesand decided to commission a forensics report from Block blockchain analytics company coin firm to help exonerate himself, though then the police closed the investigation, he said. In case any similar situations arose in the future, he went forward with the report examining those cash out attempts in 2016. Among the early suspects in the hack had been a Swiss businessman and his associates, and in tracing the funds, Vanda Sand and I also found another suspect, a Russia-based Ethereum classic developer. But all these people were in Europe or Russia,

and the cash-outs mapped onto an Asian morning-through-evening schedule, from 9 a.m. to midnight Tokyo time, when the Europeans were likely sleeping. The timing of their social media posts suggested they kept fairly normal hours. But based on a customer support email, the hacker had submitted to ShapeShift in the lead-up to the attack, I believed they spoke fluent English. Jumping off from the coin firm analysis,

blockchain analytics company Chainalysis saw the presumed attacker had sent 50 BTC to a wasabi wallet, a private desktop Bitcoin wallet that aims to anonymize transactions by mixing several together in a so-called coin join. Using a capability that is being disclosed here

for the first time, Chainllysis demixed the wasabi transactions and tracked their output to four exchanges. In a final, crucial step, an employee at one of the exchanges confirmed to one of my sources that the funds were swapped for privacy coin grin and withdrawn to a grin node called grin.combe.a.i. Due to exchange privacy policies, normally this sort of customer information would not be disclosed. The IP address for that node also hosted Bitcoin Lightning nodes, LN.tobi.ai, lnd.l.ln.d.l.tobi.a.a. etc. and was consistent for over a year. It was not a VPN. It was hosted on Amazon Singapore. Lightning Explorer 1ML showed a node at that IP called 10x.

For anyone who was into crypto in June 2017, this name may ring a bell. That month, as the ICA craze was reaching its initial peak, there was an $80 million ICO named 10X. The CEO and co-founder used the handle at TobyAI on Angelist, Betelist, GitHub, Keybase, LinkedIn, Medium, Pinterest, Reddit, Stack Overflow, and Twitter. His name was Toby Honish. Where was he based? In Singapore. Although he was German-born and raised in Austria,

Honish is fluent in English. The cash-out transactions occurred mainly from 8 a.m. until 11 p.m. Singapore time, and the email address used on that account at the exchange was name of exchange at toby.a.I. In May 2016, as it was finishing up its historic, fund raise, Honish was intensely interested in the Dow. On May 12th, he emailed HOSP a tip, profitable crypto trade coming up to short ETH once the Dow crowdfunding period ended. On May 17th and

18th in the Dow Slack Channel, he engaged in a long conversation in which he made, depending on how you count, 52 comments minimum about vulnerabilities in the Dow, getting into various aspects of the code and nitpicking over exactly what was possible, given the way the code was structured. One issue spurred him to email Slocott's chief technology officer, Christoph Yench, its lead technical engineer, Lefteras, Carapetzus,

and community manager Griffgreen. In his email, he said he was writing a proposal for funding from the Dow for a crypto card product called Dow. Pay, and added, for our due diligence, we went through the Dow Code and found a few things that are worrisome. He outlined three possible attack vectors

and later emailed with a fourth. Yench, a German who had been working on a PhD in physics before dropping out to focus on Ethereum, responded point by point, conceding some of Honish's assertions, but saying others were false or don't work. The back and forth ended with Honish writing, I'll keep you in the loop if we find any.

anything else. But instead of further email exchanges, on May 28, Honeish wrote four posts on Medium, beginning with the Dow, risk-free voting. The second, the Dow, blackmailing withdrawals, foreshadowed the main issue with the Dow and why Ethereum ultimately chose to hard fork. If it did not, the only other options were to let the attacker cash out his ill-gotten gains or for some group of Dow token holders to follow him forever into new split DAOs he created as he attempted to cash out. TLDR, if you end up in a Dow contract without majority voting power, then an attacker can block all withdrawals indefinitely, he wrote. The third showed how an attacker could do this cheaply. His last most telling post for the day, the Dow, a $150 million lesson in

decentralized governance, said Dow. Pay decided against making a proposal after uncovering major security flaws and that Slocut downplayed the severity of the attack vectors. He wrote, The Dow is live and we are still waiting for Slocut to put out a warning that there is no safe way to withdraw. On June 3rd, his last medium post, announcing block ops, blockchain hack challenges, said, Blockops is your playground to break encryption, steal Bitcoin, break smart contracts, and simply test your security knowledge. Although he promised to post new challenges in the field of Bitcoin, Ethereum, and web security every two weeks, I could find no record that he did so. Two weeks later came the Dow attack.

