DAO stands for Decentralized Autonomous Organization.  The DAO was envisioned to be a virtual venture capital fund built on smart contracts hosted on the Ethereum blockchain whose purpose was to invest in and distribute capital to various projects. The DAO did away with human roles in a venture capital fund which was intended to make everything free of human error and mismanagement.  Stakeholders vote with DAO tokens to approve or disprove of projects and to decide what direction the DAO should take.

On July 17, 2016 the DAO was victimized by an attack on its smart contract which resulted in $50m USD worth of Ether being stolen [1]. This attack forced Ethereum to do a hardfork in order to recover the stolen Ether. This hardfork was successfully completed on block 1920000 but this hardfork resulted in a split of the Ethereum blockchain [2].  The old chain with the compromised funds becoming Ethereum Classic (ETC) and the new chain retaining the Ethereum name.

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References:

1.) Nathaniel Popper (June 17, 2016) A Hacking of More Than $50 Million Dashes Hopes in the World of Virtual Currency  The New York Times

2.) Vitalik Buterin (July 20, 2016) Hard Fork Completed Ethereum.org blog