A Distributed Future: Where Blockchain Technology Meets Organisation Design and Decision-making

Dr Mark van Rijmenam, CSP -

Blockchain technology records and forever maintains data that cannot be changed. It also involves ‘smart contracts’ and consensus mechanisms that govern processes of automation, as well as the development, evaluation and execution of decisions. Blockchain technology has the potential to transform organisation design due to its decentralised and distributed characteristics. To understand how blockchain will change organisation design and decision-making, let’s first dive into the history of organisation design before investigating the impact of this fundamental technology on organising activity.

History of Organisation Design

The theory and practice of organisation design have evolved significantly over the past 100 years. At the beginning of the twentieth century, organisations were mostly viewed as closed bureaucracies. Involving a strict hierarchy of authority and power, these organisations were rational entities and assessed purely on economic performance criteria. It was called the ‘bureaucratic model’, as it captured standardised, authoritative, decision-making procedures, rational discipline and strict separation of planning and execution1. This meant that only managers had access to information and were solely responsible for strategic decision-making therein. Trust was based on controlling conformity with the organisational rules and technology, which was predominantly manufacturing technology, with very predictable effects on how organisations were designed to perform.2-4

Natural Systems Perspective

In the mid-twentieth century, an emerging natural systems theory perspective placed humans at the centre of organisations, which were, seemingly, comprised of individuals with a common goal.5 Managerial emphasis shifted from controlling individuals to motivating individuals, resulting in additional theoretical perspectives that focused on teamwork, cooperation and motivation6. Increasingly, employees and technologies, thus, became integral parts of organisations. Natural systems theory assumes that trust in organisations evolves through teamwork and fostering informal relationships, while decision-making is aligned with political processes.7, 8 In turn, these ideas implicitly defined organisations as closed systems.

Open Systems Perspective

The focus of organisation theory shifted once again with the arrival of open systems theory, now to the interaction of an organisation with its environment. Organisations perceived as open systems had to be flexible, with managers facilitating interactions among stakeholders within an organisation’s value network. An organisation is a system too, created and activated by input and output.9 Likewise, such organisation design is democratic, in that employees at all levels participate in accomplishing strategic objectives and everyone has access to information. Resulting in shared decision-making and shared trust among employees, which heralds the first wave of advanced IT-enabled, open system organisation design.10, 11

Network Systems Perspective

Open systems theory further developed into network systems theory, which explains how flexible organisations use IT to innovate, adapt and connect with actors across time and space.12, 13 Within network organisations, IT reduces the breadth, depth and width of an organisation, which supports data-driven decision-making and knowledge-based trust within and across organisations.14

A network organisation is adaptable to its environment, receptive to change and flexible in operation, which is necessary in a data-driven world involving frequent exchange of data and knowledge. 13 In today’s fast-paced business environments, network organisations with increasingly democratic characteristics are very receptive to market and technological developments and are able to anticipate disruption. These organisations have an authoritative to an increasingly democratic style of organisation design.15

Collaborative Communities

Recently, we have seen a new form of organisation: collaborative communities.16 These organisations use technologies to share knowledge and engage in collaborative relationships and decision-making with industry partners.17 Now, collaborative network organisations turn into platform organisations due to the availability of the second wave of advanced IT, which features big data analytics, blockchain or artificial intelligence (AI). However, many new digital platform organisations copy the design of highly successful companies such as Uber or Airbnb, therefore, increasingly affecting existing enterprise.6

Data-driven platform organisations consequently require a balance between power and empowerment and, hence, these new organisation types tend to have democratic to delegative styles of organisation design, in which self-governed teams no longer report to management.12 The latest type of organisation is the holacracy, which is especially relevant for organisations facing rapid changes.18 The holacracy design revolves around advanced IT, enabling dispersed teams to work together within an organisation, without formal management making the decisions.

Future Forms of Organisation Design

With the emergence of Blockchain, in general, and smart contracts, in particular, future forms of organisation design will move to a delegative style of design and decision-making, as the availability of information IT therein enables self-governed actors to create value. Blockchain technology contributes to creating value using cryptography, consensus mechanisms and smart contracts through a network of peer-to-peer actors distributed worldwide, collaborating effortlessly and in real-time to create value for all involved actors.

The Internet of Value

Within this ‘internet of value’19 configuration, (i) miners create value by validating transactions, (ii) smart contracts create value by executing certain tasks automatically, (iii) organisations create value through increased efficiencies and reduced costs using the distributed ledger, and (iv) consumers create value through reduced prices and more spare time, overall, resulting in increased value creation for society as a whole.