The morning after the attack, at 7.18 a.m. Singapore time, Honish-trolled Ethereum creator Vitalik Bouturin, by retweeting something Buderan had said before the Dao was attacked, but after it was known that the vulnerability used in the attack was evident in the Dow's code. In the two-week-old tweet, Booterin had said that he'd been buying Dow tokens since the security news. Over the following weeks, Honish tweeted anti-hard Fork posts, like one titled, Too big to fail is failure guaranteed. Curiously, on July 5th, a couple weeks after the attack, Hounish and Carapetis exchanged Reddit DMs titled Dark Dow Counterattack, though the substance of the messages is unclear because Honish has deleted all his Reddit posts.

Hossp recalls that Honish told him he had deleted his Reddit account after an altercation with an idiot on Reddit over the Dow. Honish wrote, Sorry for not contacting first. I got carried away from finding it and telling the community that there is a way to fight back. In any case, I don't see any way the attacker can use this. After Carapetzus told Honish of the White Hat's plan to protect what was left in the Dow, Honish replied, I took down the post. Carapetis responded, I will keep you up to date with what we do from now on.

Honish's last message in that exchange, I'm sorry if I messed up the plan. On July 24th, the day after the Ethereum Classic chain revived and began trading on Polonex, Honish tweeted Ethereum drama escalating from Dow Wars to Chain Wars Ethereum Classic now traded on Poloniacs as ETC and miners planning attacks

On July 26th, he retweeted Barry Silbert, the founder and CEO of the powerful and well-respected Digital Currency Group, who had tweeted, bought my first non-Bitcoin digital currency, Ethereum Classic, or ETC. Upon hearing the

name Toby Honish, without knowing evidence indicated he was the Dow attacker. Carapetys, a usually good-humored Greek software developer, who was one of the Dow creators, and had engaged with him by email and on Reddit, said, he was obnoxious. He was quite insistent on having found a lot of problems. After hearing that the Darkdou ETC had been cashed out to a grid node with Honish's alias, Kerepatsas observed that if Honish had instead remedied the situation while the Dark Dow funds were frozen, the Ethereum community would have given him huge kudos for finding the weakness and then returning the ETH. Similarly, Griff Green, whose current projects lean towards helping non-profit and public causes grow in the digital world, believes the hacker missed the chance to be a hero.

Says Green, he really screwed the pooch, reputation is way more valuable than money. Ironically, in a 2016 blog post, Honish wrote, I'm a white hat hacker by heart. 20 days later, was the Dow attack. As I noted earlier, after being sent a document laying out the evidence that he was the hacker and asking for a comment, Honish wrote that my conclusion is factually inaccurate.

He said in that email he could give me more details and then did not respond to four requests for those details. In addition, after receiving my document detailing the facts I'd gathered, he deleted almost all his Twitter history, though I've saved the relevant tweets. In May 2015, Honish and the co-founders of his crypto-debacard venture, first known as One Bit, had some success at a MasterCard Masters of Code hackathon in Singapore. They started making the card available that year,

on an invitation-only basis, because, as Honish explained on Reddit, we don't want to launch a half-assed Bitcoin wallet that gets us in trouble for violating K-Y-C or know-your-customer laws. And yes, legal is the main reason we can't just ship it. A Bitcoin magazine article at the time said Honish had a background in AI, IT security, and cryptography. In early 2017, just months after the presumed Dow attack stopped trying to cash out their ETC, Honish's team, by then operating as 10x, announced it had received $1 million in seed funding

from, among others, Fembusci Capital, where Ethereum founder Buderin was a general partner. Then came the $80 million ICO. In early 2018, things started to go south for 10x when its card issuer, Wavecrest, was booted from the VEAWR,

a network, meaning that 10X's users could no longer use their debit cards. On October 1, 2020, 10X announced it was sunsetting its services, because its new card issuer, Wirecard SG, had been directed by the monetary authority of Singapore to cease operations. On April 9, 2021, 10X posted a blog called 10X Meet Mimo. It outlined a new business that would offer a euro-pegged stablecoin, which kept its value pegged to a fiat currency such as US dollars or euros or Japanese yen. The market cap of 10x tokens, which spiked at $535 million, now sits at just $11 million. 10x has rebranded itself as Mimo Capital and is offering holders of Tenex tokens, mostly worthless

