Out of the Ether

The Amazing Story of Ethereum and the $55 Million Heist that Almost Destroyed It All

Matthew Leising

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119602941
• Edition: 1
• Topic: Crescita personale
• Subtopic: Finanza a livello personale

Discover how $55 million in cryptocurrency vanished in one of the most bizarre thefts in history

Out of the Ether: The Amazing Story of Ethereum and the $55 Million Heist that Almost Destroyed It All tells the astonishing tale of the disappearance of $55 million worth of the cryptocurrency ether in June 2016. It also chronicles the creation of the Ethereum blockchain from the mind of inventor Vitalik Buterin to the ragtag group of people he assembled around him to build the second-largest crypto universe after Bitcoin.

Celebrated journalist and author Matthew Leising tells the full story of one of the most incredible chapters in cryptocurrency history. He covers the aftermath of the heist as well, explaining the extreme lengths the victims of the theft and the creators of Ethereum went to in order to try and limit the damage. The book covers:

• The creation of Ethereum
• An explanation of the nature of blockchain and cryptocurrency
• The activities of a colorful cast of hackers, coders, investors, and thieves

Perfect for anyone with even a passing interest in the world of modern fintech or daring electronic heists, Out of the Ether is a story of genius and greed that's so incredible you may just choose not to believe it.

Part I

It is the business

of the future

to be dangerous.

– A.N. Whitehead

Zero

For most of the world the attack began on a Friday in June 2016. The planning and testing and tinkering had been in the works for weeks. Everything would have to be just right or it would fail. What was about to unfold was one of the most elegant, complicated, and weirdest thefts in history.

The clock read 3:34 in Coordinated Universal Time. That's the same as Greenwich mean time, for those who remember. The wee hours in Europe, still Thursday in New York City, and half past 11 in the morning in Beijing. A pair of eyes checked the screen again; a finger hovered over a mouse button. This was a moving machine with many parts: all interacting, all in code, all in cyberspace. It's baffling and complex, and some of the best computer scientists in the world struggle to put into plain English what happened. Robots attacking robots on the web. That's how one person put it to me, and I've never forgotten it. In this case the reward the robots battled over was immense – a quarter of a billion dollars.

None of this would have been happening if not for a new computer science discipline known as blockchain. While certainly a buzzword, blockchain is simply a new way of implementing databases. Instead of one company or government controlling access to data, the ledger is shared and spread among computer hard drives all over the world. It is what made Bitcoin possible.

Bitcoin, of course, ushered in the era of cryptocurrencies, a time where a new type of money came to exist, one that isn't backed by a government or bank but instead derived from whether people believe it's useful. Bitcoin was the pioneer, but by mid-June 2016, the second-most valuable cryptocurrency after Bitcoin was called ether. Ether is the fuel that allows the Ethereum blockchain to work.

The hacker looked at the contract he'd written one last time, then clicked his mouse. His target: a computer program that held $250 million worth of ether. What it also held was an enormous bug in its code that the hacker believed would let him walk right in and steal it all.

His first try failed. Four minutes later, he tried again. That attempt failed too – a red exclamation point next to his transaction declared “Error in Main Txn: Bad Jump Destination.” Shit, he thought he'd nailed this down. He took some time to check all the inputs, the addresses, and codes. Seventeen minutes later, at exactly 3:34:48 UTC, he tried a third time. Then, he saw it. His account had received 137 ether from the computer program that held the $250 million. That was a cool $2,700 he just stole.

The attack had begun. Thousands of these small transactions would accrue throughout the day as the theft continued. People all over the world watched as it occurred, helpless to stop it. Eventually $55 million of ether was stolen, making it the largest digital heist in history at the time.

●●●

I remember that day. I'd called in sick to my job as a reporter at Bloomberg News in New York. June 17, 2016. I'd wrapped some blankets around me as I sat on the couch in my Brooklyn apartment and checked my phone for whatever news I was missing.

