Even grandmas ask about DAO, what exactly is it?

How much does it cost to buy an NBA team? Two years ago, Alibaba co-founder Joseph Tsai bought 100% of the Brooklyn Nets for a total of $2.35 billion. Now, ordinary fans who can't afford that much money have a new way.

In November 2021, a DAO (decentralized autonomous organization) called "Krause House" began issuing NFTs (virtual tickets of three denominations) with the goal of raising 1,000 ETH (market value is about $4 million) to prepare for the purchase of an NBA team - although this amount is only equivalent to the team's one-year charter fee. The fundraising speed was amazing, and the initial 200 ETH was raised in just 15 minutes.

Krause House issues three different denominations of NFT tickets丨Krause House

The inspiration for “crowdfunding to buy a team” comes from a more bizarre DAO fundraising event not long ago - an organization called “ConstitutionDAO” wanted to buy the 1787 first edition of the United States Constitution at a public auction.

There are only 13 copies of the first edition of the U.S. Constitution left today, and the one to be auctioned this time is one of them. Sotheby's estimated the price to be $20 million. But on November 18, the six pages were finally sold for $43.2 million, setting a world record for the highest price paid for a historical document at auction.

The United States Constitution, written 235 years ago | Wikipedia

The eagerly anticipated ConstitutionDAO failed to achieve its goal, and they lost to Chicago's richest man Ken Griffin by a slight margin. The main reason for the failure was that the fundraising process of ConstitutionDAO was open and transparent, and the bid bottom line had been figured out by competitors in advance. Subsequently, ConstitutionDAO opened a refund application for investors.

The New York Times, BBC and other media have focused their attention on ConstitutionDAO in this auction: more than 17,000 netizens from all over the world contributed funds, raising ETH equivalent to more than 40 million US dollars in just 72 hours. "Some museum staff were very surprised," said a core organizer of ConstitutionDAO, "It took them half a year to raise so much money, and they asked us why we could do it in three days."

People are paying attention to ConstitutionDAO, not only because it is a quick way to make money, but also because it is a historic event in which cryptocurrency impacts the real world. These more than 17,000 strangers have the same mission: to buy printed copies of historical documents and then vote together on where the documents should be exhibited.

“We literally made history… even grandmas are asking ‘what is Ethereum?’” ConstitutionDAO wrote on Twitter.

We talked to the participants

It all started a week before the public auction of the printed copy of the U.S. Constitution. "Why don't we participate in the auction?" Some people in the cryptocurrency circle suddenly had an idea. The printed copy of the U.S. Constitution started at $10 million, and it was difficult for a single investor to get an "entry ticket". Someone suggested setting up a DAO to organize crowdfunding for this auction project. The person in charge held a video conference and worked hard to draw up a plan.

First, DAO needs to solve its own "identity problem". This "decentralized autonomous organization" is not registered in any jurisdiction according to specific regulations, so it has no corresponding legal identity. At the beginning, Sotheby's didn't even know how to deal with a "DAO" and didn't know how to comply with the regulations.

Essentially, DAO is a public computer code written on a blockchain, which can be understood as an electronic contract, but how this contract is executed is determined by its code, not by people.

DAO can be regarded as an electronic contract, and its execution is determined by its code, not by people丨Unsplash

The core members of ConstitutionDAO immediately sought out the people who knew the most about the relevant legal issues and together established a legal entity that could trade with Sotheby's; they found the non-profit organization Endaoment to discuss matters such as document preservation and attendance at bidding; and they selected the third-party platform Juicebox as the entry point for fundraising.

The fundraising website was soon launched, and the announcement on it pointed out that if $14 million was raised, there would be an auction ticket; if $30 million was raised, it could compete with others; if more than $40 million was raised, there would be a high chance of winning. The announcement also pointed out that the investors did not share the ownership of the auction items, but only the governance rights of the printed copy - according to the proportion of the investment, they would get the corresponding tokens as certificates. And this certificate can be used to initiate proposals and votes to decide what the entire fund pool can do in the future.

“When participants see the printed copy later, they will be reminded that they participated in this historic moment. They have a say in where the documents go, which is a completely different experience from visiting the National Archives,” said one of the organizers.

We found Z who participated in the fundraising and talked to him about this interesting experience.

"Everyone has different motivations. I thought it was fun and wondered if there were people raising funds this way." Z first saw someone retweeting the ConstitutionDAO announcement on Twitter. "More people think this is a historic event and want to be a part of it. There are also many people who are speculative. Some big and small Vs on Weibo are fooling people into buying this and expecting it to go up in value. Then many people entered the Discord chat room and found out that it was just a simple donation and felt cheated."