mimo tokens instead at a rate of 0.37 memo for each 10x. HOSP, who was the public face of the company while there, was booted by Hounish and another co-founder in January 2019. This occurred a couple months after some crypto publications reported on HOSP's past affiliation with an Austrian multi-level marketing scheme. However, before hearing that evidence indicated Honish was the Dow attacker, Hossp said his feeling had been that Honish had perhaps pushed him out over jealousy that Hossp had sold Bitcoin at the top of the bubble in late 2017, netting himself $20 million. Meanwhile, Honish had kept

all his crypto as the bubble and his personal net worth deflated. He came from a very poor family. He had no experience in investing, and he was in crypto in 2010, but he had literally no money, nothing when we were in Las Vegas together in the summer of 2016. He had nothing and I was doing really well with my investments. He would always push for getting more salary, for having something nicer. Hossp also mentioned Honeish had to send money home to his mother who had raised him, as well as to his sister and brother as a single mother. Upon hearing that Honish was the likely Dow attacker,

Hossp said he was getting goosebumps and began recalling details from his inner with his former partner that now seemed to take on new significance. For example, when asked if Honish was into Grin, the privacy coins the hacker had cashed out to, Hasp said, yes, yes, he was. He was fascinated by that. I lost money because of those stupid coins. I invested in them because of him, because he was so fascinated by them. He said that Honish was also obsessed with building a Bitcoin to Manero atomic swap, or a way to use smart contracts to swap between Bitcoin and the privacy coin Monaro. At the time, Hossp was confused by that because he felt that there was no market for such a product. Later, Hossp pulled up chats from

August 2016, in which Honish seemed excited about the price of ETC, the coin held by the hacker after the Ethereum fork. When trying to recall the incident that he believed prompted Honish to close his Reddit, HOSP began searching on his computer and muttered to himself. He always used Toby AI. He confirmed that one of Toby's regular email addresses ended in at toby.aI. Recalled a still astounded HOSP. For some weird reason, he was quite well aware of what was happening.

He understood more of the Dow hack when I asked him what had happened than I had found on the internet or anywhere. Stay tuned for Stephen Erlich, editor of Forbes Crypto Asset and Blockchain Advisor, interviewing me about this investigation. Join over 10 million people using crypto.com, the easiest place to buy, earn, and spend over 150 cryptocurrencies. New users enjoy zero credit card fees on crypto purchases in their first 30 days. With crypto.com earn, you can get industry-leading interest rates of up to 8.5% on over 40 coins, including Bitcoin, and earn up to 14% on stable coins. With the crypto.com visa card, you can spend your crypto anywhere. Enjoy up to 8% cash back instantly, plus 100% rebates for your Netflix, Spotify, and Amazon Prime subscriptions, and zero annual fees. Download the crypto.com app and get $25.

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Yeah, I mean, the article itself was great. I mean, Forbes is very proud to have been able to publish it. And I'm sure it's going to make a lot of waves. So I'm interested to dive deeper into it with you and kind of help the audience understand the bigger picture surrounding the Dow and sort of what it's long-term aftermath. It will be and is. So why don't we just dive right in first? And let's level set here, especially for some of your audience members that are a bit newer to this entire space. I mean, at the time, can you just paint a picture what was Ethereum's level of development? What was the price of Ether at the time? I mean, this is well before things like Defi, NFTs, and even ICOs were a thing. So what was actually happening in the space and what was sort of the climate that the Dow came into existence?

At this point, Ethereum was not even a year. year old. The network had launched in the summer of 2015, July 30th, 2015, and the Dow began to gain some traction and get some interest probably in March of 2016. And then the group creating the Dow eventually launched their crowd sale at the end of April 2016. And at the time, Ethereum was still a pretty new blockchain. It didn't have a ton of of traction. However, at that point, the price had reached double digits. And it was still in the low double digits, but the Dow actually probably boosted the price of ether because after the Dow crowd sale began a lot of what we would call normies in crypto, non-crypto people, became interested.

And so the price began to climb in the early part of the Dow crowd sale. And I think, in the book, I think I said something like by the end of the Dow crowd sale, the price of ether had gone up somewhere in the ballpark of like 60% since the start of the Dow crowd sale. And so this generated a lot of interest. One thing that fascinated me was that a number of exchanges enabled people to buy into the Dow using Fiat. So, you know, this, that was not a thing, really even in the subsequent ICOs. And I think that capability enabled a lot of, as we were saying earlier, normies to get in. And that basically, yeah, brought in new people to the Ethereum ecosystem.

Yeah, it helped them skip that step of having to buy ether and then transitioning into or converting it into the Dow tokens. I mean, just one click. Everything today is one click. So exchanges like an N. I know Cracken for one is one that you mentioned in the book that made it possible to do that certainly helped make it accessible to people. that had never done any coding in their lives, didn't know what a smart contract was, et cetera. Exactly.

