Explainer: What is a DAO, and how did one of them come close to purchasing the US Constitution?
One of the 13 remaining copies of the original United States Constitution sold for $43.2 million earlier this month in New York. The fact that it was the highest amount ever paid for a printed document was not the only reason this auction grabbed attention.
Among the bidders was a digital organization that banded together to try to acquire the historic document using cryptocurrency with the purpose of displaying it publicly. Even though they did not win the auction, the nature of their organization continues to draw attention.
ConstitutionDAO is a DAO – decentralized autonomous organization – a digital hub where users may pool their resources to make purchases and share ownership using cryptocurrencies such as Bitcoin and Ethereum.
How does a DAO function?
All DAO transactions are recorded on a blockchain, which is a distributed database that employs numerous computers in a network to keep data about purchases and ownership in a format called a “block.” This can be seen but not changed.
Each block holds a certain amount of data, and when it is full, it is locked and cannot be reopened. A new block is then opened, which ties back to the now-closed block in a chain, hence the technology’s name.
The security features of blockchain have facilitated the proliferation of cryptocurrencies. Blockchain serves the same function in a traditional currency as banks do by giving proof that an individual has the cash to make a purchase via its transparent digital records.
DAOs are not frequently recognized as legal entities, although this is changing. To be eligible to bid on the US Constitution, the DAO has to form a limited liability business. Wyoming just became the first state to establish a DAO’s legal status.
After being outbid on the purchase of the Constitution, the DAO, which was claimed to have raised more than $40 million, has declared that it will return investors, less a “gas fee” or processing charge.
What are the advantages of a DAO?
DAOs are built on the concept of a smart contract, which establishes the rules by which they function. Only a vote of the members may amend the rules at that point. ConstitutionDAO’s creators claim they opted to issue refunds rather than try to amend their smart contract.
Nonetheless, despite their transparency, DAOs have been subjected to two major objections. For starters, their smart contracts do not necessarily provide every member an equal voice. Second, there are worries about their security, which, in one well-known example, lost investors a lot of money when it was hacked.
What about the DAO’s drawbacks?
In exchange for their investment, DAO members often get a “non-fungible token” or NFT. Simply said, non-fungible implies it cannot be traded for anything else, as opposed to cryptocurrencies, which, like traditional currencies, are meant to be swapped for anything.
With an NFT, you may be recognized as a member of a DAO and hence vote on how it should be administered.
However, as writer Geoffrey Mak discovered while studying many DAOs for The Guardian, not all tokens are created equal in terms of voting rights.
He studied one DAO that permitted one vote per token. However, because tokens were also distributed depending on the amount of likes given to a member’s postings in its chatroom, it was possible for one person to acquire more tokens than other users.
DAOs’ susceptibility to hackers was notably shown in 2016 when The DAO, a pioneering investment DAO,, was hacked. Because of a flaw in the DAO’s code, a hacker was able to steal $50 million in Ethereum currencies.
DAOs in the Future
DAOs are a subset of the growing realm of Decentralized Finance, often known as DeFi. According to the World Economic Forum’s 2021 DeFi Policy-Maker Toolkit, the industry saw a rise in 2020, with the value of assets held in DeFi smart contracts increasing 18-fold to $13 billion by the end of the year.
“What is obvious is that DeFi represents a different and potentially important development, both within the environment of blockchain and of financial services more broadly,” the research stated, before cautioning authorities that there were “no clear answers” concerning the technology’s future.