Blockchain-Based Organizations (BBO) beyond DAOs
A different perspective on the future of work
Future of work and blockchain
In this article, I discuss some consequences of blockchain technology on the world of work and its impact on organizations. The blockchain –born in the world of cryptocurrencies– represents a powerful tool for organizational and inter-organizational alignment on a global scale.
I will mainly refer to corporations –as this is the world I know better– but many of these arguments also apply to non-profit organizations, the public sector, and some of the significant challenges that humanity is facing today.
Compared to the status quo of today’s business, blockchain makes it possible to rethink organizations in a more decentralized and horizontal way, enabling them to interact more effectively and orchestrate their resources. These capabilities become even more critical in a post-COVID era, which requires a remote workforce, that can only be coordinated through effective processes and incentives rather than through centralized and military-inspired management models.
Two main trends are at work when it comes to organization and blockchain. The first is changing the relationships between organizations. The second is transforming organizations from within. While analyzing these two trends individually, they operate simultaneously. To explore them, we will build a mental model of a new type of organization that we will call Blockchain-Based Organization (BBO).
Organizations and how blockchain can transform them
Organizations are the social structures that coordinate human groups. Their activities align toward a common goal through economic incentives. Under this definition, we encompass public and private organizations, for-profit or not-for-profit, and all the broad taxonomy of human groups that gives structure to our society.
Organizations uniquely identify the “inside” and the “outside” through an organizational membrane. These membranes can be highly porous. Some molecules can cross them, but it is possible to define who is inside and outside when necessary. If you are inside an organization, you have a private view that includes a set of knowledge and practices. If you are outside, you can view its surface, interfaces, products, and services.
Organizations are “islands of trust.” Coase, in 1937, gave the organization’s border an economic meaning. According to the Coase theorem, described in the article The Nature of the Firm, the transaction cost for carrying out activities, otherwise known as work, defines the organization’s perimeter. Outside of this perimeter, it is possible to negotiate the execution of the activity with an external economic entity (like a consultancy or outsourcing company). Inside the perimeter, there is a financial advantage in the continuity of skills and relationships provided by an employee.
Through its ability to create a trustworthy algorithmic third party, the blockchain can expand the perimeter of the Coase theorem, lowering the transaction cost related to working and transforming the structure of the organizational membranes.
There are two fundamental ways in which blockchain can transform the organizations we observe today:
- How organizations interact with each other and become part of business networks
- How organizations are structured internally
The first mechanism applies to companies as we know them today. The second is poised to have a long-term impact. Both dynamics could drastically change how we understand organizations.
Changing the inter-organizational ecosystem
We all know the impact technology has had on the way of working, with the advent of large mainframe computers, personal computers, the Internet, and today with the massive adoption of mobile technologies and AI. Organizations use information systems to provide a service to customers, reaching them wherever they are.
The ecosystem that hosts today’s organizations is still predominantly analog, based on relationships. This ecosystem represents the connective tissue in which organizations operate and speak to each other. The inter-organizational interactions are based on contracts, legal agreements, standardization, licenses, consortia, rules, and laws. Like cartographers like to say, “Hic Sunt Leones.”
The blockchain facilitates the interaction between organizations. Different organizations can connect and start coordinating resources for the common benefit, defining assets, processes, goods, and services that cross organizational boundaries. The blockchain can complement the current functioning of organizations to rationalize this space, which often lacks technological formalization.
For example, product chains highlight the need for coordination between multiple organizations that are part of the same global process. Organizations collaborate and compete on these global value chains, delivering services to customers. However, they need a common substrate, which no individual company can control.
Production of raw materials, product creation, logistics, and large-scale distribution, for example, are part of longitudinal processes that are not currently optimized. Our world optimizes on the scale of the individual organization but not on the scale of the overall service.
The progressive introduction of the blockchain in these inter-organizational spaces must be careful. We must avoid that such a powerful inter-organizational tool becomes an opportunity for modern-day capitalism to create a cartel, optimizing the model to its advantage and the detriment of the consumer. Consumers must become part of this fabric through the organizations that represent them.
The broadest and most ambitious vision is that the game’s rules are written on-chain. A new era of digital regulators and laws, executed with certainty, will have to begin.
Changing organizations from within
The complementary trend to re-mapping organizations’ connective tissue is transforming organizations from within. Despite the relentless digitization of any business, the organizational cytoplasm is still predominantly analog.
Here the reasoning becomes more subtle. The blockchain has allowed us to recognize that money is an application we can write within a smart contract. Also, the organizational rules on which a company is based can be considered an application that governs the organization itself. It is a social application that defines how workers interact by making decisions, assigning and completing activities, recognizing individual contributions, and modifying the game’s rules.
