Bail-Out Definition
In the context of blockchain and cryptocurrencies, a bail-out refers to the act of providing financial support to a failing or distressed entity, to prevent a collapse, by central authorities, such as a government or financial institution. In a crypto context, this could refer to the controversial decision by the Ethereum’s community to conduct a hard fork in its blockchain to bail out the DAO (Decentralized Autonomous Organization) which suffered from a major hacking incident in 2016.
Bail-Out Key Points
- A bail-out is a financial lifeline provided to a failing or distressed entity to prevent its complete collapse.
- In a crypto context, this term is often used in reference to the controversial action taken by the Ethereum community to save DAO after it was hacked.
- Bail-outs represent a point of challenge to the ethos of decentralization in cryptocurrencies.
What is a Bail-Out?
A bail-out is a form of financial assistance given to an entity on the verge of failure, with the aim to prevent its complete collapse. It is typically conducted by central authorities, such as a government body or financial institution, as a way to stabilize the entity in question. In the realm of cryptocurrencies, bail-outs are controversial due to the decentralized nature of blockchains.
Who usually performs a Bail-Out?
In traditional financial systems, bail-outs are typically performed by governments or central financial authorities. In the blockchain world, bail-outs may be performed by the community or core developers, as was the case with the Ethereum community during the DAO hack.
Why are Bail-Outs controversial in the blockchain space?
Bail-outs are controversial in the blockchain world as they go against the decentralization ethos of cryptocurrencies. By definition, blockchains should operate without the need for central authorities. Hence, bail-outs, which need central intervention, challenge this principle. For instance, after the DAO hack, the Ethereum community was split on whether or not to perform a bail-out, and this led to a hard fork creating a separate chain, Ethereum Classic.
When is a Bail-Out needed?
A bail-out is considered when the stakes are high and the collapse of an entity would have far-reaching or catastrophic consequences. For instance, the collapse of a large cryptocurrency project could trigger a loss in investor confidence which could negatively impact the overall market.
How is a Bail-Out performed in a blockchain context?
In the blockchain context, a bail-out may take the form of complex interventions such as forking the blockchain or changing the project’s code. This was precisely the case with the 2016 Ethereum bail-out of the DAO hack, which involved conducting a hard fork to return the stolen funds to their owners.