When Z clicked into the fundraising page, the progress had just reached 27%丨Photo provided by interviewee Z

When Z first clicked into the fundraising page, the fundraising progress had just reached 27%. After clicking on Donate, he would be redirected to a third-party fundraising service called Juicebox, and then click on "Connect Wallet", and the ETH that Z had placed in MetaMask would be donated.

After the donation was completed, Z received the token "$PEOPLE", which is not only a proof of his investment, but also a proof of his identity as a DAO member, and a certificate for his future rights and interests.

The question is, will the organizers of the project run away with the money? The organizers of ConstitutionDAO said that they would transfer the money to an account similar to a "blockchain safe". If the money is to be moved, a certain number of administrators (only the organizers of the project, not the decision-makers) must agree and sign. Z told us that they set 13 organizers as administrators in advance. If the funds are to be moved, 9 of them must sign their digital signatures at the same time.

The numbers 13 and 9 were chosen "to preserve tradition and pay tribute to history." On June 21, 1788, the U.S. Constitution became the law of the land after it was ratified by nine of the original 13 states.

“Even though the bid failed in the end, most people felt it didn’t matter. This has already made history. But they are also reflecting that it is not a good idea to raise funds through auctions on the blockchain because the other party will know your cards. Some people even suggested not to disband and keep the coins to auction cheaper printed copies of the United States Bill of Rights.” Z said.

Can The DAO be trusted?

There are more than 17,000 investors in ConstitutionDAO, and they come from all over the world. Why are they willing to trust an "organization" that does not even have a formal legal identity?

In this event, people’s trust is not based on written contracts, nor does it rely on judicial authorities that have the power to interpret these contracts. At its core, it lies in a series of cryptographic and computer technologies. People trust the organizers of ConstitutionDAO not because they made promises, but because their promises have become public computer codes, and the execution of these codes is not subject to human intervention.

The technical basis is first of all digital signature.

Digital signature technology is based on "public key cryptography" that emerged in the 1970s. Public key cryptography pioneered the use of users to publicly disclose a piece of information (called a "public key") for encryption, and a corresponding piece of confidential information (called a "private key") for decryption; the public key is calculated from the private key in a one-to-one manner, but the private key cannot be deduced from the public key. In communication, the sender uses the other party's public key to encrypt the information, and the receiver uses his own private key to decrypt it - this is also the basis of secure Internet communication.

The public key is calculated from the private key in a one-to-one manner, but the private key cannot be deduced from the public key丨Ledger

Later, public key cryptography was extended to digital signature technology: after using a private key to generate a signature for a message, others can verify whether the signature is from you as long as they know the message, your public key and your signature.

In banking and other systems, digital signatures are used as an identity verification scheme, such as the bank's USB shield. But in permissionless blockchains such as Bitcoin and Ethereum, digital signatures have become an account system: the public key is like an account number (can be made public), and the private key is like a password (cannot be made public). Assets are directly recorded under the name of a public key, and when transferring assets, the signature of the corresponding private key must be presented. Since signatures cannot be forged, others cannot directly steal your assets.

Correspondingly, the theft or loss of private keys will also lead to the loss of control of assets丨Unsplash

This system solves many problems: it eliminates the need for banks or certain institutions to issue accounts. A pair of public and private keys is an account, and the private key is a very long string of numbers that an individual can generate as many as they want using software.

Similarly, such a system is inherently borderless and permissionless, so ConstitutionDAO can allow people from different countries and regions around the world to participate.

However, when a public key claims how much money it has, how do we know whether it is true or false? This requires the use of another set of technology - blockchain.

In a narrow sense, blockchain technology can be seen as a method of connecting many mutually untrusted computers together to form a shared, ordered database.

Blockchain is a technology that allows many untrusted computers to reach a consensus on the order of events within the network丨Unsplash

In blockchain networks such as Bitcoin and Ethereum, what is shared between computers is the history of transfer messages and signatures - that is, the record of the flow of funds between different public keys. As long as a computer has complete blockchain data and interprets and verifies this data according to the same code rules as other computers, the results obtained must be consistent with other computers in the same blockchain network.

Because the records of funds flowing between public keys are public, even without a third-party authority, the amount of funds under each public key will become a definite consensus - as long as you download the latest shared data in real time.

As a result, ConstitutionDAO can accept donations with confidence, without the need for a bank to verify contributors’ funds.

The final component that made ConstitutionDAO possible came from a sub-area of ​​blockchain design: smart contracts (distributed computing programs that can be triggered when certain conditions are met).