Yeah. And Christoph Yunch, one of the creators of the Dow, noticed from the messages that he was getting that a lot of non-crypto people were buying in because they really did not understand the basics, even from the way their emails were written or the kinds of questions they were asking. He really understood, oh, wow, the level of understanding here

is far below that of a typical crypto person. Yeah, I think in your book you mentioned how a lot of people sort of conflated the Dow and Ethereum together. They didn't recognize that they were two separate things and that the Dell essentially was a smart contract platform built on top of Ethereum. And also just development of the ecosystem. I mean, was the Dow the only application out there at the time?

Were there other DAPs running? Or, I mean, was this sort of a one-hurst town when the Dow launched? There were other DAPs, but there just weren't that many. You know, there were previous crowd sales on Ethereum prior to the Dow crowd sale. For instance, Dichick's Dow was one. I think there are a few others. I'm just, oh, Agar.

Auger was another. But the Dow really was the first major one. I think some of the others might have been capped, which might have helped keep them a bit smaller. But certainly this just had a much wider appeal than those others, which really were more limited to the crypto community. So let's introduce the readers to some of the, the key players here. You mentioned one, but with the Dow came a company called Sloket and a few

other key figures that weren't involved necessarily in the launch of Ethereum itself. So maybe just let people know who they need to know to understand the story of the Dow. So the three main creators, well, actually there's more, but we'll limit it mainly to the coders and I'll mention some of the other people working for Sloket. So, well, I'll actually start with the co-founders of Slocut. So the co-founders of Slocut were Christoph Yanch, who I mentioned before, and he had previously worked at the Ethereum Foundation. He was the lead tester for Ethereum during the period when they were building the network, which meant that he basically was tasked with trying to figure out how the blockchain might accidentally split into two and thereby

create a second chain, which is very ironic, obviously, given what happened. Yeah, and then, I mean, but obviously the purpose of that was to prevent that in the future. And then one of his other co-founders was his brother, Simon Yench, who was the CEO of Slokka and Christoph was the CTO. And then their third co-founder was someone named Stefan Twal, who also had previously worked for the Ethereum Foundation. And his role had started kind of around community building and communications, but then there was a moment when some of the leadership changed. And so at that time, he became

chief communications officer. And then people will read in the book, but yes, he eventually left. And so, or depending on how you look at it, he had to leave. And then he ended up at Slocut. And then the other people who were involved in the Dow were Lifteras, Carapetis, who was one of the developers at Slocut. And interestingly at this time, because Sloket wanted to request funding from the Dow, and that was how it was going to pay itself rather than attempting to get venture capital funding, he was not actually paid a salary at that time. He was kind of making just a minimal amount of money.

And then the last person is Griff Green, who was the community organizer for Slocut and the Dow. Yeah. I know they all feature prominently throughout the section of the book and some throughout the entire book. So a couple of things really come to mind. I mean, I guess first, before I get into that, maybe just explain what Slokit does or what it intended to do and sort of why it made sense in their minds to build sort of a crowdfunding

mechanism on top of Ethereum. They were trying to build a decentralized sharing economy. And their main way of doing that was a devout. device called the sloc, which was basically like a lock that was smart. And so it would unlock with an Ethereum transaction. At DevCon one, Christoph gave a presentation with the sloc where he used an Ethereum transaction to basically turn on a device, which creates for a fun scene in the book. People will definitely want to read that. So, I mean, just to kind of help bring this home for some newbies that are going to listen to this, is it sort of like a city bike type of application that runs on a blockchain and can be used to unlock like a home or any type?

That's a great analogy, yes. Okay, great. And also, it's curious. I mean, venture capital back then in crypto is not nearly what it is today, but it did exist. There were some major companies that got their seed, A, B rounds, et cetera, from some of the. more prominent firms that are still around today. So why do you think they chose to go this route and just given how cutthroat it can be to run a startup? I mean, you hear the stories about people, basically these companies run their own lives. I mean, why do you think they felt it was

proved to take the time out of building the company to build the Dow when there was no guarantee that they were actually going to get funded from it? I mean, at this time, you know, there was just a lot of talk and excitement about decentralization. And so this would be the decentralized way to get funding this way, rather than from a VC, which is very centralized. And I think, you know,

there was just kind of a lot of idealism and almost a little bit of a naivete too about the promise of the technology or at least its capability at that time, you know, whether or not it, you know, remains naive in the long run to believe that these technologies or these smart contracts could do these things, remains to be seen. But definitely for the development at that time, yeah, it was more kind of probably an optimistic,

idealistic hope. So one of the things that I found really interesting in your book was how the founders sort of coalesced around a term called a legal, which I think is a way for like decentralized autonomous organizations like the Dow to sort of exist outside of traditional regulations and law enforcement jurisdictions. Could you maybe talk about? about that term and sort of the importance that it had to DOWs and the DEL? Yeah, so this was a term that Gavin Wood used in a talk, and Christoph did tell me that it kind of inspired him.

