How Did a Hack Split Ethereum in Two?

One of the most significant events in Ethereum's history began with an attack not on the Ethereum network itself, but on an application running on the network.

The DAO attack, which occurred in 2016, not only caused millions of dollars in losses, but also confronted the Ethereum community with a very difficult question that the blockchain world is still debating:

Should a transaction on the blockchain be reversed when the consequences are severe?

The different answers to this question led to Ethereum continuing as two separate blockchains.

What was The DAO?

The DAO was designed as a decentralized investment organization that didn't function like a classic company or mutual fund.

Instead of managers or a traditional board of directors, decisions were planned to be made by the votes of DAO token holders. Users invested Ether in the project, received DAO tokens in return, and could vote on which ventures the collected funds would be used for.

The idea quickly gained significant interest. According to the SEC’s official investigation report on The DAO, the project raised approximately 11.5 million ETH. At the time, this amount was worth approximately $150 million, making the project one of the largest crowdfunding initiatives of its time.

However, this large sum of money was held within a smart contract that hadn't yet been sufficiently tested.

How did the attack occur?

On June 17, 2016, the attacker began exploiting a vulnerability in The DAO's withdrawal mechanism.

Normally, the system would first require the user to send their money, and then update the balance in their account. However, the contract was running another contract outside before updating the balance.

The attacker used this sequence to their advantage.

Before the first withdrawal was completed, they called the same function again. Since the system hadn't yet registered the balance decrease, it processed the payment again. This process was repeated many times before the contract could update the balance.

We can think of this like an ATM that doesn't update its account after dispensing money. Because the ATM still sees your balance as the same, it allows you to withdraw the same amount repeatedly.

As a result of this method, known today as a reentrancy attack, approximately 3.6 million ETH was transferred from The DAO to another contract controlled by the attacker. At the time of the incident, this amount was worth approximately $50-60 million.

Why Did the Ethereum Community Divide?

The stolen funds couldn't be spent immediately. The DAO's rules required the allocated funds to be held for a certain period. This gave the Ethereum community time to find a solution.

But it wasn't just a technical problem. At the same time, there was a debate about the fundamental principles of blockchain.

One group argued that the attack was unjustified and that users' funds should be recovered. They suggested modifying the Ethereum software to transfer the funds to a recovery contract.

Another group opposed this.

According to them, even if the attacker acted unethically, the transactions on the blockchain had been carried out according to the rules. Altering the chain's history could harm the principle of immutability of the blockchain. This view was based on a very simple idea:

Whatever the code did, the result should be valid.

One Blockchain, Two Ethereums

On July 20, 2016, the Ethereum network performed a hard fork at block number 1,920,000. With this update, funds linked to The DAO were moved to a recovery contract where investors could recover their ETH. During the fork, the vast majority of miners supported the updated chain.

However, not everyone accepted this change.

A group of users and miners continued to work on the original, untouched blockchain. Thus, the Ethereum network split into two separate chains:

The chain that accepted the hard fork retained the name Ethereum (ETH).

The chain that continued without altering its original transaction history went on to become Ethereum Classic (ETC).

Therefore, Ethereum Classic is not a mere copy created later. It is a chain that shared the same history as Ethereum before the DAO attack, but chose a different path after the fork decision.

Why is the DAO Attack Still Important?

The DAO attack clearly demonstrated that smart contracts are not just pieces of code. Because these contracts can directly manage millions of dollars in assets, even a small sequencing error within the code can escalate into a major financial crisis.

The event also revealed a crucial truth about how decisions are made in decentralized systems. There may be no central administrator on the blockchain; however, when a major crisis occurs, developers, miners, users, and platforms still have to make difficult decisions.

The real legacy of the DAO attack is not just the 3.6 million ETH lost.

This event left the blockchain world with the following question:

In a system that should be immutable, can the past be tampered with to ensure justice?

The fact that Ethereum and Ethereum Classic still exist as separate chains today shows that this question is not answered in the same way by everyone.

Disclaimer

This content is for general informational purposes only and does not constitute technical, investment, or cybersecurity advice.

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