Recently, investors formed a DAO (decentralized autonomous organization), which is a type of crypto structure, as a way to collectively bid on a rare copy of the U.S. Constitution. The group, called ConstitutionDAO, failed to successfully bid on the auction, which ultimately caused the organization to shut down.
After giving refunds to traders who injected money into the DAO, the bidders are left to take care of fees worth millions.
What happened to ConstitutionDAO?
ConstitutionDAO formed as a decentralized autonomous organization as a way to collectively bid on a rare copy of the U.S. Constitution. The collectible (one in 11 surviving copies) was up for auction at legendary auction house Sotheby's. The copy sold for $43.2 million to another bidder named Ken Griffin.
The ConstitutionDAO founders decided not to keep the DAO alive. Instead, they offered to return investments with no time limit. According to the website, "We have determined that building and maintaining an ongoing project is not something that we as a core team are able to support, given the technical and administrative requirements of doing it properly."
ConstitutionDAO bidders will pay millions in fees.
After the organization failed to win the auction, shut its doors, and started processing refunds, fees started rolling in. In many cases, the fees cost half or more of the initial investment. For bidders who invested small amounts into the DAO, the gas fees ate up a huge percentage of the cost basis.
According to ConstitutionDAO's Discord group, 17,437 donors each sent a median donation of $206.26. The organization raised about $47 million in a matter of days. Small-time donors lost most of their investment, but the overall return fees amounted to an estimated 3 percent of the total or $1.5 million.
Where do the fees come from?
The ConstitutionDAO token trades on the Ethereum blockchain, which requires tons of energy to run. Transactions include gas fees to cover costs for the transaction facilitators. Like the gas we use to drive, prices fluctuate based on basic supply and demand. If the Ethereum network is experiencing high trading volume (high demand), the price goes up. This is also the case now as ConstitutionDAO returns investments.
One user who invested $400 paid $168 in gas fees upon refund. According to one of the Discord group's delegates, ConstitutionDAO "looked at and did everything in our power to come up with a gas-free refund option. However, there was nothing that could be set up in a timely manner." Instead, they prioritized safe and quick refunds.
Who is auction winner Ken Griffin?
Griffin beat ConstitutionDAO in the bid for a rare copy of the U.S. Constitution. Griffin is the founder and CEO of Citadel and his bid set a world auction record for books, manuscripts, historical documents, and printed texts.
Griffin said about the document, "The U.S. Constitution is a sacred document that enshrines the rights of every American and all those who aspire to be." Griffin is worth an estimated $20.8 billion.
Are DAOs the way to go?
One Discord admin wrote about the ConstitutionDAO fee issue and said, "This was a very, very hard call and we've all been at our computers for the last several days for every waking hour trying to find the least bad option."
For DAOs, especially those whose sole intent is to bid on something they might not win, there are kinks in the model. This new structure will require some revisiting in order to prove that it's safe and lucrative for crypto traders moving forward. Many cryptocurrency fans advocate for using crypto for everyday financial purposes, but there are bumps that haven't been smoothed yet.