Like he talked about this as kind of a moment when he just had, you know, sort of an epiphany or just, it was like a concept that stuck in his mind. And the way that Gavin described it was, that in kind of like a centralized world, there's things that are legal and illegal. But then when you create something like Bitcoin that is decentralized, it's kind of running on its own.

And he was calling it a force of nature, meaning you know, you launch the software and then it's just going to go forever, right? Similar to how if you launch a smart contract on Ethereum, that's what's going to happen. And so he was saying that, you know, these are forces of nature and they don't care about human laws and jurisdiction and all these things. And so that was why he was saying that they are illegal, like they're just out of

this whole system of what's legal and illegal. This is Gavin who is pausing this. He is a coder, not actually anybody with any kind of legal background. So, you know, whether or not this is a concept that any legal person might agree with or think is valid is a totally separate question. But yes, this is what Gavin was talking about and what inspired Christoph. It does seem like a lot of people that have built Defi protocols and the lake are banking on something similar to this term illegal. And I guess we'll have to see how the SEC and other regulators around the world feel about that. But that did strike me. And I'm also, I wanted to, before we get specifically to the hack, there's some interesting debates that kind of went

to the construction of the Dow, which ended up having significant implications or ramifications for unwinding what happened later. One was the decision not to cap the Dow, which could have limited the damage. And I know that you discussed that a length in the book. And then two, I think they tried to create sort of different levels of thresholds for quorums and for a quorum is necessary to allocate higher amounts of the funds within the DEL. I think they needed, what was it, 53% in order to spend all the money in the Dow for a given proposal.

And that ended up biting them because when it came time to try to fix some of the issues with the half, they couldn't get a quorum necessary to do certain things. So maybe just briefly touch on those two topics because I do think that they're important, not just for the Dow, but also for some of the issues or obstacles facing Dow's today. Yeah, I mean, certainly at that time, just the level of sophistication that these systems had is nowhere near what it is today. And so when the Dow was actually launched and the crowd sale was over and then it kind of went into, how are we going to use this Dow? Suddenly it became very apparent that all the tools that you would need to do the voting and to have the, proposals and have them approved and all that, like none of that existed. And so then when in the

beginning people were realizing, hey, there are flaws here. We should try to fix them. Then it was like, oh, well, we would have to get people to vote. But since a lot of people who participated are not even crypto people. And then we have this minimum quorum that's pretty high. You know, it was going to be extremely difficult to actually make that happen. So it actually seems very similar today where, I mean, if people buy defy tokens on Coinbase or Cracken or other exchanges, they can't vote on proposals then there either, even today. So back then it would have been just like unfathomable to have that capability. Yeah.

And then also the capping of the Dow or the decision not to cap it. Because in your book, you do detail, and I don't want you to give out any spoilers, but you talk about, there was a discussion. It wasn't just, hey, let's see how much money we can get. There was a reason why they chose not to cap it. And maybe you could just touch on it briefly here. Yeah, I think it depended on who on the team you're talking about. There are different people and Slocut who had different views on why they didn't want to cap it.

They all had their own reasons. But yes, the various people who were most in charge of the Dow, all for different reasons, did not want to cap the sale. I guess people should read the book to find out, but it wasn't just because of greed. There were other reasons beyond just that, which I think was, interesting for me to read and for other people to find out. So let's go to the hack. Just in a very brief, explain it like I'm five type of overview. Could you just please explain what happened and how quickly it happened? So on the morning of June 17th, 2016, suddenly a stream of transactions

were taking ETH out of the Dow. And it was 258th per transaction. transaction. And they were happening very, very quickly. So this is why you'll hear people often say that the funds were siphoned because it was, you know, this small amount just over and over and over and over and over again for hours. And the way that this worked was that it would be like if you went to a bank teller, and I do use this analogy also in the article and in the book, if you went to a bank teller you had $101 in your bank account, and then you went through 100, and then before the bank teller updated your balance, you were able to force the bank teller to then give you 100. And because the balance, again, was not updated to $1, you would be able to then withdraw 100 again, and this was going

