Almost buying a copy of the Constitution is simple, but returning the money is difficult.Visual Media Factory
ConstitutionDAO found itself in possession of approximately $49.8 million that it was unable to spend as of last Thursday night. The organizers of the group only had a mandate to spend the crowdfunded money on one thing — a rare copy of the US Constitution that they failed to win at auction — so instead of attempting to gain community approval to use the money for another purpose, they began the process of returning the funds to backers.
However, returning that much money has been a difficult process. Backers must manually request refunds, so tens of millions of dollars are still sitting in ConstitutionDAO’s pockets a week later. And, because all of the money was collected in Ether, and sending funds over Ethereum incurs high transaction costs, contributors are paying a high price to get their money back.
“THIS IS NEW TO PEOPLE; IT’S DIFFICULT TO UNDERSTAND.”
The return process hasn’t been as chaotic as its worst moments suggest — at least not yet. According to Andrew Hong, a data scientist working in the crypto space, more than half of the funds collected by ConstitutionDAO have since been returned. As of this afternoon, nearly $27 million, or roughly 54% of the total raised, had been returned. However, this means that there is still nearly $23 million sitting around waiting to be returned.
According to ConstitutionDAO, there is no time limit on contributors receiving their money back. Because returns must be requested manually, the soon-to-be-defunct organization could theoretically be sitting on a large and otherwise useless refund pile for some time if backers don’t know or care to get their money out.
According to Jonah Erlich, a core contributor to ConstitutionDAO who created a guide on how to donate money, the ConstitutionDAO team has discussed creating educational resources on how to get refunds. “People are new to this; it’s difficult to grasp,” he explained. “This isn’t an ideal situation.”
Transaction fees have also been a source of contention. All contributions were made via Ethereum, which requires fees — often quite high ones — to be paid in order to transmit currency (along with performing many other tasks). When it came to raising funds to purchase the Constitution, that was already a challenge. According to Alex Kroeger, an engineer in the crypto space, these fees, known as gas, do not significantly decrease when sending a small amount of Ether, so small-dollar donors frequently had to pay large sums just to send their contribution in the first place. He had to pay around $50 in fees to send around $170 worth of Ether to the project.
THE MEDIAN CONTRIBUTION WAS $217, THE LARGE MAJORITY OF WHICH COULD BE COVERED BY FEES.
According to Kroeger and Richard Chen, a general partner at the cryptocurrency investment firm 1confirmation, more than $1 million was spent on gas fees in total to make contributions to ConstitutionDAO. Erlich also estimated that the gas fees for contributions would range between $800,000 and $1 million. The Ethereum system on which ConstitutionDAO was built “is not optimal for small value use cases at the moment,” according to Kroeger.
Anyone who wants their money back must now pay gas fees on the refund, which has already cost more than $200,000, according to Kroeger and Chen. Fees may not be an issue for large donors — after all, if you’re getting $100,000 back, $50 is a small price to pay — but that’s not the case for the majority of ConstitutionDAO’s contributors. The average contributor contributed $217. If that person had spent $50 to send the money and another $50 to receive it, they would have lost nearly half of their money.
And that figure could be conservative. One contributor tweeted that they spent $70 on gas to send $200, then another $70 to get it back. That means they’re out $140 on a refund that should have been $200. A refund will simply not be worth it for anyone who sent less than the current gas price.
That is one of the factors that has contributed to the complication of the situation. Many contributors hoped that ConstitutionDAO would shift its focus and redirect its massive account balance to a different purpose. Organizers briefly considered launching a new token for those interested in reorganizing around a different goal, but then changed their minds and announced plans to shut down. Many people in the group’s Discord channel were disappointed because contributors were supposed to be able to influence the group’s decision-making. However, the organization never achieved its goal of becoming a true DAO — a decentralized autonomous organization that would have been member-controlled — and organizers chose to close and focus on refunds.
The outcome demonstrates both the promise and the challenges of DAOs and other crypto-focused organizations. ConstitutionDAO was able to raise an impressive amount of money in just one week. However, the project’s steep fees (not to mention the challenges of setting up and buying into the Ethereum ecosystem) made it difficult for small donors to contribute to, and the organization’s decision to dissolve demonstrated that, despite all the promises of decentralization, there is often a core group in control at the top. And, in the end, those who contributed the least will bear the brunt of the consequences.