Blockchain: Cutting the Heads off Companies?
Some of the most radical speculation about blockchain technology has been that it will allow us to have “companies” with no management or even workers. Instead, shareholders would use a combination of voting and algorithms known as “smart contracts” to run the company in an agreed-upon way. For example, last year developers tried to launch a company called the DAO (decentralized autonomous organization) that would essentially have been a decentralized venture capital firm. Investors would buy shares that would give them the right to vote on which projects their money funded. The only employees would be “curators” who would have no decision power but would simply gather information that investors would use to vote. However, before the DAO could start operating, hackers exploited a coding error to steal one third of the funds it had raised, and the project never recovered.
The security concerns are grave, but let’s put those aside and focus on the concept. It would eliminate the possibility of managerial fraud or diverging incentives between ownership and management. But could it be a viable company? I’ve touted the decentralized nature of the blockchain as a great advantage, but do we always want to decentralize decision making?
In some industries, we can reject this decentralized structure out of hand. A pre-programmed smart contract to run The Coca-Cola Company could not have anticipated the rise of energy drinks in the market—how could it formulate a question to shareholders on how to respond? If you had an employee who looked at the market and formulated such questions, you would be right back to a company with centralized control.
The decentralized structure seems marginally more viable for venture capital where investment decisions follow a more regular pattern. But consider this scenario: A company misrepresents its financials to the venture capital firm. Is there a smart contract that could file a lawsuit or hire a lawyer? It seems impossible to leave such decisions to algorithms, and at that point, the company could be vulnerable to fraud.
When we think about “decentralized” decision making, we need to ask, in whose hands? I’ve made the point in previous work that one advantage held by small businesses is that more decision power is held by those who gather information on the ground. But this advantage doesn’t apply to shareholders in a venture capital fund, who may have put up money but usually have a different full-time job and no specific connection with the information being gathered. There are many applications where the decentralized nature of blockchain technology is a big advantage, but in this case it seems to be happening just for its own sake. For now, I’ll keep my money with human beings.
Max Gulker
Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.
Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.