on and on and on and on. And yeah, it caused a lot of pandemonium once people realized what happened. But then after a while, it stopped, and by that point, 31% of all the ether and the Dow had been drained. Who were some of the key players in the response? What was the mindset? I mean, what were they what were some of their first instincts? Well, first of all, they wanted to figure out how was this happening? What is going on? So they, you know, all jumped into a group to try to do that. But they also were trying to figure out, how are we going to prevent this person from cashing out? And there was a very tense scene in the book. People will have to read that where definitely not everybody agreed about how to handle that and it definitely caused a lot of tension and yeah certainly certain players

really felt that they weren't being listened to I would imagine and there was also you know just frankly talk about potentially needing to do a hard fork and that really came out kind of like probably right in the very beginning I don't want to um again not give out any any secrets in the book, but Vitalik is someone that everyone in this community knows and was a key player during all of this. I mean, can you just briefly describe kind of what he was thinking right then? So he did mention the hard fork as an option in one of the first calls. At least that is what some of, at least one source recall. I don't remember if there were more than the one person I'm recalling at this moment. But, you know, I think he had an awareness that, oh, if this has this

vulnerability, then it might be that that might be the only way to resolve this issue. So. Okay. No, it's interesting because there were some competing priorities. I mean, for one, it was like, how do we stop this? And because of the way the DAO was constructed, and we don't have to get into all the details here, it was very hard to do that, to actually be able to safeguard funds without being sure that the hacker can follow them into child DAOs and continue.

doing what they were doing. There were the ethics of whether or not they, what they were doing was legal, technically they were going to do the same type of attack that the attacker did, but they were theoretically the good guys. And even if they did that, which was kind of seen as like a white hacker type of proposal, I know they were worried about what the SEC and other regulators might think about that.

And then aside from perhaps stopping the leak, stopping the theft, then they had to figure out how to roll, theoretically give people their money back. And that's where the hard fork discussion comes in. For people that aren't very technical, they may not realize that hard forks happen relatively often in Ethereum. And most of the time, they're non-contentious. I mean, hard forks are happening even now as they move from proof of work into proof of stake.

But this one was seen, was and is seen as highly contentious. And at the time, you described in the book as a sort of the nuclear option, maybe just briefly explain what you mean by that and why it was so contentious. Well, in crypto, anytime you do a contentious hard fork, then it runs the risk of creating a second competing currency because the two blockchains at that point will share a history and everyone who had coins at the time of the hard fork will now own coins in the new blockchain. And it's long been thought that, of course, that sort of dilutes the brand of the original blockchain. And this is why both Bitcoin and Ethereum, and I'm sure other chains, but those are the really popular and established ones, have these other forks that have the name in them. But yeah, there's a lot of concern about, you know,

the impact that that will have on the original blockchain. At the time when they were trying to figure out what was going on and what happened, what knowledge did they have about the identity of the hacker? at all? Almost none. There was an investigation that was being done by someone at one of the exchanges because a lot of people felt, oh, if you look at exchange activity, you might be able to find somebody who profited from the attack and therefore, you know, that might indicate what the motive might be and it might indicate what the identity. And so there were some leads in that regard that people were following. And other than that, it was pretty, I would say, just like, mysterious.

Like people didn't really seem to know. I had all kinds of weird theories thrown at me when I was reporting this. But the only kind of more substantive stuff that I found was one investigator in particular who, like I said, followed a trade that seemed suspicious. Why do you think it was important to identify the hacker? And why did you work so hard to to do so. This was the most important event in Ethereum's history. It was the only moment that I would say was an existential crisis for Ethereum. Ever since then, of course, there have been different hacks and different events,

but this was the only one where it really caused a massive crisis for the community and resulted in an event that, depending on who you are in, and where you sit, you might view it as something that sort of delegitomized Ethereum or that, yeah, it was just a blemish on Ethereum's history. Interestingly, I did find some other people, people read about this in the book, who actually thought the way it got resolved was a sign of maturity. So that was kind of fascinating to find just a huge range of perspectives in how people viewed it. How long, I know you spent a couple of years researching the book, but how long specifically

did it take you to do the investigation and pinpoint Toby as the attacker? Wow. So it's kind of hard to put a number on it. I definitely spent a very long time following the one lead from that time, which was that one transaction. And there were other circumstantial details that kind of pinpointed a number of people actually. And I ended up interviewing all of them, and I was going to present the results of those queries in the book when very, very, very late in the editing process, one of my sources, Alex Vandesand reached out to me to say that he became the subject of an investigation into the Tao in Brazil, which is where he lives. And at that point, he wanted to get some information to help exonerate him.