When implemented to the extreme, these technological features can result in new forms of organisation design affecting organisations and inter-organisational relations, as well as changing strategic management practices due to automated decision-making. This does not mean that existing organisation designs cease to exist. On the contrary, organisations that do not use distributed ledger technology are not affected; however, those that do will change significantly.

The Decentralised Autonomous Organisation

Currently, a decentralised autonomous organisation (DAO) is the most revolutionary organisation design, which uses distributed ledger technology and smart contracts to establish governance without management or employees and is run completely by computer code. DAOs are complex mechanisms that operate autonomously, conform to compliance automatically and radically change decision-making within organisations.

The DAO is an extreme form of organisation design, where members can propose changes to the organisation and where technology itself determines how to organise activity. Eventually, these new organisations may change society by enabling peer-to-peer collaboration and removing the need for intermediaries. While this may seem (too) radical for some, the first DAO (called The DAO) was already developed in 2016—despite subsequently failing. Since then, multiple further attempts have been made to create a successful DAO with more likely to emerge in the (near) future.

How Blockchain Changes Decision-making

Organisations are part of complex interacting environments. Over the years, decision-making moved from an authoritative process to a collaborative effort and even delegative decision-making. Yet, the arrival of distributed ledger technology, in general, and consensus mechanisms and smart contracts, in particular, will again change the concept of decision-making drastically.20

The Consensus Mechanism

Humans have used consensus decision-making for many years. Although beginning as a concept applied to politics and societies, it has become an important part of computer science. Consensus algorithms ensure connected machines can collaborate independently without the need to trust each other and can continue working even if some members of a network fail. Many consensus algorithms take different approaches to authenticate and validate values and transactions on a blockchain. This involves removing the need for trust between parties, thus, enabling decisions to be made, implemented and evaluated without the need for a central authority. As a result, we have intermediary-free transactions and decision-making, whether it is human-to-human, human-to-machine or machine-to-machine.

As there is no trusted central authority, consensus is vital in blockchains. Actors in a network must agree upon the rules that govern the blockchain, including how these rules must be applied before one is deployed. The nodes in a network execute an agreed-upon algorithm, while a predefined majority must approve on the outcome. Consensus algorithms also use cryptography to validate transactions (and, thus, decisions). At the moment of writing, the two most common consensus algorithms are Proof of Work (PoW) and Practical Byzantine Fault Tolerance (PBFT). New consensus algorithms are constantly being developed, and it is likely that the landscape will look different in the years to come. Thanks to consensus mechanisms, decision-making can now be done decentralised and without a central authority, while the arrival of smart contracts has automated decision-making.

Smart Contracts

Data on a blockchain are immutable, verifiable and traceable, and since trust among actors collaborating on a blockchain is ensured by cryptography, intermediary-free transactions and decisions are possible. This removes the need for trusted centralised third parties, who generally take a commission for verifying transactions. Eliminating intermediaries completely changes how actors interact with each other and how decisions are made, implemented and evaluated.21

It was Nick Szabo who first coined the term smart contract as ‘a computerised protocol that executes the terms of a contract’. It can be seen as a traditional agreement that is defined and executed by code, automatically and without discretion. Smart contracts are analogous to scripts for processing transactions or decisions run on a blockchain. Smart contracts can also be viewed as ‘if this, then that’ statements—albeit significantly more complicated. They are software programs that execute certain transactions or decisions that are agreed upon by two or more actors are created by choosing events or preconditions, and by providing information about what needs to happen when those preconditions are met. The protocol is then recorded on a blockchain and, once deployed, cannot be altered and will always execute once the preconditions are met.

Ricardian Contracts

However, there remains one problem with smart contracts; they are not legally binding. Consequently, in 2018, there has been a renewed interest in Ricardian Contracts. Ricardian contracts differ from smart contracts that they are legally binding. It records the agreement between multiple parties in a human-readable and machine-readable text (contrary to smart contracts, which only executes what is defined in an agreement). It is a legal contract that is easy to read and understand by everyone, not only by lawyers. The main advantage of a Ricardian contract is that if there is a dispute among parties involved, the case can be decided in court. This is not possible with smart contracts, which are only the instructions based on what is defined in an agreement.

Smart contracts, or Ricardian contracts, not only have an effect on contract law, but also more broadly on social contracts within society and organisations since they minimise the need for trust by removing human judgement. Although smart contracts cancel the need for developing, implementing or evaluating decisions made by management or employees once deployed on a blockchain, they still involve manual decision-making in defining the involved parameters. When multiple smart contracts are combined together with AI and big data analytics, this results in a ‘fundamentally new paradigm for organising activity’ thanks to automated (strategic) decision-making22.

