Recently, a consortium of crypto investors, ConstitutionDAO, pooled in Ether worth $47 million to buy a first edition of the US Constitution at an auction. They lost, but the effort has brought an application of blockchains and cryptocurrencies to the fore: DAOs. Here’s what it means:
What are DAOs for dummies?
Decentralized Autonomous Organization (DAO) is built using smart contracts, a popular feature of blockchains such as Ethereum, Solana, and Cardano. Traditional organizations have a board of directors who are empowered to make changes to an organization and its rules. A smart contract is a piece of code that contains all of these rules. No single member of a DAO can make changes to the organization or its rules. Everyone who joins a DAO gets a vote and rules and regulations can only be changed if a majority is achieved. As it is built on a blockchain, each decision is pitched, discussed, and documented automatically.
What happened to ConstitutionDAO?
ConstitutionDAO was created for the sole purpose of winning the auction. However, they lost to Kenneth Griffin, the chief executive of American hedge fund Citadel. Griffin won the bid at $43 million, after the two parties spent many rounds of bidding trying to outdo each other. The move was hailed by many as a show of strength for the crypto community and as a show of how powerful applications built on principles of the third generation of the Internet (web3) can be. In the group’s own words, it showed the world what “a group of Internet friends" could do with the “power of web3".
The world of crypto
What went wrong for ConstitutionDAO?
Griffin’s money comes from his own treasury, but ConstitutionDAO’s treasury came from crypto transactions that its members had to make to pool in resources. On blockchains, each of these transactions require additional transaction (gas) fees, to be paid to miners who provide the computing power to authenticate them. It amounted to about 3% of the total amount.
What would happen next?
DAO has already started refunding its members’ deposits, which was defined within the smart contract. However, it won’t be able to return the money that went into gas fees, approximately $1 million at the time of writing. Donors were informed about this in advance though, but it exposes a big problem with the current web3 infrastructure. Gas fees are dynamic and can cost a lot of money. Platforms often struggle to scale because gas fees on a single transaction on ethereum can be as high as $150 or more.
What is the solution to this?
Blockchain networks such as Ethereum and Bitcoin are designed to reward every miner involved in a transaction. Now, platforms such as Ethereum are moving to a ‘proof of work’ system, where only a handful of miners will be paid for each transaction. This system is expected to bring down gas fees by more than 90%. New chains such as Cardano and Solana employ this system to reduce the fees, while the polygon platform is built to run on top of Ethereum and reduces traffic on the main chain, thus reducing gas fees.