The Parity Hack and the Nature of Property Rights to Cryptocurrency
Tl;dr Property rights exist independent of whether states recognize them. They are ultimately a matter of ethics.
With the Parity hack, as well as the DAO one, the Ethereum community is facing an issue of justice.
The hackers violated the property rights of ETH owners in both the DAO and Parity case. However, justice does not demand that the Ethereum community restores the access to the frozen ETH because property rights in blockchain money are unlike those of bank-maintained digital money.
It is of course very unfortunate that the latest Parity hack happened and resulted in the freezing of around $150 mln. of ETH at the time of writing but, like a neuroscientist eagerly awaiting the opportunity to scan the brain of a new patient, I will use this occasion to muse about the nature of property rights to digital currency on the blockchain.
The question is actually very important to those of us who hope that a functioning legal system can exist without the state. Viewed from this angle, the decision of the Ethereum community to execute the hard fork on 20 July 2016 was actually a major judicial precedent, and the question that the community faces now is whether the case of Parity hack warrants the same response as a year and four months ago.
Before answering the question whether any of the two hacks violated the rights of ETH users, a major preliminary point needs to be made. If we consider rights as something that is dependent on the state and legislation to exist, then the Ethereum community can just leave the hack to the government courts to examine. This discussion is only interesting if we assume (in my view, rightly) that property rights exist regardless of what anyone, including the state, thinks or does about them. What people think and (or) do about rights influences whether they are respected but does not affect their existence.
It follows from this that there is no ethically privileged actor who is naturally assigned the role of assuring that rights are respected, and, hence, the Ethereum community is not precluded by the existence of states and their claims to the monopoly of law formulation and enforcement from adjudging in the Parity hack case. Moreover, one may say that it may be morally right for the Ethereum community to act as a judicial body here because of how long it will take for state-based judicial mechanisms to work through the case.
Having established the above, we may ask the question whether there is a major relevant difference between the DAO and Parity hacks. I claim that to answer it we need to first consider the nature and content of property rights to blockchain assets.
Consider what happens when you have money in the bank. Most of the currently existing money is electronic, hence your property right may not possibly be to the tangible paper currency. So what is it to? Money in this system exists as the content of the relevant bank data bases. Since data bases are ultimately certain magnetic states of the relevant computer hardware, the property right to the digital bank money appears to translate into the right to having the bank in question maintain the relevant hardware in the appropriate state.
In one key respect, blockchain moneys like ETH are similar to bank digital money. They also exist as the magnetic state of certain hardware, although the hardware is arranged differently and there is more of it. Clearly, if a bank is notified that a hacker froze money on certain accounts or stole the money from certain accounts, the bank is ethically obligated to restore the rights of account holders by modifying the data base.
What is crucial for interpreting the DAO and Parity hacks here is that in the bank example there appear to be two parties against whom the claim of property rights violation can be made. The hacker violates them by default in both cases, the bank violates them if it fails to restore the data base to the original state.
Hence, we can see that both the DAO and Parity hackers violated the property of rights of digital currency holders. The question becomes whether the Ethereum community is a property rights violator if it refuses to do the equivalent of the bank’s data base modification through executing an Ethereum-ledger changing hard fork.
Notice that this question is not about the desirability of doing that in terms of the fallout from the state regulators or the Ethereum-associated risk perception, or, alternatively, bailing out bad smart contract code developers in a sense. Rather, it is about pure justice, in other words, what is asked is whether the Ethereum community is morally obligated to act.
The response to this question depends on your view on the uniformity of property rights. If all property rights are like those a house owner has to her house without liens on it, then the Ethereum community, or more precisely the owners of the nodes are ethically obliged to ensure that the ledger is restored to its pre-hack state.
However, if you are not a deontologist about ethics but believe that rights are part of the world as it actually is, their content must reflect the nature of the objects to which they relate and the common understanding people have when bringing particular rights into existence through appropriating those objects. In this respect, blockchain money differs from a bank-maintained money in a potentially crucial way. Given the nature of the situation when a bank, for instance, creates and credits your account, it is reasonable for you to expect (from the nature of the relationiship and the history of banking) that the bank will maintain your account in the appropriate manner, which includes correcting the potential digital hacks.
With open-source blockchains, however, the idea that one may reasonably expect the same outcome is rather implausible. The key characteristic of such blockchains is that anyone with a right hardware may run a block-validating node. If she is considered to be ethically obliged to execute the hard fork to restore the ETH owners to their pre-hack state, it follows that she is also ethically obliged to continue maintaining the blockchain once she started doing it, because if the nodes stop doing that, everyone will lose their ETH.
It does not matter that not all nodes need to follow for assessing the ethical obligation, and since the obligation to maintain the node appears to be absurd, the one to follow the hard fork seems to be absurd, too. To see why this is so with regard to the questions of justice consider a situation where 1000 people conspire to poison someone by each adding a microscopic dose of poison into her drink. Suppose also that only 501 conspirators need to add poison for it to work. Clearly, regardless of the details, all of the conspirators are ethically responsible if they participate, regardless of whether the murder would have happened without their input, anyway.
Therefore, the upshot here is that justice does not seem to demand that the owners of Ethereum nodes execute a hard fork to relieve the Parity hack victims. Whether such an action is desirable for reasons unrelated to justice is another matter which is beyond the scope of this post.