Buying the US Constitution is expensive, especially if you don’t succeed.
On Nov. 18, a group of cryptocurrency investors banded together online to form a decentralized autonomous organization (DAO), a collective managed on a blockchain, to buy a rare copy of the US Constitution at Sotheby’s auction house. Despite raising a staggering $47 million in cryptocurrency, the group known a ConstitutionDAO was outbid by Ken Griffin, the billionaire CEO of the hedge fund Citadel.
The effort was hailed as a coming-out party for DAOs and a show of force for what crypto enthusiasts can do online. But the very things that enabled it—the decentralized design of crypto—complicated financial matters thanks to the fee structure for transactions.
Despite losing the bid, the DAO’s donors will now be on the hook for an estimated 3% of the total cost in fees after returning $47 million to the project’s 17,000 donors. The more than $1.5 million in transaction fees, or “gas fees,” processed for every donation and refund, demonstrate the difficulties of using crypto for everyday financial purposes.
What are gas fees?
ConstitutionDAO was organized on the Ethereum blockchain. This supports certain crypto applications like nonfungible tokens (NFTs), games, and decentralized finance (DeFi) apps. Its native currency, ether, is the second-most-valuable cryptocurrency by market capitalization behind Bitcoin.
But every ether transaction has fees associated with it. To transact with ether—buy, sell, or even transfer the currency between one’s own wallets—the user has to pay “gas fees” to “miners” in exchange for the computing power it takes to validate and store the transaction on the blockchain. While gas prices fluctuate based on supply and demand, fees have been rising recently. As of Nov. 22, the average cost of an ether transaction was nearly $37, though it was briefly north of $60 earlier this month.
ConstitutionDAO’s donors spent around 200 ether in gas fees, equivalent to about $860,000 at the time of the Sotheby’s auction, according to calculations by Richard Chen, a general partner at the crypto investment firm 1confirmation. ConstitutionDAO’s 17,000 donors will have their donations returned to them in the coming days with a big chunk missing.
Depending on when the DAO issues its refund, it will pay around the same amount to return the money to its donors. (The group told donors they will receive their contribution minus gas fees from the donation and the refund.)
That means the total cost of the donations and the refunds, all processed in ether, could easily surpass $1.5 million.
Shane Molidor, head of business development at the crypto trading platform AscendEX, said that if ConstitutionDAO had been successful, the high gas fees likely would not have raised eyebrows. But with an average donation of about $200, he said, claiming a refund could cost half of the original donation. (Gas fees are not proportional to the amount transacted, rather set by miners based on supply, demand, and other factors.)
“It is clear the ecosystem needs to develop an alternative solution, as asking a user to forfeit half their initial principle does not make logical sense in a fundraising scenario,” Molidor said.
An imperfect crowdfunding project
ConstitutionDAO demonstrated the power of cryptocurrency crowdfunding. But the millions of dollars in transaction fees alone could undermine the efficacy of crypto as a fundraising method.
Ethereum’s transition to a proof-of-stake model—an alternative to the high-cost, high-energy proof-of-work model first introduced with Bitcoin—could lower gas fees for users. In proof of work, miners use energy-intensive computer power to validate complex calculations of transactions on the blockchain to create more coins. In proof of stake, miners only have to validate the percentage of coins held by each miner, a less energy-intensive process.
Ethereum’s transition will “lower the energy and power required for processing transactions, increase the [transactions per second], and make the network more secure,” said Anthony Georgiades, president and COO of the NFT marketplace Pastel.
But until then Ethereum’s high fees will continue to attract competition from other blockchains such as Solana that offer faster transaction speeds and lower fees. “Ethereum’s high token price indicates it currently remains the dominant chain, but the question is, how long will that dominance last?” Molidor asked.
ConstitutionDAO’s 17,000 donors will have their donations returned to them in the coming days with a big chunk missing and, while they were essentially buying voting rights and not a financial stake in the document, they will truly have nothing to show for the effort.