The engine that drives the Decentralized Autonomous Organization (DAO) in the decentralized world is none other than the treasury. Its responsibility entails funding development, paying contributors, and maintaining the ecosystem by holding capital usually in the form of Ethereum, stablecoins or a native governance token. However, it comes with the downside of possible catastrophic loss in the event of a single vulnerability due to its governance being managed with a smart contract instead of traditional legal structures.
What happens when a DAO treasury is hacked? Let us discuss that below:
1. Immediate Financial Devaluation
The most notable impact of a hacked DAO treasury is the dreaded “death spiral” of the native token. Once investors hear news of a treasury breach, it tells them their funds are no longer secure, and they panic-sell their native token, taking the DAO down with them since it is backed by the value of the token. Another scenario involves the hacker themselves flooding the market with the native tokens they stole leader to severe devaluation and wiping out the holdings of honest community members.
2. The Governance Standoff
“Code is Law” is the ethos of the DAO, and a philosophical and operational crisis is created when the code is exploited, as in the case of a hack. When there is a treasury hack, you can expect some intense governance debates, as was seen in the 2016 “The DAO” hack, when the debates resulted in the controversial decision to hard-fork the Ethereum blockchain to recover the funds. This can lead to a split in communities and loss of trust in the project.
3. Legal and Liability Ambiguity
Due to the fact that DAO “members” exist in a legal grey area, unlike directors at traditional corporations, you might find you have little to no legal recourse in traditional courts when a DAO treasury is hacked due to a known bug or negligence. Victims of the hack have no choice but to rely on blockchain forensics and potential “white-hat” negotiations with the hacker.
4. The Path to Recovery (or Dissolution)
While recovery is certainly rare in cases of a DAO hack, it is not impossible. Some DAOs have taken measures to mitigate the effects of hacks, like an “emergency pause” in smart contracts to freeze remaining funds or insurance protocols like Nexus Mutual. However, since recovery is very rare, the most common outcome of a major hack on a DAO is treasury recapitalization or dissolution of the project(gradually or abruptly).
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
