Cryptocurrency costs

In our piece on cryptocurrencies recently we pointed out that while the high price of cryptocurrencies has driven a lot of interest in the sector it was actually a disadvantage for any practical use of blockchain technology. And now we have a live example.

A group set up a fund to buy a copy of the US constitution that was being auctioned by Sotheby’s last week. The fund, named ConstitutionDAO, is what is known as a “decentralised autonomous organisation”, which in this case is something like a bank account with embedded rules to collect donations.

The fund quickly raised its target of $47 million, mostly from small donations (the average contribution was $206). This enabled it to bid $40 million and have $7 million left for costs. Sotheby’s let ConstitutionDAO participate in the auction but it was outbid by a hedge fund CEO (who plans to lend the document to a museum).

But now ConstitutionDAO is trying to return the donations they’ve realised that the transaction costs are quite high: a figure quoted is a total of $1.4 million for the whole operation. Estimates of the breakdown in costs varies, but one small donor complained that his $120 dollar donation required him to pay $60 in fees to make the donation and another $60 in fees to reclaim it, leaving him with nothing.

This is a fundamental issue with many high priced cryptocurrencies. A high value equals high transaction costs, which means limited usefulness. I’ve just read a report that argues the ability to exchange cryptocurrency for services on the blockchain gives them economic utility, and that they can be thought of as “digital gold”. But the example above shows the opposite: people want services to be cheap and that means low cost and stable cryptocurrencies.

More details are here and here.

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