When each public key wants to transfer funds on the blockchain, it must provide a corresponding signature; the computer that receives the transfer message checks the balance under the public key on the one hand, and verifies the validity of the signature on the other hand - this is essentially a process of performing calculations. So is it possible to let the computers in these blockchain networks perform some other calculations?

Ethereum is a blockchain protocol that fully implements this concept. On the Ethereum blockchain, users can upload any code and pay a certain price to require all computers to execute it. Just like the message of transferring money will be executed (verified) by every computer, the message requesting to run the code will also be executed by every computer in the Ethereum network.

The codes themselves are public and visible to everyone. Once triggered, they are executed on every computer in the Ethereum network. This execution process can be considered to be mechanical and non-human. Finally, if you do not trust the results obtained by others, you can run the computer software that implements the Ethereum protocol yourself to verify the execution results of others.

So when ConstitutionDAO organizers said that funding decisions must be signed by at least 9 of 13 public keys, it was the public nature of the blockchain and the characteristics of Ethereum that made it a credible commitment.

The code speaks for itself.

This kind of computer code that can coordinate human economic affairs is called a "smart contract." It was proposed by computer scientist Nick Szabo as early as 1996.

As of this writing, the Ethereum network has 5,006 public computers (ethernodes.org data); the Bitcoin network has 14,921 public computers (bitnodes.io data). The operators of these computers all voluntarily run the corresponding software and join these networks | Unsplash

Should I join the DAO?

The initiators of ConstitutionDAO also made another "self-limitation": they did not invest any funds themselves and had no ability to decide how the funds would be used - the initiators simply gave the project a name and uploaded the code to the blockchain.

The event attracted such keen attention because it stimulated people to rethink the existing forms of business organization and the way resources are allocated.

Throughout the fundraising process, ConstitutionDAO did not pay any compensation to the organizers and contributors. This group of smart minds came together just to make the goal of "buying a printed copy of the U.S. Constitution" a reality. This unprecedented joint force has challenged the traditional "corporate" employment system.

DAO distributes management rights to all participants, and the organizational structure is flatter than that of ordinary companies. The decision-making behavior of some managers can be replaced by voting based on tokens. The allocation and flow of all funds are recorded on the "chain" and are open and transparent.

In addition, DAO can only use digital signature technology to represent identity and authorize operations. The account does not carry real identity information, so this type of organization is inherently global and can be joined by people from any region. In terms of the incentive system, the more people contribute, the more DAO governance tokens they can get - in other words, all employees can hold company shares according to their work, and the efforts of talents and the company's profits will enter a positive cycle.

DAO challenges existing business organization forms and resource allocation methods丨Unsplash

But not all DAOs are efficient. They are essentially computer codes. Codes written by people can be good or bad. The economic cooperation models assisted by the codes can also have differences in efficiency.

DAOs still have two limitations today. First, there are not many jurisdictions that recognize DAOs. The legal definition of DAOs in most countries is still in a gray area, which is why ConstitutionDAO needs to set up a special corporate entity to participate in the Sotheby's auction; second, its security is almost only guaranteed by the code. If the smart contract code is not written properly, it may be attacked maliciously and cause participants to lose funds.

As early as April 2016, the first DAO “The DAO” appeared, raising $150 million through crowdfunding to start a venture capital fund. However, within two months, it was hacked due to a code vulnerability, and one-third of the funds were stolen.

In September 2021, the People's Bank of China and 10 other ministries jointly issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Transaction Speculation". The currency circle, which has been operating in the gray area, has also suffered a heavy blow under the clarification of the policy.

In today's environment where people are afraid to talk about currency, a practitioner said: "I hope everyone will not demonize technology. For example, digital signature is digital signature. It is used in banks and other places in life. It is just a technology used to verify identity consistency. Secondly, we should not deify technology and exaggerate its actual effect. Ultimately, the concept of technology will lose its meaning and become a common propaganda slogan, which will further hinder everyone's understanding and acceptance."

Although the industry has been questioning the sustainability and security of DAOs, the recent frequent "out-of-circle" of DAOs has also made many outsiders curious: "What can I do with it?"

There are more than 100 core DAO organizations (including social DAOs, collector DAOs, media DAOs, service DAOs, etc.), controlling more than $10 billion in assets. 丨Compiled by @Cooopahtroopa

Looking back at the ConstitutionDAO incident, the reason why the organization was so efficient was that resources were quickly allocated and organized within a week. The underlying reason is that this technology already has a strong trust foundation. More deeply, perhaps a strong social consensus is emerging, and people are eager for a more decentralized Internet. People call it Web 3.0.

“Some members of ConstitutionDAO have suggested that we should not disband even if the auction fails, and we can write the Constitution of Web 3.0 together,” participant Z told us.