And actually, what's funny is that the investigation into him actually became closed even before he ever did his interview. However, he still felt well in the future, if I ever need this information, if I ever need to defend myself this way, I should probably just commission this report. And so he reached out to me saying, I think maybe you, you could also use this data. And it was from a company called CoinFirm. And basically they discounted him, you know, for the report. And then I would also give them credit in the book. And we used that to go over the cash-not transactions to kind of try to get any details we

could about this person. And we could see kind of things like, I mean, we didn't know exactly what this meant, but we could see at least what hours the transactions typically occur. And that was informative because they weren't necessarily the times when the people that I had been looking at were awake. And so, I mean, the one thing is they did match up against the times when the people who worked at ShapeShift, which was a Denver-based company, which is the exchange that this person was trying to use to cash out. those were the hours when ShapeShift was not basically, you know, it was not official working hours. So I did think, well, it could be that someone was specifically trying to target those hours when Shapeshift wasn't at work. But even then, it still kind of seemed,

you know, it was just a conjecture. But yeah, I then sent the information to Chainalysis, and I did not know that they had this capability, but this is what we mentioned in the article where they have the ability to demix wabi transactions, which was not something that was known before. And so... Just quickly for people that don't know, could you just explain what a wasabi wallet is

and what it does? So, wasabi uses a technique called coin join to mix a whole bunch of transactions together, sort of like in a washing machine or something you could imagine. I mean, well, actually, it's a good analogy because, of course, this is used for a lot.

laundering money. And when the money gets spit out on the other side, it's not always easy to follow the trail because it could be, you know, any one of these other number of people whose coins got mixed with yours. And so that was, you know, kind of a crucial step. And then, of course, that money then got tracked to four different exchanges. And from one of those exchanges, you know, those details were what helped us identify Toby. You mentioned this in the article, but what happened with Toby when you kind of presented him with this information? So I initially tried to reach out to get an interview multiple times. And when I didn't hear back, I decided to send all the fact checking for the book with all the details we were going to put in the book.

And I sent it as a Google Doc. And when I did so, I... then saw him in the Google Doc reading it. Because, you know, a Google Doc will show you if there's, like with an icon. And he didn't use one of those anonymizer, random animal. I mean, I don't remember that part, but I sent his exact email address, the document. Then, yes, it would have showed that it was him. Yes. Because nobody else also had that link.

It was like just for him. I got you. You know, at that moment, I had a lot of adrenaline running through my body. But it was also good because then I knew, okay, at least now I know for sure. that he has seen everything. Even if I don't get a response, at least I know that he knows what's coming. So that just felt good, like, on a process level,

you know, just to make sure that all of the eyes were dotted, all the T's were crossed. And then later, he did send that email saying that my statement and conclusion was factually inaccurate or something like that. And he offered to send me more details if I wanted them, but when I asked for them multiple times, he did not respond.

And I want to ask, I'm just going back to ATSA and the coin firm report. Some people, some skeptics may look at that and say, well, of course, someone's going to pay someone to produce a report saying that they're not the hacker when they're being investigated by a law enforcement agency in another country for this issue. Obviously, you're a credential, reputable journalist, so I'm sure you understood a potential motive behind that with EFSA. So how did you take that into account as you were doing your research? Afto was one of the people trying to rescue the money. So, I mean, I guess it's sort of possible he could have been the hacker, but I had no evidence to indicate that he was. And when I looked at the report, it was definitely just the Brazilian federal police,

even just trying to figure out what Ethereum is and what the Dow is. there was like the Wikipedia page for Ethereum printed out. And people, you know, there are like handwritten notes. They definitely were very confused by the whole thing. So it wasn't necessarily that I thought that that was something that cast suspicion on him. And also, frankly, I mean, he was telling me about it, which would have been another, you know, I think if he really was a suspect, then he probably wouldn't have gone telling a journalist that he was now the subject of this investigation. Have you heard from any law enforcement agencies about this?

I mean, do you think regulators, et cetera, might read your book and start trying to find Toby and investigate him further and kind of follow the lead that you've set up? The news is not out now. When we're recording, it's not out. But by the time this will come out, it will be out. So that remains to be seen. It is noteworthy, though, that the SEC did come out with a report several years after the DowHack. I think it was been the first month or two when Jay Clayton, Gary Gensler's predecessor at the SEC, took office. And it was something like an 18-page report that basically said they're not going to prosecute, but the Dow was definitely, the Dow token was definitely an unregistered securities offering.

