Today's Reading
FOREWORD
DON TAPSCOTT
This book explores nothing less than the biggest challenge to the corporation in a century.
Throughout capitalism's history, the corporation has been the foundation of production, wealth creation, and prosperity. The newest titans of the digital age have booted up a new model, the decentralized autonomous organization (DAO), which I believe will shake the foundations of every industry and economy—for the better.
In 1995, I wrote The Digital Economy: Promise and Peril in the Age of Networked Intelligence. The internet and World Wide Web had just emerged commercially, and everyone was figuring out how it would change business. I cited Nobel Prize-winning economist Ronald Coase, who, in his 1937 paper, "The Nature of the Firm," asked why corporations exist.
His answer? "Transaction costs," namely the costs of searching for, contracting, and coordinating production factors. These costs were more expensive in an open market than inside a firm. He posited that a firm would expand until the cost of performing a transaction inside exceeded the cost outside. Consequently, twentieth-century capitalists vertically integrated their firms across the value chain.
In The Digital Economy, I argued that the internet would reduce transaction costs and lead to more networked business models, which it did, somewhat. Search engines reduced search costs. Applications like email, social media, enterprise resource planning, and cloud computing reduced coordination costs. Firms began to outsource, crowdsource innovation, and eliminate intermediaries, freeing industries to consolidate assets and operations.
However, the internet's impact on corporate architecture has been peripheral. The industrial-age hierarchy remains capitalism's foundation, partly because the internet also dropped transaction costs inside firms. Executives still consider this a better model for managing intangible assets like talent, brands, intellectual property, knowledge, and culture.
Also, the internet hasn't dropped what financial economists Michael Jensen and William Meckling called "agency costs"—the costs of ensuring everyone inside the firm acts in the owner's interest. Nobel Prizewinning economist Joseph Stiglitz argued that firms' size and complexity have increased agency costs even as transaction costs plummeted—hence the huge pay gap between CEOs and frontline employees. This concentration of power and wealth has worsened economic and social inequities.
This dynamic began to shift with blockchain's increasing use. In our 2016 book, Blockchain Revolution, Alex Tapscott and I argued that this new "internet of value" could diminish transaction costs in an open market and eliminate many agency costs. The result would be radically new models of orchestrating resources in our economy and society. Networks could do what corporations once did, often better, in a distributed rather than concentrated way.
That's happening today, with the DAO, user-owned and governed networks that can steward huge resources and create value in the economy, as the most important new entity. Visionary leaders can now launch truly decentralized organizations, based on powerful networks owned by their participants and acting autonomously in their own self-interest.
Smart contracts—blockchain-based software that automates many search, contracting, and coordination activities—encode, monitor, and self-police agreements between people and organizations. They can automatically execute payments as conditions are met.
Digital tokens, which are value containers, allow contributors to participate in decision-making and receive compensation for the value they create. In DAOs running on public blockchains, transactions are transparent, reducing many transaction costs and building trust among token holders and the public. Our work at the Blockchain Research Institute provides strong evidence that DAOs are not just better vehicles for innovation, coordination, collaboration, and wealth creation but can also help make the global economy fairer, more inclusive, and more democratic.
The implications of DAOs are staggering. Agency costs are reduced because DAO participants are also economic stakeholders. DAOs are challenging entire industries. Now software can do what most banks do. This isn't fintech, which is simply a new coat of paint on a legacy industry's ancient walls. It's an entirely new industry called decentralized finance or DeFi.
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