Crypto Crowdfunding and the War for Ukraine
This post is inspired by the fascinating writing of crypto educator, Dror Poleg. You can find his website here. I would highly recommend his recent articles ‘In Praise of Ponzis’, ‘Apeing into War’ and ‘Global Money, Global War’ if you’re at all interested in the use of crypto in Ukraine.
I have to admit, I used to think cryptocurrencies were a bit of a joke.
The idea of putting your savings into something so risky didn’t make much sense to me. How could you buy a financial product which provides no income, purely in the hope someone else would pay more for it in the future?
To me, the whole thing was a great example of the greater fool theory. The person who buys crypto at a certain price is a ‘fool’ — the person who buys it off them for more is the ‘greater fool’. So ‘greater fools’ become ‘fools’, new ‘greater fools’ come along, and the cycle repeats.
Reading Dror Poleg’s articles, I realised it far was more nuanced than I had first thought. In fact, I realised these ‘fools’ are the very thing that makes crypto so powerful.
National Treasure 4 - making Nicholas Cage Proud
For those of you who don’t know, there’s a cool thing out there in the crypto world called a DAO (pronounced like the Dow Jones). It stands for ‘decentralised autonomous organisation’. It’s a computer run organisation governed by a set of rules written to fulfil a task. These rules are known to all members and can’t be changed by human intervention — they are coded in the form of a ‘smart contract’.
One such DAO, ConstitutionDAO, was set up in November 2021 to bid for a rare physical copy of the U.S. Constitution.
It worked like this: people donated money and received $PEOPLE tokens in return. The donations were then used to fund the auction bid. The $PEOPLE tokens gave investors the ability to vote on how the document, if successfully bought, would be displayed. The tokens were essentially shares in that copy of the U.S. Constitution.
Despite raising $47 million from nearly 20,000 donors in just 7 days, ConstitutionDAO failed to win the auction. As encoded into the DAO’s rules, donors could therefore convert their $PEOPLE tokens into cash or other cryptos and move on with their lives. But before a lot of them could get their money back, something crazy happened.
The price of the $PEOPLE tokens skyrocketed 10,000%. After two weeks, the daily trading volume of these tokens was $70 million, 50% more than the amount initially raised to buy the document. Keep in mind, these tokens served no purpose — the auction had been lost. So, why did so many people want to buy the $PEOPLE tokens?
They wanted to be a part of the story.
ConstitutionDAO was a massive event in the crypto community. In a world dominated by memes, the story spread like wildfire across the internet. The more the story spreads, the more people are interested, the more people want to be a part of it, the higher the demand for $PEOPLE tokens. By buying $PEOPLE tokens, investors bet on the story growing.
However, they didn’t just make the bet, they were directly incentivised to make sure the bet paid off. Think of Pokemon cards. If you have a collection of super-rare Pokemon cards, you don’t want people to forget about Pokemon. You want it to stay relevant and cool for as long as possible. That involves promoting it, marketing it and talking about it.
People were incentivised to tell the story of ConstitutionDAO to increase demand for their $PEOPLE tokens. They were complicit in a kind of market manipulation.
Crypto crowdfunding is incredibly powerful. With it, any great story has the potential to amass huge amounts of money, super easily. This begs the question: if we used it to try and buy the U.S. Constitution, why can’t we use it to fund a war?
Zelensky’s secret weapon: NFTs
On March 2, Ukraine’s Vice Prime Minister tweeted there would be an ‘airdrop’ for those who donated crypto to the Ukrainian war effort. Airdrops promise to drop tokens into donors’ crypto wallets as a reward for their generosity. The hype following Ukraine’s tweet led to a huge influx of donations. Last week, over US$50 million worth of crypto was given to the Ukrainian government.
Although Ukraine cancelled the airdrop before any tokens were given out, they announced the launch of an NFT project to support the Ukrainian military. Presumably, that would involve the government creating NFTs and selling them to investors worldwide. They would then use the proceeds to purchase equipment, fuel, food and even weapons for the defence effort.
Because they’re selling NFTs, the Ukrainian government would have no financial obligation to the buyer. The only costs to Ukraine would be those associated with the production and distribution of the NFTs. This means it’s essentially a costless method of raising money.
And for the donors, they could easily make money. The entire world has its eyes on Ukraine. If $PEOPLE tokens issued by ConstitutionDAO appreciated 10,000% in value, what could happen for these Ukrainian NFTs? After all, as far as stories go, it doesn’t get any bigger than this.
Basically, it’s crowdfunding on a tonne of steroids.
Because the donors know ‘fools’ will likely pay exorbitant amounts for the NFTs later, they can donate massive amounts to the Ukrainian cause with very little risk. Even if the NFTs end up being worthless, they still supported a cause they presumably believed in.
If Ukraine sells these NFTs, they will have an army of strangers incentivised to keep the war at the centre of attention. Not because it’s a noble cause, but because it inflates the value of the NFTs they’ve bought. Zelensky may be intentionally releasing these tokens for the very purpose of making sure people keep talking about the war. To incentivise people to push their governments to act. To make sure his country isn't annihilated. That is one of the great things about crypto — it has the power to align personal incentives with a greater cause.
There is no telling how much this scheme could raise. There is no imagining how much good it could do to peoples’ lives. Having said that, let’s not forget crypto crowdfunding could have incredibly harmful unintended consequences.
But for the time being, these ‘fools’ might just help Ukraine win the war.
More from The Curious One:
Don’t hate the player, hate the game