The problem of recovering lost funds in crypto...

Years ago, my credit card was stolen. The thieves made off with my card and enjoyed a little spending spree. I called up my credit card company and explained the situation.

Within days, I had a new credit card and the stolen funds were refunded to my account.

It was a bit of a pain, but really, looking back, it was pretty easy to deal with and the credit card company did a nice job resolving the situation.

This was for a few hundred dollars. What happens when something like this takes place in the land of cryptocurrency?

Nothing. You lose your funds. What happens if this is a theft or scam of millions of dollars in cryptocurrency?

It depends.

This is a big problem, and a barrier for adoption for a lot of potential cryptocurrency users. Developers are wrestling with this problem, and there is no simple or ideal solution.

Months ago, Ethereum experienced a devastating hack called "The DAO hack". For a basic run-through of what happened here, have a look at this article. Essentially, money was stolen through an exploit in a smart contract running on Ethereum, resulting in theft of many millions of dollars. Ethereum developers decided to fork the currency to reset the blockchain and restore funds.

Like reversing time, the blockchain was restored. Except, not everyone agreed to the fork. Thus, Ethereum Classic was born out of an insistence that "code is law" and whatever happens, happens, and should stay that way.

There have been other incidents such as the Parity bug (read about it here), resulting in lost or frozen ether valued in the millions. Should a currency fork every time a major incident such as this occurs - a sort of "rewind time" feature?

Should this occur for thefts or bugs or hacks of less than $100 000? How about less than $10 000? At what point is it not worth "refunding" users who fall victim to such events?

It's a tricky question, and one that for now, creates a barrier to adoption for potential users of cryptocurrency. The fact that you are your own bank brings some risks along with it.

As smart contracts are developed, there is inherent human error involved in the process. This can lead to vulnerabilities that can result in lost funds. Over time, the process of developing and assuring the quality of a given smart contract should improve, and hopefully, we will see less of these events occur.

On a smaller scale, however, this is still going to be a problem for some time. I was reminded of this problem the other day when Coinbase announced SegWit support, along with a warning to not send Bitcoin Cash or USDT to new Bitcoin SegWit addresses, as the funds will be permanently lost. There really isn't a way, as of now, to deal with this problem, other than just being careful. Of course, everyone should be careful with their money anyway, but the fact remains that humans do tend to make mistakes from time to time.

This leaves me contemplating future solutions. Will there come a time in the future where a smart contract somehow enables contested funds to be resolved in the case of losses, thefts, or hacks? Will there be a way, in the future, to prove a refund request's validity and recover lost funds?

Share your thoughts in the comments!

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sources:
https://www.coindesk.com/understanding-dao-hack-journalists/
http://www.businessinsider.com/ethereum-price-parity-hack-bug-fork-2017-11

image source:
https://www.etsy.com/au/listing/467479453/all-sales-final-no-refunds-no-returns