Today, the coordination of employees takes place mainly offline. When they take place online, it’s still manipulable. These coordination activities are human-centric, with many verbal, brain-to-brain, and untracked interactions. Although technologies are present, they are still secondary to the human aspect. The organization is still an analog concept. Systems exist, but they come after the organization. The hierarchical chain can overwrite systems. People take commitments through ephemeral and non-binding means such as emails, in-person meetings, and videoconferences.
Furthermore, this analog approach leaves space for power and personalism. Although these traits are attributable to the behavior of the human being, it is possible and necessary to seek new strategies. These strategies (algorithms) must define the community’s behavior and favor better customer and citizen service. We need a foundation on which we collectively can write these rules without ambiguity.
Exciting experimentation has been active for a few years in the blockchain world as Decentralized Autonomous Organizations, or DAO. In a nutshell, a DAO is an organization based on a blockchain, which can coordinate many contributors based on predefined and autonomous algorithms written in the code of smart contracts. These algorithms uniquely define the rules of organizational interaction, what is possible and what is not possible to do, how decisions are taken, and how work is assigned, contributed, and evaluated.
DAOs typically operate in the absence of a command and control hierarchical structure. Furthermore, through a DAO and the tokens representing participation, it is possible to align the economic incentives. The blockchain community is at the forefront of this radical evolution, in which all fundamental interactions are digitalized by going beyond traditional analog modes.
The total digitization of the organizational substance –in which the company’s rules become software and the code represents the language in which these rules are written– allows us to go further in the process of reviewing the company structure and experimenting with new models. The theory behind DAOs aims to define, through smart contracts, anonymous organizations in which the contributors are known not through their legal identity but a pseudonymous identity.
There are numerous examples of DAO experimentation, especially in the DeFi space. Historical projects implement rudimentary DAOs such as Digix and Maker. Furthermore, platforms that allow the creation of DAOs have also been developed. There is no space to go into every project’s details. Still, it’s worth mentioning the pioneering work of Aragon (aragon.org), Colony (colony.io), and DAOStack (daostack.io), in addition to the original and controversial The DAO.
These are still initial projects, and these DAOs are still very simple compared to what BBOs could become in the long term. BBOs generalize the very concept of DAO in the direction of building a fully functioning organization on the blockchain, capable of managing business cycles in their entirety.
BBOs can have a network of relationships. An individual can be part of multiple BBO, having a tracked reputation. You can see how the BBOs can become productive units capable of dynamically joining other organizations or equivalently leaving them based on the decisions of their stakeholders.
A monolithic business organization today could be divided into a multitude of services, thus becoming part of a dynamic system capable of evolving based on feedback from users and other organizations.
We can find the complexity of inter-organizational relationships in the organization itself. Several models are possible, of which a consistent taxonomy has yet to be described. However, the perspective is reversed. In today’s organizations, technology is still an afterthought. In BBOs, technology is the organization. The network’s rules determine how people can interact organizationally and not the other way around.
Conclusions
The COVID pandemic has caused an acceleration in the transformation of work. Digitization can transform companies into IT applications that coordinate a growing number of people outside the walls of traditional corporations. This transformation requires a substantial change.
Organizations have been constantly modified throughout history, driven by social transformations. The Roman societates, the medieval guilds, the Florentine and Venetian companies, the development of banks with the Medici, the birth of joint-stock companies in the era of maritime exploration, railway companies, industries of the industrial revolution, and the more recent history of high-tech companies are some examples. Organizations have been, through the centuries, a constantly evolving social software through which humanity takes shape.
Unless you think that current companies are the last step of organizational evolution, it is possible to imagine that a subsequent iteration is possible. The organizations we know use information technology and contribute fundamentally to the diffusion of technological development, but the organization itself is not digital.
The organization is still an analog concept.
With the invention of the blockchain, we can face this challenge, but the amount of theoretical reflection and practical work it takes to build this new system is massive. We can glimpse on the horizon an ecosystem of interconnected and intrinsically digital organizations, able to interact with each other on-chain and reorganize themselves based on the governance of their stakeholders.
Furthermore, the intersection between the blockchain and other automation technologies (such as artificial intelligence and the Internet of Things) let us imagine completely autonomous companies (“lights out” organizations). Businesses could one day become a subject for programmers in the form of disintermediated services, which do not require the human touch.
As “calculators” once referred to people, and today refers to machines that are enormously faster and more effective, the company will become in the future an autonomous code. BBOs will provide products and services in connection with many other BBOs.