Why do you think the SEC decided to issue that paper? Do you think it hit the mark? And how has that impacted the SEC's, I guess, behavior towards crypto in the years since? So I think that they did want to make some kind of statement about what by then was a pretty rampant, I guess, initial coin offering spree that was going on across the world and was getting a lot of U.S. investors interested. throwing their money into these initial coin offerings. So I think they wanted to sort of put their stake in the ground and make a statement, look, these are securities offerings and show what their viewpoint was. And I think maybe they did it with the Dow because since the Dow had, you know, ended, I guess you could say, since people got their money back. And so nobody, in a sense,

was harmed, depending on, you know, how you look at it. But from the SEC, viewpoints since it wasn't going on anymore and they had the opportunity at least to get their money back, then I think they felt that that was a way to get their point across without necessarily having to do an enforcement action right away. So the SEC's Dow report was definitely probably correct in the sense that the Dow tokens probably were security simply because they were to invest in a venture fund, which is pretty much literally the definition of security because you in the U.S. have to be an accredited investor in order to act essentially as a venture capitalist, which is what the Dow really was structured to do. And, you know, in terms of whether or not the Dow report was

effective, I'm not so sure because obviously after it got published, there were still so many ICO is just raking in tons of money, you know, billions of dollars worth over the next year, year, a half, two years. And so clearly not everybody got the message or they might have realized, well, the likelihood that they come after me is probably low, something like that. And so, yeah, it was, you know, there were like small little things I found that that the SEC didn't necessarily get correct, but I don't know if that really affects anything about the total statement around the report. As we're recording this, as you're coming out with your book and publishing this article, Dow's are very much in vogue again. I mean, Forbes just published its latest issue with a big

feature story on the growth of investing Dow's. A lot of it enabled by Syndicate Dow, which you had their co-founders on your show a couple weeks ago. So, I mean, not the Dow's ever one of away, but now that they've really sort of sort of captured the zeitgeist of crypto again, how does the legacy of the Dow fit into all that? Well, I think for sure a lot of people have learned a lot of mistakes from the Dow. So for instance, I remember one of the first DAWs to really get some traction after the Dow was something called Mollick Dow. And Mollock Dow was structured so that if you wanted to remove your funds,

you could just do it. There was no, you know, there were no waiting periods. There was no voting. It wasn't this whole kind of like time-locked gated system. It was just very simple. You could, as they called it, rage quit. And I think a lot of DAOs nowadays also have the benefit of having all the infrastructure needed to have a functional DAO in place. You know, just even things like doing the simple voting and taking these snapshots, that was not possible during that time. And, you know, I imagine it just, I don't know if it's necessarily that those were built because of the DAO.

I think people recognized, even at the time of the DAO, that those were necessary things to have. But yes, I think all of that infrastructure does make these Dow is probably more likely to succeed. But in some ways, too, maybe a little bit of that, like the ability to dream a little bit could be gone. I mean, I know for a lot of DALs right now, they're capped at 99 investors, many of which have to be accredited investors. And some of the magic behind the doubt was that theoretically anybody could participate anonymously or pseudonymously.

And perhaps to make certain DALs a bit more palatable, regulatory compliant, they've had to make certain concessions on that front. So that's just one interesting, at least in my opinion, one interesting sort of like sidebar to this whole discussion. Is there a way to make these types of opportunities safe and secure for ordinary investors? Yeah, is there a middle ground in some ways here? I think so. I think right now there's definitely a lot of experimentation where people are trying to figure that out. These new Web 3 investment clubs that Seneca Dow has launched probably are going to go a long way in determining that. but I would imagine so.

You know, I don't want to, I tried not to like make projections because I just want to be open to whatever actually really does happen in the space. But I would be surprised if people didn't figure that out. Well, Laura, I'd like to thank you for coming on Unshamed. Thank you for having me. Yeah, but this was a great discussion. I really enjoyed reading the book and diving deeper into this really sort of, critical chapter in Ethereum and Crypto's history in general. So I hope everyone enjoys reading the article, listening to this podcast, and reading your book.

Thank you. Thanks for interviewing me, Steve. It was really a pleasure. It was so much fun chatting. All right. So thanks so much for joining us today to learn more about the Dow, the Dow hack, and this investigation. Read my book, The Cryptopians.

Idealism, Greed, Lies, and the Making of the First Big cryptocurrency craze. And check out my Forbes article. You can also check out the show notes for this episode. All of the links to these items will be in there. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Ness, Mark Murdoch, Shoshonk, and CLK transcription. Thanks for listening.