They Tried to Buy The Constitution

It's November 11th, and in one week, a copy of the US Constitution is going up for auction. Everyone expects it to draw the usual crowd of wealthy collectors. But the crypto community has another plan. They want to crowdfund enough money to place a winning bid, and they'll do it using a dao. There's only one week until the auction, so they need to move fast. On Friday the 12th, they put up a website. Things are messy with competing code repositories, but on Saturday, they find some partners to help. Juicebox will help with crowdfunding. Syndicate. Dao will help with legal, and FTX will help with exchange. The auction house agrees to work with the DAO on Sunday, but there's a problem. Sotheby's has to follow Know youw Customer rules. So the DAO needs to partner with an llc. Two members of the DAO step up to form the LLC and bridge the crypto and traditional finance worlds. It's now Monday, and things are really picking up. Steam. 10,000 people are chatting in the Discord. The media starts catching on. Paki McCormick writes a blog, then CNBC covers it. Donations start flowing and they're out to buy the United States Constitution. Tuesday leads to more big names signing on. Chris Dixon and other A16Z folks are now supporting the project. On Wednesday, they break $20 million raised. It starts looking like this might actually happen. Thursday is auction day and people are absolutely stoked. The DAO has over $40 million now. It's chaos in the Discord. No one knows who's representing the dao. Clearly, both bidders really want this. Brooke Lampley places the winning bid at $41 million, but no one knows who she's bidding for. Sold. $41 million. DAO backers are claiming victory, but slowly the truth leaks out. The DAO lost and the winner is revealed. It's Ken Griffin, the founder of Citadel and arch nemesis of the WallStreetBets Reddit. A crushing defeat. The story of the ConstitutionDAO is useful because it touches on so many different aspects of the current Web3 landscape. So let's go through the good parts of this, then talk about some of the bad parts, and finally close on the ugly, because it gets really ugly here. First up is the good. Well, it's the Constitution. What's not to like? It's an extremely meaningful historical document, and the DAO only had two rules for what they were going to do with it. It had to be displayed publicly and it had to have a plaque next to it that mentioned the Constitution. Dao's website. That's a noble goal and it's a big part of what led to the massive surge in support. The the team also did a great job of making it clear that they weren't in this for financial gain. Even though they could have easily given themselves some tokens for free at the start of the project, they didn't, which helped build trust in the community. Now, to be fair, there's still a world where the core contributors wind up benefiting from the project. The team was planning on submitting a proposal for compensation after the auction that would have been voted on by the dao, but that certainly seems reasonable to me, and a lot of the core team members had other Web three projects and a high profile story like this could draw attention to what they're working on. But again, that's totally reasonable. This approach led to a very positive community developing around the project. Although I didn't contribute to the project, I was in the discord and could see that everyone was just having fun and excited to be a part of a cool story. No one was trying to inflate expectations, and the core team was very clear that the DAO was merely a governance token and did not represent real ownership in the Constitution. Packy McCormick put it really well in his blog post when he said, if you want to contribute, you should think about it as purchasing a keepsake as opposed to investing in an asset. Even with this caveat, I think the fact that the money donated to the Constitution Dao was going to fund the purchase of a real physical item is important here. Unlike previous crypto projects, the Constitution Dao is very easy to understand, even for people who are new to crypto. At this point, most people understand what an NFT is. They've seen the crazy JPEG selling for millions of dollars and heard about massive Sotheby's auctions. But not everyone agrees that these NFTs have value. The Constitution, on the other hand, has centuries of history behind it and could actually generate cash flow, at least in theory. Although this wasn't the plan, some museums do charge entrance fees, so it's not crazy to come up with some sort of fundamental value based on traditional financial modeling. Even though the project didn't pan out as planned, it definitely served as a good educational tool for sparking interest in daos. The idea of a decentralized, autonomous organization is still very new to most people, but the Constitution Dao helped spread the idea that lots of people could come together quickly online to crowdfund a specific goal. And unlike traditional Crowdfunding daos have a built in voting mechanism. It's still unclear where these daos will go or how useful they'll be in the future, but more people are aware of how they work and I think that's a win for the team behind this project. Obviously the hope here was to win the auction and propel the DAO into the mainstream zeitgeist, and it doesn't look like that'll happen, but it's still remarkable that the project was able to break into the mainstream media in just a few days. Crypto broadly has been a hot topic for years now, but most of the attention comes back to price movements. Every time bitcoin hits a new all time high, there will undoubtedly be a press cycle covering it, and that's fine if you own bitcoin, but. But I don't think it really moves the needle where it's needed most, the developer community. This project represents a step forward precisely because there wasn't an expectation of massive overnight gain. So one of the few ways to get more involved was to actually contribute to the project in some way. If you're a proponent of crypto, this seems like a good development. The Constitution dao was basically a massive stress test of the current Web3 infrastructure, and it clearly exposed a bunch of areas for development. Most of the problems, which we'll get to in a minute, do have solutions, and they are now much easier to see for interested developers. Last but certainly not least, it is extremely good that no money was stolen here. Crypto is still very much a wild west and fortunes are made and lost every day. The very first Dao, which was appropriately named Just the DAO, raised $150 million before quickly getting hacked back in 2016. Even though Web3 projects can offer very high levels of security, in theory, there's still a ton of bad actors out there who can scam people. But that didn't happen here. Even though they lost the auction, supporters will get their money back, and that's a good result, all things considered. The stakes were clearly pretty high, with tens of millions of