In November 2021, Southby’s held an auction of one of the eleven surviving copies of the U.S. Constitution first printed in 1787 and although the auctioneer had previously sold it in 1988 for $165,000 USD, the only copy in private hands had expectations of $15 to $20 million USD.
What happened at the auction was unprecedented and in a remarkable show of people power, a group calling themselves The ConstitutionDAO was formed in a little over a week to produce one of the greatest internet flexes of all time.
ConstitutionDAO is a decentralised autonomous organisation (DAO), a new organisational structure where people with a collective ambition form a community to reach a common goal. It has been described as ‘a financial flash mob’ or ‘a chatroom with a bank account’.
Much like the Dogecoin meme token currently worth $23.5 Billion USD, ConstitutionDAO began as a joke. Josh Erlich was an original member and as he explained in an interview with Nilay Patel of The Verge, “There was an article about the Sotheby’s auction for a copy of the US Constitution, and some crypto people were making jokes of, “Oh, what if a bunch of crypto people got together and bought the Constitution?”
When the conversations become more serious, a Zoom call confirmed a serious intention to pursue the treasured document and” Literally seven days later, we had a representative at Sotheby’s bidding with an almost $50 million war chest’”.
In the end, despite their commendable chutzpah, ConstitutionDAO were ultimately outbid by a billionaire investor called Ken Griffin and in their understandable haste to get things up and running, there was a host of problems to deal with and some remain unresolved.
The problems
Problem #1 - The rules of engagement were unclear. As Erlich stated “We had not figured out the governance model. In the rush to buy this document, there were a lot of details that we were going to figure out after we had won”.
Problem #2 – Not a fractional ownership model – This operation was simply a pooling of funds, it was unclear if the exact money donated by an individual equated to the appropriate amount of fractional ownership, or if all donors were equal regardless of the donation amount.
Problem #3 – Donations were made in Ethereum, a cryptocurrency that can fluctuate wildly. ConstitutionDAO could have arrived at the auction with a lot less than they envisioned.
Problem #4 - The gas fees were prohibitively high. ConstitutionDAO recommended that people add $100 or $200 to what they were willing to contribute just to pay for the gas fees, which are the transaction fees in the Ethereum network, which may have discouraged some to even participate.
Problem #5 – High fees made refunds difficult. This problem is ongoing as 45 percent of donations remained unclaimed.
Problem #6 - Without a precedent**, there was no clear vehicle for a DAO to interact with a real-world entity** and many decisions were made on the run without reference.
Problem #7 There was plenty of internal politics. Sometimes, it’s not easy to find consensus in a large group of people and this would have been exacerbated by the rules of engagement being unclear.
Problem #8 - Without a governance model in place, a big concern for some was that some of the large holders — whales — would have outsized control over what happens.
Problem #9 – Without any alternative, too much trust had to put into the entity. Although ConstitutionDAO established a multi-signature wallet that held the funds and was controlled by 13 different signers of which, seven had to sign to move the funds, it was not a perfect system.
The positives
Positive #1 – Significant fundraising potential via a collective. As Erlich suggested “One of the most rewarding parts of this experience was the number of museums that we’re speaking to that now want to learn more. They saw us raise $40 to $50 million depending on the Ethereum price. They had said, “We take six months to raise this amount of money”.
Positive #2 – Viable alternative to traditional models. Erlich suggested that we are “going to see more DAOs for people who are trying to accomplish goals that don’t fit in the structure of a company or a nonprofit, but more of a community collective.”
Positive #3 – Enormous potential for model improvement. As Erlich said “We’re going to see lots of people take the lessons from what we did and build better tooling and better best practices” and “There’s a few things that a DAO can actually do today. The thing we need to bridge the gap with is figuring out what a smart contract can actually control, because that’s the source of a DAO’s power. For a lot of DAOs today, the majority of what they do is just sending treasury funds”.
One improvement might be to begin with progressive decentralization because as Erlich states **‘**it’s hard to start something fully decentralized, so you have to start with an initial team that builds something, who then brings it to decentralization’.
Recommendations for improvement
#1 – Accumulation of funds should be simple – Apart from the fact that cryptocurrencies can fluctuate wildly in value, it should be easy to donate in a currency that people are familiar with, such as a USD stablecoin.
#2 – Rules of engagement should be clear – Ideally, these should be set prior to purchase.
#3 – Low gas fees – Transactions fees should be a fraction of the donation.
#4 – Fractional ownership – The amount of each donation should be transparent, that each donor of the donation should reflect the donor’s partial ownership represent a match
#5 – Fair governance – the governance model for voting in regard to the asset should be fair. A whale (who might own say 40 percent) should not dictate terms. Each voice should be heard.
#6 – Aim should be towards full decentralisation – The aim should be that the all the rules should be contained in the code, meaning less reliance on individuals.
Based upon these learnings, a whitepaper has been produced to create a secure, low-fee, blockchain-based suite of applications to manage the procurement and fractional ownership of ‘museum worthy’ memorabilia via a DAO (decentralised autonomous organisation).