The problem of how best to manage organisations has busied minds for centuries, from Max Weber to Henry Ford. More recently, CEOs, politicians and leaders have seen the fruits of flattening organisations and minimising hierarchy. While that has always been easier said than done, a new field of blockchain-powered governance called ‘DGov’ (or ‘distributed governance’) promises to realize a new era of organizations.
What is distributed governance?
Distributed governance is a form of organization where there is no controlling centralized actor(s). It replaces old systems which involved authority, hierarchy and delegation. In the blockchain context, distributed governance refers to the administration of decision-making processes like votes through blockchains, which serve as single sources of truth. As a result, these DGov organisations have governance by design.
Why do we need it?
To understand DGov, it’s important to understand the history of governance and management. Governance can be defined simply as decision-making in organisations. Those organisations can range from small hobby fishing groups, to multinational corporations, to democracies themselves. Some of those groups, like some corporations, might be strictly hierarchical, where leaders command followers. However, even those groups which profess to be democratic, require some level of human authority to manage and protect said democratic processes. Fishing groups need to trust that their secretaries will count the votes properly and democracies need police to remove individuals who break the social contract. As both fishing groups and democracies alike have experienced, entrusting humans with these responsibilities can be problematic. In both examples, the final protection against rogue secretaries and police officers is often a constitution, but this, in turn, needs to be interpreted by a human who is, once again, fallible.
DGov offers a solution by allowing these decision-making processes to be governed by code, not humans. It is impossible for votes to be miscounted or for individuals to be expelled for personal reasons. The handling of these issues is embedded in code, available to all members and unable to be persuaded or bribed.
Benefits of DGov
The replacement of human-administered democracies with decentralised autonomous organisations remains a pipe dream, not least because almost all of the decisions that democracies make need to be exercised by humans anyway. This is what makes DGov so suitable for organizations that deal with only, or mostly, virtual matters. Indeed, such organizations already exist. The very first, Bitcoin, has existed for over a decade. The currency facilitates all the currencies of a bank: storing value, sending value, and even providing collateralized loans. However, it is completely stateless. It has none of the physical trappings we often associate with banks: no CEO, no security guards and no tellers.
In this way, the function of a bank, storing and transferring value, is able to be replicated by Bitcoin, which stores value on a blockchain. Similarly, if we see companies fundamentally as complex networks of contracts, then they are able to be replicated by Ethereum, which stores contracts on a blockchain. This is exactly why so many DGov implementations today are based on the Ethereum blockchain. Perhaps the earliest, and most memorable, example is that of The DAO, an online venture capital fund. The DAO sought to allocate funds to deserving projects in the fairest way possible, without funds getting misdirected to personal connections. It had 18,000 stakeholders who held voting rights to allocate funds to certain projects. In June 2016, the DAO was attacked, resulting in the allocation of a parcel of 3.6 million ETH to one specific wallet, valued at the time as USD 50 million. While technically a valid operation, the move was so controversial that it resulted in the ‘forking’ of Ethereum into a version of the cryptocurrency in which the attack had never occurred. Despite the high-profile failure of The DAO, the platform proved the possibility of running a truly stateless, non-physical organisation that controlled a very large amount of money without centralized human leaders. The DAO was described by TechCrunch as “a paradigm shift in the very idea of economic organization” offering “complete transparency, total shareholder control, unprecedented flexibility, and autonomous governance”. Indeed, such an entity was entirely novel in the eyes of regulators, although it was later determined to be a security by the SEC, on the basis that it paid dividends to investors.
Other decentralized autonomous organizations (DAOs) have been established in the wake of The DAO in an attempt to solve the outstanding legal issues. One example is the LAO, which ties the otherwise supranational entity to a Delaware corporation and all accounts to actual accredited investors. This solution seeks to marry the ease and convenience of distributed decision-making through online voting with legal accountability, giving regulators an avenue of recourse. An alternative route has been taken by MetaCartel and MolochDAO, decentralized venture funds that remain fully stateless but which seek to correct some of the technical issues that led to the attack on The DAO in the first place.
However, The DAO is unlikely something most organizations are seeking to replicate. Nevertheless, it does provide a proof of concept for a new breed of DGov platforms and technologies that have been developed since. These should be of note to many organisations in our increasingly digital and remote work environment. Anja Blaj, Chief Strategy Officer at the Future Law Institute, says that “the world is becoming exponentially interconnected, complex and interdependent. While we rely on each other and continue to make contractual relationships, we often engage on a level where we share the same values, network, resources and a common cause. As distributed governance becomes increasingly resilient, it holds the potential to increase efficiency and leverage business.” Both GovBlocks and Aragon, for instance, provide fully customizable platforms for the management of distributed organizations. Before launch, organizations can choose the extent of decentralization they desire and define roles for different members. The result is a voting system governed by blockchain, an easily accessible platform for conducting those votes and a single, unambiguous source of truth for auditing those decisions. Nexus Mutual is one organization that runs on GovBlocks. Nexus is a mutually-owned insurance fund that seeks to provide an alternative way to share risk than conventional insurance companies. Currently, they are offering insurance for digital-only events, like smart contract failure, with a view to eventually offer more standard products, including earthquake cover.
Many organizations, from businesses to hobby groups, are transitioning to an almost wholly digital existence. With the doing away of physicality, and all the hierarchy that is built into uniforms like suits or large corner offices with the word ‘Director’ printed on the door, the possibility offered by DGov should be considered. At very least, as the human element of administering decision-making processes becomes more distant, businesses may want to think about how to conduct votes digitally. DGov, combined with the ability of blockchains to create programmable, scarce value and incentives, mean that we may be seeing a new normal in managing organizations very soon.