$160 Million Stuck: Can Parity Still Shake Up Ethereum?

When life gives you lemons to the tune of nearly $160 million, it's not so easy to make lemonade.

But that's just what ethereum startup Parity Technologies is seeking to do after a rough 2017, a year in which it suffered one of the most high-profile breaches in the history of blockchain. Far from a sinister hack, though, it's had to face that its fortunes effectively changed when a novice developer "accidentally" froze the funds so no one could access them.

Worse still, attempts at getting the money back don't exactly look promising.

Entering 2018, that could have an impact beyond just a single startup. Far from a conventional business, Parity supplies support for one of the two most widely used clients on ethereum, providing software roughly a quarter of the network uses to operate.

And like other blockchain conglomerates (think the ever-expanding Brooklyn startup ConsenSys), Parity has diverse interests. Also affected by the incident was the Web3 Foundation, the non-profit that oversees the development of the Polkadot blockchain, and it is also led by former ethereum CTO and Parity founder Gavin Wood.

The much-heralded blockchain for blockchains raised roughly $150 million in an ICO last year, and as reported by CoinDesk, funds lost in the Parity freeze included the ICO earnings.

As such, Ashley Tyson, a spokesperson for the Web3 Foundation, acknowledged that the loss to its operations has been felt. Plans to deploy bounties designed to fix code weaknesses and grant programs to spur development, she said, have been scrapped.

Tyson told CoinDesk:

"With a majority of our funds frozen, we're not sure what our ability is to financially contribute to these initiatives. Certainly, it will need to be massively scaled back."

Yet, the affected companies are rebuilding and continuing to develop their software, with some major projects proceeding almost as if nothing happened.

Technical progress

So far, the best example of Parity's ability to bounce back is the release this week of its node software, which improves the speed of its ethereum client while adding a range of updates.

A bigger and more long-term project, though, is their so-called ethereum "bridge." Based off an age-old idea in blockchain, the tech has been in development for a while, with Wood telling CoinDesk in November the project was 70 to 80 percent complete.

For now, the prototype can be used to connect the ethereum network with Kovan testnet, meaning users can send their funds to a special ethereum smart contract and locks those funds for use on an experimental version of ethereum.

Unlike the main blockchain, Kovan comes to consensus via a mechanism called "proof-of-authority." Though it's not as decentralized, it's still designed to make sure no one's making transactions they really shouldn't be making, replacing ethereum's miners with a set of approved authorities.

This is a first step. And if and when the project is finished, users will be able to seamlessly send their money in this way to any ethereum-like network.

Eventually this will be used to link ethereum to Polkadot, an idea described in the "Polkadot white paper" to connect many blockchains together with the help of incentives and game theory.

This is a pretty big step in and of itself, though, since the company is the first such ethereum "bridge" to connect two networks with such different underlying algorithms.

To put the project into context, they are trying to achievedsimilar functionality to sidechains, a long-promised bitcoin technology that has stalled for years due to security problems.

Despite the frozen funds, development updates show the bridge is still in progress, with the developers releasing a number of security improvements a couple weeks ago. One of the next big steps for the bridge is to move funds back and forth in a decentralized fashion.

"We're getting all our ducks in a row. Soon it will be time to start machine gunning them down," Wood said.

Setting perspective

And for Wood, the hack is less of a debilitating loss and more of an expensive growing pain.

In interview, Wood and Parity Technologies developer Robert Habermeier both spoke in a manner that alluded to the nascent state of ethereum broadly, with Wood noting it only "kind of" works as it was envisioned today.

With this in mind, Wood is still confident Parity can make progress on technologies that will bolster the blockchain he helped found. (Wood was the author of the ethereum "yellow paper" and is responsible for much of its high-concept math).

"For ethereum to continue its fairly staggering success story its gonna need to scale," he said, noting that's another thing Polkadot, moved along by the bridge prototype, can help.

Along these lines, Web3 Foundation is building on its plans to help develop the rest of the decentralization world, partnering with a range of ethereum projects with the same goal of keeping data in the hands of users.

It's hosting a workshop bringing together a number of budding decentralized exchanges in Berlin, Tyson told CoinDesk, and plans work with developers of encrypted peer-to-peer technologies that shield data passed around on blockchain networks.

Still, she stressed that Web3 Foundation won't be crystal clear about its budget for another couple of months, and it won't be able to contribute to the overall ethereum ecosystem as much as ot hoped.

And with technical ideas for recovering the funds shot down by other ethereum developers so far, there still might be hurdles to come.

Tyson told CoinDesk:

"We would obviously like to find some way to recover the funds, but the process for that is still unclear. We will take time to engage the community on what their concerns, feedback and suggestions may be."

Correction: An earlier version of the article misstated that a file deletion froze the funds. This has been corrected.

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