The blockchain organized business bitcoin continues to make headlines for various reasons, including it is the currency used for the Colony Pipeline ransom.
El Salvador recognizes bitcoin as legal currency, and everyone’s favorite – it is up/down 50%. While many still wonder if bitcoin, or some other cryptocurrency, will become the standard payment of the future, another use of the blockchain technology is coming to the forefront.
There have been many proposals to create a business organized by blockchain. These are called decentralized autonomous organizations or DAOs. A quick explanation of blockchain before continuing on to DAO.
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Bitcoin, as most cryptocurrencies, relies on the blockchain concept to ensure security and trust. Each bitcoin is encrypted with the history of transactions. To prove an individual owns a particular bitcoin, the system queries everyone else in the network. If they all agree on the history of the transactions, then one can prove they are the current owner.
‘Distributed ledger’ is at the heart of the matter
This is why bitcoin is said to operate on a “distributed ledger.” The power is rather than needing a centralized ledger for trust, such as a bank, the network itself servers to authenticate and secure transactions. The goal is it can cut out middlemen, reduce the powers of central authorities and enable independent, autonomous yet verifiable transactions.
So what does blockchain have to do with business organizations? Instead of using blockchain to manage units of currency, the use would be to manage units of ownership much like stock shares in a business. These shares could be traded independently between entities without losing track of who owns what.
As exciting (or worrisome) as it sounds to use blockchain technology to trade shares of a company, there is an even more intriguing use that comes with this model. The owners of the shares could vote on company decisions remotely and securely. In fact, they could vote on all decisions.
Take out the middleman, cast a vote, execute ‘smart contract’
This would sidestep the need for a central decision making authority (CEO, the board, etc.). Thus, the business would become a decentralized autonomous organization. When each “share” can be verified and each vote secure, all owners of the company could participate in the decision making process.
And since all of this is connected remotely and the vote tallies can be instantly verified, decisions can be executed in the form of “smart contracts.” A smart contract is a contract that is automatically executed based on certain conditions.
A company could make decisions about marketing campaigns, hiring or firing vendors, or what new markets to enter into based on these contracts. The upside here is a company can instantly tap into the expertise and opinions of its owners and execute decisions faster.
So far, more theory than practice
How will DAO fare? I don’t know. So far they are more theory than practice. There have been a few companies created on that model, but they are mostly limited to financial services and are very young. Wikipedia only lists five DAO businesses as being “operational.”
While I spelled out many of the upsides of a DAO above, one doesn’t have to imagine very hard to think of potential downsides. Will the business make the best decisions when there are many potential “shareholders” who may or may not have experience or knowledge in the business be able to make the “best” decisions?
What happens when smart contracts are tied to each other? For example, will there be unintended consequences when contracts trigger contracts that tigger contracts that trigger contracts?
The model on paper sounds interesting. But in practice, there is more kinks to work out.