Changing Organisation Design

Smart contracts can enable a wide variety of applications, not just those related to financial markets or ‘self-enforcing autonomous governance applications’.23 Therefore, the possibilities of Blockchain are nearly endless; it can enable organisations to create new, distributed products and services that will result in both efficiency gains in organisations and increasingly automated decision-making capabilities. Such blockchain-enabled products and services are commonly referred to as decentralised applications (dApps).

Decentralised Applications

A dApp has at least two distinctive features: 1) any changes to its protocol have to be approved by consensus, and 2) the application has to use a cryptographic token, or cryptocurrency, which is generated according to a set algorithm.22 Hence, consensus mechanisms and cryptographic primitives result in a new form of organisation design: the decentralised organisation.

An organisation built upon dApps is a decentralised organisation in which decisions are made using consensus by decentralised actors; trust among actors is created cryptographically, and governance is embedded within the code, bringing the code to the data.24 Decentralised applications do not require a centralised authority for maintenance, as the database is stored on thousands or millions of decentralised computers. Its decentralised infrastructure ensures that a single case of mismanagement resulting in a point of failure does not affect the entire network.24 In addition, due to the trustless system based on cryptography, the use of blockchain and smart contracts enable an organisation to control and reduce opportunism, therefore, directly influencing the behaviour of the firm.25, 26

A Strong Focus on Data Governance

Although Blockchain removes the need for trust in the absence of a centralised governing body, any organisation developing dApps requires a strong focus on data governance. As mentioned, only data authenticity can be ensured; reliability and accuracy cannot be guaranteed. Laws and regulations can be programmed into a blockchain itself so that they are enforced automatically, which makes governance easier, or even automatic. Hence, the distributed ledger can act as legal evidence for data, increasing the importance of data ownership, data transparency and auditability.27 Smart contracts and immutable records on a blockchain, combined with big data and AI, enable a second new form of organisation design: autonomous organisations, which have automated decision-making capabilities. Already, traditional organisations can incorporate different aspects of decentralised and autonomous organisation design by incorporating blockchain for various applications; however, when these two new forms of organisation design are combined, they could become DAOs.

The Self-Organising Framework of a DAO

A DAO is a combination of smart contracts linked together, possibly connected to the Internet of Things (IoT) devices, big data analytics and AI. Although it is run by immutable code under the sole control of a set of irreversible business rules, this does not mean it cannot respond to a changing environment.28 Smart contracts might be reactive but, with big data analytics, a DAO can be as flexible as any traditional organisation if insights from big data analytics are used as input for smart contracts. A DAO will also have different actors from today’s organisations and will require extensive data governance processes ensuring data reliability and accuracy; this will likewise result in a fundamentally new organisational structure.

DAOs are self-organising frameworks that use automated decision-making based on consensus generated through actors interacting without the need to trust one another. As such, there is no traditional organisational hierarchy, as the order is determined by ownership, trust and merit. A DAO goes beyond a holacracy, as in a DAO there are no managers and employees. This change in organisational structure alters the power balance. In traditional organisations, power is distributed either by hierarchy or knowledge and often these are related; the higher you are in the hierarchy, the more information and power you have within an organisation. This works differently within a DAO. The number of tokens an actor owns, an actor’s trust level and their achieved merits all determine the extent of one’s power. This shifts the power balance within an organisation from a hierarchical structure to a distributed structure.29

Immutable Computer Code Organising Activity

In its simplest form, a DAO is just immutable computer code—one or more smart contracts linked together and deployed on a blockchain, encouraging actors to self-organise. The code defines governance (i.e., the rules that are implemented within smart contracts) within a DAO, which can then operate as traditional organisations; however, they do this autonomously thanks to interconnected smart contracts. DAOs can order products and services, have customers and suppliers, make a profit or loss, and pay taxes as well as dividends. They have the same activities as traditional organisations, in that they need to make money; have costs, customers, shareholders and even employees (although these are independent contractors); offer a product or service; and are subject to regulatory requirements (although, being a distributed company, this can become difficult, as regulations and regulatory requirements can be contradictory across countries).

