Editors Note: DBizInstitute is excited to share this article, written by Dr. Setrag Khoshafian, with our community and in advance of his new book release. Keep an eye on our website as we share additional articles in the coming months written by Setrag, as well as a pending Meet the Author webcast [7] to discuss his new book 'How to Alleviate Digital Transformation Debt’ expected to air Fall 2021. This article was originally published on CognitiveWorld.com in 2017.
[In 2017], I attended the Blockchain World Conference [8] and found the main focal points of the event to be quite interesting: The case studies and transformational messages were pervasive. Decentralization and its impact on organizations, as well as business transactions, came through loud and clear throughout the conference. Examples of pragmatic applications with disintermediated interactions spanned healthcare, financial services, sports, education, government, non-profit, beauty, industrial applications, and more. A number of presenters emphasized the new era of decentralization with an ideology that empowers communities vs. centralized greedy brokers.
The focus of Part II in this article series is primarily on the cultural ramifications of a decentralized organization that can be realized through Blockchain (or rather deployed on a Blockchain)—including its governance policies, bylaws, voting, and operations. Even though the Blockchain revolution is in its infancy, the introduction of Smart Contracts executing within the Blockchain is a key enabler for practical changes in organizational culture; towards flat organizations, robust communities, and autonomy.
Blockchain could become a critical contributor for decentralized governance. It provides a robust peer-to-peer infrastructure for trust, and organizational business logic can execute in the Blockchain through Smart Contracts.
However, the compelling autonomy and decentralization trend also impacts development communities who are innovating and building what is often characterized as the next phase of the Internet—the Internet of Value (which we alluded to in a previous post [9]). Not surprisingly, computer scientist and software developers are usually the avant-garde of next generation digital solutions for their own environments. Software has been the core milieu of creativity and innovation for the digital era. Software developers and computer scientists have been the early adopters of technology and cultural transformations to accelerate innovation especially through decentralization.
Decentralized Applications (dApp)
Decentralized Applications (also called dapp, Dapp or dApp) can leverage an existing Blockchain ecosystem (e.g., Bitcoin) or execute Smart Contracts over the Blockchain. These are not exclusive. There are different perspectives and definitions on the scope and capabilities of Decentralized Applications. The book “Blockchain: Blueprint for a New Economy” by Melanie Swan provides a good definition of dApp: “A Dapp is an application that runs on a network in a distributed fashion with participant information securely protected…and operation execution decentralized across network nodes.” The Ethereum white paper [10] on decentralized applications distinguishes three categories of dApps, spanning financial transactions as well as decentralized governance.
One of my favorite examples of dApps is Storj [11]. Storj allows participants on a network to rent their hard drive storage space and uses peer-to-peer decentralized Blockchain network to provide secure file storage application capabilities. Contrast that with centralized cloud storage options with a central point of vulnerability, or failure, as well as higher costs.
dApps are foundational for understanding Decentralized Autonomous Organizations (DAOs) which are a more complicated and specialized type of dApp. DAOs use code (in Smart Contracts) to digitize and automate on organization’s bylaws or constitution.
Blockchain Decentralized Autonomous Organizations
If you have been following Blockchain and cryptocurrencies—especially Ethereum—you will have most likely been exposed to DAOs. The governance, constitution, bylaws and operation of a DAO uses Smart Contracts executing on the Blockchain. In other words, code running an organization in a decentralized and distributed network. This approach has several advantages: It allows participation by all the shareholders, as well as employees or other stakeholders, to quickly agree and vote on decisions. Since actual code is executed for running the organization, it leaves little to the imagination for the interpretation of the governing policies. Furthermore, there is no central government or authority regulating a DAO. In a very real sense, DAOs operationalize flat organizational cultural trends.
