ConstitutionDAO Should Have Won

How The People Can Win Next Time

“We the people.”

That’s how the US Constitution starts, but you probably already know that. You may also know that this past week, that we the people tried to buy a copy of the Constitution.

We failed, but the ConstitutionDAO should have won, and I’ll tell you why.

What is ConstitutionDAO?

If you’re already familiar with the ConstitutionDAO story, skip to the next section. If you aren’t, ConstitutionDAO is a group of anonymous people that pooled crypto assets to buy an original copy of the US Constitution at a Sotheby’s auction. DAOs are decentralized autonomous organizations, which you can think of as a sort of crypto native corporation that pools digital assets for some common purpose. Instead of corporate bylaws and rules of operation established through legal documents, DAOs operate through smart contracts built on computer code. DAO members can vote on how pooled assets are used and how the group will operate. That voting is enabled and enforced by the smart contracts that serve as the underpinning of the group.  

The ConstitutionDAO pooled more than $40 million from 17,000 participants. The DAO’s target was only $20 million, based on Sotheby’s estimate that the Constitution would sell for $15-20 million. The document ultimately sold for $43 million, and in a movie-plot twist of fate, Ken Griffin bought it. Griffin is the founder of Citadel and an established enemy of WallStreetBets, the group famous for making irreverent investments in meme stocks. Griffin will lend it to a free art museum in Arkansas so at least the people can still enjoy the document.

Basic Auction Theory: Making DAOs More Competitive

The reason I believe ConstitutionDAO failed in its mission is because the structure didn’t allow the group to act as a single bidder would in an auction.

I grew up in the weird world of auctions. My dad was an auctioneer. I even went to auctioneer’s school. The beauty of auctions is that they efficiently establish the fair market value of any asset if you get the right buyers in the room, and you only really need two — the one willing to pay the most and the one willing to pay the second most. But here’s what almost always happens in the heat of bidding. The side that comes in thinking they will only pay $100 gets outbid, and they bid $110, then they bid $120, well more than they intended. The other side does the same thing. You end up with the real fair market value when the pain of the incremental bid for one side exceeds the pain of losing the item they really want.

The problem with DAOs as auction participants is twofold:

1.     All the other bidders in the room know how much the DAO can bid, so it creates a simple binary decision as to whether anyone wants to beat that base DAO bid. In a sense, DAOs aren’t really a bidder. They’re just a single and static offer that, once beaten, is out of the auction.

2.     DAOs can’t capture incremental, emotional demand from the pool once they’re outbid. I can almost guarantee you that the 17,000 people in the ConstitutionDAO would have put more money into the pool when they were outbid by Griffin. Maybe Griffin still would have won, but I don’t believe true market demand was expressed in the $43 million price.

I’d be willing to bet that ConstitutionDAO could raise $80 million or even $100 million to try to buy the document from Griffin today, although I don’t know that he’d sell. In any case, I’m confident the Constitution is worth way more than $43 million with an efficiently constructed DAO and a sales process that allows for maximal DAO participation.

Sotheby’s could fix this problem by extending auction time to allow for DAO participants to add to the pool, although that defeats the spectacle of a live sale. DAOs could also probably fix this problem by setting up separate pools or even through some sort of shadow pools that hide the total voting power of the pool. Either way, I’d expect both auction houses and DAO creators to optimize for more effective bidding in the future.

Even though the ConstitutionDAO failed in its effort to buy the Constitution, this is just the beginning for pools of individuals buying valuable, culturally relevant assets rather than just the wealthy.

Price of Cultural Relevance is Going Up

In a frothy market with a lot of capital chasing assets, it’s hard to find assets that seem obviously mispriced, but the ConstitutionDAO episode revealed that rare collectible assets with extreme cultural relevance are worth way more than anyone thinks.

The emergence of DAOs creates a new incremental buyer with vast pooled buying power for these rare collectibles. Back to auction theory, the prices for these rare assets are generally determined by two people. The high bidder and the low bidder. Adding just one new bidder to the demand pool will drive higher prices.

The Constitution was the perfect asset to make DAOs mainstream. It’s a document that is immediately familiar to almost everyone in our country and many beyond. It has patriotic importance to many of those people. Most importantly, it captures the emotional imagination of so many people that just want to be able to say they are a part of owning something rare and important. Other culturally relevant assets on the scale of the Constitution are probably worth at least twice as much as they were pre-DAO.

It’s probably a great time to buy those kinds of culturally relevant assets before the market figures it out, if you can afford them. If you can’t get ready to be a part of a lot of DAOs.