Therefore, governance is important when developing a DAO, and a governance structure has to be incorporated therein (i.e., within the code). In addition, developers need to ensure a DAO’s code not only works but also works correctly and indefinitely, as it becomes irreversible once deployed on a blockchain. Lack of governance or quality assurance can have major consequences. Therefore, actors who wish to establish a DAO must ensure the right governance structure is implemented within the code, and that the code works correctly to guarantee its operation once deployed.

Decision-Making Executed by Code

There is no management within a DAO, only decision-making capabilities that are executed by a code, which is distributed across thousands of computers. Hence, decision-making shifts from being centralised by management to decentralised by code. For decentralised and autonomous organisations to be successful, a decentralised decision-making and governance framework is required. This can be achieved through cryptography and consensus mechanisms. In addition, game theory allows actors to operate independently and interact with each other using smart contracts. The technology provides the chance of removing inadequacies often associated with traditional organisations, such as opportunism, fraud, money laundering or corruption, as any transaction will be immutable, verifiable and traceable.

Startups Building a DAO

Multiple startups are building a DAO, including Dash, Colony, Aragon and PolkaDAO. Dash is a cryptocurrency that is managed as a DAO, and any member can suggest changes to the network.30 It originated as a fork of the bitcoin blockchain, and members can make proposals that are voted upon by Dash Masternodes to decide whether or not the proposals receive funding.31 Colony and Aragon are platforms for developing open organisations and, therefore, offer the infrastructure required to develop DAOs on top of it. PolkaDAO also allows members to propose new projects which are then voted on by the community automatically.

New Forms of Organisation Design

New forms of organisation design based on cryptography, consensus mechanisms and smart contracts will change how actors within the organisational network interact with each other and how decisions are made. Even if an organisation only moves partially to a DAO design, the use of blockchain and smart contracts affects how actors interact with each other and changes decision-making capabilities; this is because blockchain both reduces opportunism within networks and automates decision-making. As a result of sharing the same database across time and space, industry partners can become more intensely connected with each other, which increases the number of actors and interactions within a network, resulting in collaborative community designs.

Therefore, blockchain and smart contracts will result in two new forms of organisation design being included in this discourse: decentralised and autonomous. These forms differ from past discussions on decentralised and autonomous organisations (see Table 1), in which decentralisation and autonomy were achieved by reorganising human interactions and decision-making. The existing literature views decentralised and autonomous organisations as those in which trust is created by experience and forging relationships; meanwhile, decision-making is based on expertise and seniority, while governance is established by a board of directors.

We define decentralised as an organisation design that uses consensus mechanisms and cryptographic primitives to ensure trust among actors who are decentralised across time and space. Conversely, an autonomous organisation is one that is run completely by immutable code, in which decision-making is automated using smart contracts and governance is embedded in the code. A decentralised organisation does not have to be autonomous, but an autonomous organisation has to be decentralised.

Table 1: Traditional and new decentralised organisations

DAOs and a Delegative Leadership Style

Decentralised and autonomous organisations rely heavily on a delegative style enabled by extensive applications of IT. The more an organisation applies distributed ledger technology, the more it moves to a delegative style, and the more decisions are delegated or even automated, while trust (within and among organisations) becomes replaced by mathematics. When that occurs, autonomous software algorithms will solely guide actors’ interactions, and organisations will move from ‘social entities’ to ‘artificial entities’. Individuals no longer represent the most vital element of an organisation, but code does. As such, a DAO is the next phase in the evolution of organisation design, which will require new research to understand how existing theories are affected by this new form of organising.

Conclusion

New forms of organisation design, both decentralised and autonomous, will likely appear due to the emergence of Blockchain and smart contracts. By ensuring a single version of the truth of ownership, Blockchain removes the need for trusted intermediaries and enables irrefutable transactions and decisions to be executed automatically and autonomously across time and space. Organisations that apply Blockchain are increasingly unifying with a distributed network organisation, as part of the ‘Internet of Value’. When organisations start using smart contracts that are deployed on a blockchain, they move towards becoming a DAO in which actors of all kinds self-organise to create value. Governance, whether implemented within a code or ensured through the right processes within an organisation, is vital because of the irrevocable code that is deployed and the data that are stored on a blockchain. In addition, DAOs must ensure they comply with regulatory requirements, which may or may not be contradictory.

Overall, Blockchain offers tremendous opportunity for organisations to create value, develop new products and services, automate strategic decision-making and reduce intermediaries, resulting in new forms of organisation design. However, significantly more research is required to overcome the considerable governance and technological challenges involved therein.

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Image: Ico Maker/Shutterstock

This article was co-authored by Assoc. Prof. Jochen Schweitzer and Prof. Mary-Anne Williams.