The term “DAO” was introduced by Vitalik Buterin, co-founder of Ethereum. As he describes it in his seminal ‘incomplete’ (as he titles it) decentralized organization guide [12]: “It is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automation itself cannot do.” In his taxonomy of automation, including automated agents through AI, Buterin characterizes a DAO as “autonomous at the center” but “humans at the edges.” Thus the operation, governance of the organization is done through smart contracts executing on the Blockchain, with human participants at the edges. A DAO is a Blockchain application and as we noted above a specialization of a dApp.
Ethereum DAO had a rocky start. The three-letter acronym has two connotations. First, it stands for Decentralized Autonomous Organizations or Corporations. As noted, it leverages Smart Contracts for an innovative self-governing organization running on Blockchain. In fact, some consider all cryptocurrencies that use public Blockchains as DAOs [13]! However, there are examples of organizations that more explicitly implement a DAO and clearly indicate it often in the organization’s name (e.g., DigixDAO). Second, it also stands for an actual crowdfunded organization that was launched in May of 2016. The DAO raised in excess of 100 million dollars [14] (other numbers sited are 150 million and 168 million) through crowdfunding. One of the largest in history! However, the DAO Smart Contract had a vulnerability that resulted in tokens (think of DAO tokens as shares) that were adversely appropriated—ok, stolen! It caused Ethereum to be hard-forked. This is important. Smart Contracts running organizations (or for any other purpose for that matter) are powerful. But the developers should be careful as bugs or vulnerabilities could cause havoc—which was the case with The DAO.
Disadvantages of DAOs
There are many advantages and desirable features of DAOs —as a corporation or organization. But as noted with the example of The DAO, there are also vulnerabilities and disadvantages. Smart Contracts are essentially software. A Smart Contract can contain the policies and governance bylaws of the organization. It can, and most probably will, have bugs or vulnerabilities. However, unlike traditional software development, Smart Contracts deployed on the Blockchain are immutable. If there is a vulnerability or bug, it will persist. One of The DAO developers stated in an interview: [15] “If I would have known the size it has grown to, maybe the tester in me would say, ‘I need more testing,’…This is very risky. It’s all new land.”
There are workarounds. You can divide the contract into more discrete components of logic and decide how to enforce or turn off various components. You can deploy other contracts to compensate. This is different than creating a new version while deprecating the old. dApps take a different software life cycle approach and, as noted above, it is very much a “new land.”
There are other disadvantages—such as liability and the lack of recognition by governments. Cryptocurrencies and Blockchain technologies go across countries and continents. Governments can lose control and there are numerous audits and initiatives to legislate and control crypto. Well, DAOs take it a step further and challenge the whole corporation or organization registration and incorporation laws of states and federal governments. And yes, malicious players will prey on the innocent. There have been many Initial Coin Offerings (ICOs—some claim as high as 80% [16]) that were outright frauds. Fraudulent DAOs and corresponding ICOs will happen—not that fraud has not happened with conventional organizations. For instance, Ponzi schemes predate DAOs by decades, if not centuries.
Blockchain & Crypto Development Communities
Blockchain is about decentralization and disintermediation. Therefore, it is not surprising that Blockchain communities and cooperatives are themselves seeking and pursuing non-traditional models for cooperation. Open Source has always fostered and promoted democratic cooperation. These cultural trends are also giving rise to several community initiatives. Behind the various cryptocurrencies and technologies developed by Open Source communities, are organizations that promote communication and cooperation—which are in essence democratic and “flat.” For instance, the Bitcoin Foundation’s Manifesto states: “The technology is completely decentralized and the founder does not head up an organization that sets the strategy, governance and standards. This has created a diverse ecosystem of stakeholders that don’t all share the same vision for Bitcoin. We believe that The Bitcoin Foundation is uniquely positioned to facilitate communication, cooperation and integration towards a shared purpose.”
Similarly, the Ethereal Foundation [17] encourages collaboration for “development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications (dApps), and together build a more globally accessible, more free and more trustworthy Internet.”