I'd been at Bloomberg for 12 years, reporting on Wall Street and energy and oil markets, and then, for most of that time, my beat became the financial infrastructure that keeps the whole system humming but that no one talks about. How exchanges work, for example, or the ins and outs of US Treasury bond trading. Then the world went through the worst financial crisis since the Depression. I covered the Dodd-Frank Act's debate and passage: legislation written in hopes of reining in the financial world to stave off another crisis. I never thought I'd end up being a financial reporter – it just sort of happened, and then I found myself involved in one of the biggest stories of the century.

In 2015, all that background brought me to the realization that a new concept – blockchain – could radically change everything I wrote about. I'd dismissed Bitcoin as a fad for years. I didn't understand it. I thought, how in the world could anyone value something that was nothing more than ones and zeroes?

Blockchain, though, was different. Most of the financial plumbing I spent my days talking to people about was antiquated and in great need of updating. Banks like JPMorgan were sitting atop technology systems that would make the mazes of Babylon seem a snap to navigate. That's because they inherit IT systems when they buy other banks. And then they build systems in-house that might be designed according to the whims of a certain part of the bank, which then won't work with a system in another part of the bank. Some of these systems were written in Cobol, a programming language popular in the 1970s that faces the very real possibility that no one who knows how to fix it will be alive in a few years.

The best thing to do would be to rip it all out and completely redesign these systems. Which is impossible, of course. But Wall Street's need to catch up to the twenty-first century in terms of technology systems was critical. Blockchain turned many heads for this reason. Not only could it streamline bank IT systems, it held the potential of speeding up transactions, which would save banks a lot of money.

That's what I realized, thanks to a short article I read in the Economist in 2015. Soon after, I told my boss I wanted to include blockchain on my beat. He said, “That's great. What's blockchain?”

As I lay on my couch on that day in June 2016, the news hit that this thing called the DAO had been hacked. The DAO is the computer program I told you about, the one that held $250 million. I didn't use the name at first because I don't want to confuse you any more than absolutely necessary. I'll do my best to make this as painless as possible, but there are still going to be technical details. And names like decentralized autonomous organization, or DAO. Please – stick with me, hold my hand. We can do this.

So anyway, ether was being stolen, even as I read the story on my couch. I think I remember this vividly because I immediately experienced the pang of guilt any reporter feels when they are out of the loop as a big story is breaking on their beat. I should call in, I thought; I need to help tell this story. But I really was sick, and I didn't have many good Ethereum sources at that time.

In fact, earlier in 2016 was the first time I'd spoken to anyone about Ethereum. I went to visit Joe Lubin in the funky Bushwick headquarters where he'd started ConsenSys, the largest innovation studio for applications that would run on top of the underlying Ethereum network. An Ethereum cofounder, Lubin is quiet and demure. A native Canadian, he has an intense focus that can make you feel you have his entire attention when you speak with him. He shaves off the hair that remains on his head and is strikingly handsome in the way that some men pull off being bald.

Years before I met Lubin I'd lived in Bushwick. The Brooklyn neighborhood had been much rougher in 2004. Restaurants were few and far between. A bar called Kings County was one of the only local gathering spots and was just around the corner from where ConsenSys would later set up shop. I had friends at the bar who told stories of being chased by packs of wild dogs, of returning late to their apartment from the subway to find a tiny slip of paper jammed into their keyhole, put there by the guys in the shadows who demanded everything they had. It was an amazing time.

I knew the building ConsenSys would come to occupy, next to an overpriced natural grocery store. Its facade was forever covered in graffiti long before ConsenSys moved in, a detail no profile of Lubin or his firm has ever seen fit to leave out.

Lubin built ConsenSys in the hopes of fostering the types of digital applications that would make Ethereum indispensable to the world. Think of a blockchain-based digital version of Uber, but without the middleman that is Uber taking 30 percent of every transaction. Consumers pay less, drivers earn more, and hopefully the user experience of clicking an app on a smartphone isn't much different. Or think of an app that directly connects artists with their fans without a record company and lawyers and agents all in the middle taking their cuts.

What's amazing about this idea of a new kind of Internet that's peer-to-peer is that Ethereum has money programmed into it already. Ether is the currency of the realm, meaning that banks can't shut it down. Losing access to banking is almost always a sure way to kill off something you don't like. Here it's impossible.