dollars flowing into the dao. But the team handled things responsibly and kept communication flowing. But now we have to turn to the bad side of the Story project, and we should probably start with the actual structure of the dao, because it's extremely convoluted. Web3 projects tend to work best when they are off in their own little pristine walled gardens. The world of traditional finance is extremely messy and highly regulated, but wading through all of that was unavoidable for this project. Let me walk you through how money was actually going to flow from individuals to the original owner of the Constitution, who was selling it. Step one. A contributor goes to a cryptocurrency exchange like Coinbase and buys Ether with US dollars from their bank account. Step two, they now send that Ether from Coinbase to a wallet like MetaMask. Step three, they use MetaMask to send ether to the ConstitutionDAO project, which is hosted by a crowdfunding platform called Juicebox. Step four all of the Ether donations are then collected in a multisig wallet, which Requires agreement from 13 different team members in order to move that money further. Step five. Because Sotheby's can't work directly with the Dow, a Delaware LLC with just two signatories has to interface with the auction house. Step six, the LLC would orchestrate the transfer to Sotheby's in the event that they did win the auction. That's a remarkably complex process for something that's pretty simple at its core. We're just talking about a bunch of people pooling their resources to buy a single object. This shouldn't be so complicated. And yet it is, because Web3 is so new and best practices are still being developed on the fly. One of the big benefits of crypto projects is decentralization, and the Constitution Dao was going to allow everyone who donated to vote on where to display the Constitution in proportion to the amount that they paid. The tokens they issued would allow these votes to take place without needing any single person to be trusted to count the votes. This is a great use for crypto, and it wouldn't have any issues if there wasn't a physical asset involved. The problem is that the further you get from the blockchain, the more centralization is required to move things forward quickly. And at a certain point, the Constitution Dao wound up in a situation where you basically had to trust that the two people responsible for the Delaware LLC would just do the right thing. I think these issues can be solved, though, especially with a long enough time horizon. It's remarkable that the team was able to do as much as they did in just seven days. And I really have no doubt that we'll see much stronger patterns develop in the next few years here. But we still need to talk about the most obvious bad outcome here. They lost. The Dow originally thought that raising $20 million would be enough, since that's how much experts thought this copy of the Constitution was worth. They wound up raising more than twice that much. But they still couldn't win. And a big reason why is because the funding total was public. Given that the maximum possible bid was known to everyone, the the seller of the Constitution, meaning the person who owned it and put it up for auction, could bid against the DAO directly to drive up the price. If the seller knows that the DAO is willing to pay up to $40 million, they will just bid up to $39 million to get the maximum payday from the DAO. Even if the DAO does win the auction in that scenario, the more money they raise, the more expensive the final price gets. Now, to be fair, it doesn't look like the seller was bidding on the Constitution themselves. Ken Griffin is just a multibillionaire and was able to outbid the DAO directly, but it's always a bad idea to show your cards before you have to, and that's exactly what the Constitution Dao did here. Even still, in the long term, there could be a solution to this problem. There is a branch of crypto called Zero Knowledge Proofs that could obfuscate the exact amount of money raised by the DAO while still giving Sotheby's confirmation that the DAO could fund their current bid. It's complex stuff and it's not going to be implemented next week, but it's theoretically possible and it would make a lot of sense for the next project of this kind. The last bad outcome from this project has been a bit of a punchline on Twitter. Transaction Fees because of all the interest in Web3 projects right now, the Ethereum blockchain has become very expensive to work with. Every time you go to execute a transaction, you'll usually get hit with a gas fee somewhere between 20 and $100. Even though the DAO lost the auction, everyone that contributed still had to pay gas fees to transfer their Ether into the dao. Some people were estimating that the total cost of transaction fees could be as high as $5 million, but it looks like it was closer to 880k. That's still a ton of money though, and it doesn't really fit with the long term promise of cryptocurrency. Worse still, everyone who put money in is now going to be hit with gas fees on the way out as they request refunds. The median contribution size was only $200, so lots of people wound up paying nearly 50% in transaction fees. Everyone in the crypto community is aware of this problem though, and they know that it will hurt adoption if it's not fixed. The Ethereum team is working on Eth 2.0 to lower these fees, and other blockchains like Solana already offer low fees and similar functionality, so transaction fees are unlikely to be a major problem in the long term, even if they won't be resolved overnight. But now we have to discuss the really ugly truth about this project. The core concept here is remarkably simple. We're just talking about a bunch of people chipping in to buy something expensive. It's not that complicated. And yet there still doesn't seem to be an easy way to get this done. Why is that? Part of this has to do with tradeoffs. There are good reasons for know your customer and anti money laundering laws, and it's also important to protect people from scams. But it seems ridiculous to me that it's still so difficult in the year 2021. We're not talking about curing cancer here or building a Mars colony. It's really just moving some numbers around that represent value. When I think about the future, I still envision all the classic sci fi elements. Flying cars, interstellar travel, immersive virtual environments. These crypto projects are a stark reminder that we still have a remarkably messy financial system, and dealing with that just takes time. I do think this is important work, and I think that the Constitution Dao could lead to some meaningful innovation. But it's still just a bit sad that we have to spend so much time untangling messy systems just to move forward. I'm definitely going to do more research on crypto and Web three, so if you'd like to follow along, just drop your email@john coogan.com and please check out this recommended video. The YouTube algorithm thinks you'll really like it.