Another interesting example of the collaboration culture: Chain Cooperative hosted a webinar by theHum.org on Patterns For Decentralized Organizations. [18] The Hum has been around for a while and focuses on organizational interactions without a management hierarchy. The presentation made some interesting observations, especially on the tradeoffs with decentralized organization. The presentation elucidates the negatives and positives of Hierarchical vs. Collaborative organizations. Not surprisingly, collaborative innovation and creativity score higher. However, decisions take longer. These are quite applicable to Blockchain communities, organizations, and the overall decentralized approach implicit in Blockchain. RChain Cooperative advocates and promotes these principles within its community developing this next generation Blockchain.
It should be noted that while decisions could take longer due to collaboration—as participants express views that need to be discussed, vented, and voted upon—once a decision is made and captured in a Smart Contract, its execution is very fast. Compare that to making a voting decision of a publicly traded company via an annual shareholder meeting. As long as the by-laws and governance policies are captured in Smart Contracts and deployed on the Blockchain, their execution and operation is much faster.
Governance of global organizations in a digital era is complicated. There are organizational challenges and the technologies are rather immature. Building a DAO on top of a Blockchain solution ground up could be challenging. Some organizations are providing technology layers on top of existing Blockchains to facilitate the development and deployment of DAOs. This is similar to what happened with the Internet, where many software companies provided, and continue to provide, robust easy to use stacks and development environments for faster innovation and deployment.
Conclusion
Culture is always more important and more significant than technology. There are irreversible trends of workers or employees wanting to be more autonomous, creative, productive, and enjoy their work. We saw in Part I [19]that this not a new trend. It is one of the main characteristics of the cognitive knowledge worker. An increasing percentage of the workforce is becoming cognitive, but there are obstacles. Without the balance of control and accountability, decisions take longer. So finding balance is extremely important.
There are mostly yet to be discovered opportunities for Blockchain assisting organizations who want to become flat or circular and more decentralized. There are several DAOs that leverage Smart Contracts for governance. Examples include DigixDAO, Dash DAO, and MakerDAO. Others will emerge or experiment. However, as noted above, vulnerabilities, liabilities, regulations, and recognition by governments is still a huge challenge—and will be for the foreseeable future.
The most likely scenario of Blockchain for cultural change will be sub-organizations that leverage elements of a DAO approach. A hybrid approach, as we discussed in Blockchain to Valuechain [9]. Smart Contracts for organizational, worker, shareholder, or even customer empowerment can accelerate decision making. This is similar to the “circle” or “flat” organizational trends that were discussed in Part I [19]. Thus, a recognized formal organization or corporation can potentially leverage Blockchain for some of its community decisions, either with shareholders or employees.
There is a whole spectrum of possibilities and organizational models for DAOs. It can involve members, shareholders, administrators and a board of directors—agreeing upon and deploying Smart Contracts that capture the bylaws or operational policies of the organizations. More interestingly, non-human intelligent agents or robots can also be members or participants in the DAO. This is similar to assigning tasks to automated agents, IoT devices, or robots in a digitized business process. DAOs can also potentially be members of other DAOs; you can have a mesh of DAOs collaborating for business objectives. Conventional organizations or corporations can govern potentially multiple DAOs in a hybrid approach. Organizations can leverage the best of Blockchain for certain decentralized activities, within the context of legally recognized (by government agencies) organizations. Furthermore, digital technologies especially Artificial Intelligence and Digital Process Automation can be used to make the entire organization more dynamically responsive.
There are several salient characteristics of decentralized services [20] and organizations; execution speeds, flat organizational structure, built-in trust, and consensus-based decisioning. The flattening and decentralization trend is cultural, powerful, and unstoppable. DOAs are one manifestation and possible realization of this trend. As described elegantly by Wright & De Filippi [21], “These organizations can re-implement certain aspects of traditional corporate governance using software, enabling parties to obtain the benefits of formal corporate structures, while at the same time maintaining the flexibility and scale of informal online groups. These organizations also can be operated autonomously, without any human involvement. They can own, exchange, or trade resources and interact with other humans or machines, raising novel questions around traditional notions of legal personality, individual agency, and responsibility.”
This is a two-part article series, be sure to check out Part I [19]!