But what does a blockchain Uber really mean? Let's run through it and call it CarCoin. This is how I first came to understand Ethereum's potential method of mass disruption.

How does CarCoin make money? That has to be the first question. No one wants to build complicated software for free. What you do is create a new cryptocurrency along with the application for your ride-hailing business. CarCoin will be created and sold to the public. Importantly, you must have a CarCoin balance to access the app on your phone.

Now imagine CarCoin hits it out of the park. Everyone wants some. The price of CarCoin goes up. The founders and developers of CarCoin, meanwhile, have made sure to give themselves a lot of CarCoin for free.

They do this in hopes that its value rises; then they're sitting on pure profit and all their hard work has paid off. This is smart contract 101 stuff once you understand the 360-degree nature of the ecosystem Ethereum's inventor Vitalik Buterin and his colleagues created. The app, the coin, and the supply demand dynamics all intertwine. It makes sense, yet I now understand it never really was the vision in the early years.

The people who invented and created Ethereum were flying blind. Very little of how the project became a reality followed any kind of thought-out process. That goes as far as making sure to have a way of making money.

Fabian Vogelsteller was an essential early programmer for Ethereum. Starting in about 2014 he built, with Alex Van de Sande, the Mist wallet, one of the earliest and most important Ethereum apps as it allowed users to access the Ethereum blockchain and hold the different digital currencies they owned.

“There was no business model at the time,” Vogelsteller said. The economics are rather limited, as he spelled out. You can't charge for using smart contracts and people are already spending ether to access Ethereum – that's fundamental. A digital application can only hope to earn money if it provides a useful service to people. But that was the last thing on early developers' minds, he said.

“We never thought about business models at all. It was only about what to build, not how to make money,” Vogelsteller said. I was speaking to him in 2020 for a story I was writing about his new project, Lukso, an arts, culture, and fashion focused blockchain based on Ethereum. I ran my CarCoin example by him, and he zeroed in on the big problem right away: Why is CarCoin – i.e., the new cryptocurrency – necessary? Why not just use ether for everything? It's taking the money aspect of Ethereum a bit too far to build an entirely new coin on top of it.

While this criticism doesn't blow a hole in the idea of digital applications, it does call into question the nearly two-year-long orgy known as the initial coin offering market that took place from about 2016 to early 2018. Billions of dollars were raised by legitimate and completely fraudulent dev teams alike. Everyone was welcome at this scamfest. And all of it can be seen in hindsight as an enormous waste of time, energy, and the little creativity that went into most ICO projects. It was a folly, but only one of many to come.

“The whole Ethereum community, from the core developers and on, is pure idealism,” Vogelsteller said. This sanguine vibe is strongly tied to one of the universally shared beliefs among the people who created Ethereum: the Internet should be free so we can all share it and build cool things, to paraphrase how Fabian Vogelsteller described it to me.

The correct incentives are the next ingredient in this idealism pie. Fabian compared it to a jungle: brutal, yes, but it all works because the incentives line up in favor of keeping the entire ecosystem healthy. Shitty incentives in the jungle lead to death for everything. Blockchain has to believe in incentives because its core function – to date, at least – is tied directly to the network of computers that mine and validate transactions. Making as much money as possible by mining comes with a nifty side effect – it provides the best security for a blockchain network. Greedy miners are wanted.

“In nature we have a lot of these systems” of aligned incentives, Vogelsteller said. “In society we don't believe it's possible, but blockchain shows it is possible.”

So does CarCoin work, or not? I wish I could tell you, but advances in crypto-economics aren't exactly whizzing about the industry. As far as I know, as of early 2020 the debate about incentives goes on without a clear answer. There are many problems Ethereum has to face if it's to become universal, not least of which is how people make money from it.

But the middlemen are still there and seem ripe for the taking. The speed at which Uber o...

Table of contents

• Cover
• Table of Contents
• Cast of Characters
• Prologue
• Part I
• Part II
• Part III
• Part IV
• Sources
• Appendix
• Acknowledgments
• Index
• End User License Agreement