Distributed autonomous organizations
Distributed Autonomous Organizations are, in effect, virtual distributed firms. They consist of collections of smart contracts written on the Ethereum blockchain, which together define the corporate governance of the organization without resorting to a traditional vertical managerial structure.
Taken collectively, smart contracts amount to a series of bylaws and other founding documents that determine how an organization’s constituency — including anyone around the world who possesses DAO tokens bought with ethers — votes on decisions, allocates resources, and, in theory, create a wide range of possible returns.
Decisions are made through collective voting. The decentralized nature of a Distributed Autonomous Organization’s “management structure” is revolutionary, striking at the heart of traditional hierarchical organizational models, the firms that have been the foundation of our economic system since the First Industrial Revolution.
Blockchain technology blurs the lines between the market and the firm since it creates a more efficient way to manage the high transaction costs of economic coordination.
The emergence of network-centered models based on blockchain technology can challenge the preeminence of existing digital platform giants and provide the underlying framework for a shared economy and reconfigured economic activity.
Despite the enormous potential that blockchain technology presents, technical, organizational, and regulatory challenges remain that stand in the way of its widespread adoption.
Can the network grow?
The consensus-based nature of blockchain validation mechanisms requires significant computational power and can delay transaction speed as the demand for data storage increases.
This poses a serious technical obstacle to the scalability of the blockchain system and to attaining economies of scale.
Is it secure?
The 2016 cyber-attacks on Distributed Autonomous Organizations, the result of the vulnerability of smart contracts, highlight cybersecurity as a concern for blockchain and indicates that the technology has not yet reached its maturity.
Can different blockchains work together?
In order to benefit from a distributed system, the establishment of industrywide collaboration and common standards for interoperability is critical.
However, the technology is still in its pilot phase and a certain period of prototyping will be necessary before industry standards emerge, suggesting that industry-wide standards are not likely in the near term.
In the financial services sector, consortia initiatives are currently underway to provide space for coordination among stakeholders, such as Fabric by Hyperledger and R3 Corda.
Is data privacy guaranteed?
Several ambiguities and concerns remain unresolved concerning data protection in the context of blockchain applications, including choice of applicable law and jurisdiction, right-to-be-forgotten inapplicability, and the availability of data to all parties.
On the last issue, there are concerns regarding the vulnerability of personal data that could potentially be cross-referenced and deciphered, despite the ‘anonymity’ on the blockchain.
Can regulation adapt quickly enough?
This is arguably the most important hurdle preventing rapid adoption of blockchain. The existing regulatory framework has not been able to keep up with the rapid pace of digital innovation.
Unclear or hostile regulations and a lack of government recognition of digital assets can deter the onboarding of any new technology, including blockchain.
For distributed ledgers technology to be accepted in the financial services industry, it will need to comply with existing Know Your Customer/Anti Money Laundering regulations.
Some countries, including the United Kingdom, China, and Singapore, have taken a hands-on approach to understanding the new regulatory needs, appointing special task forces to advise the government on its strategy or forming public-private partnerships, while others have adopted an arm’s-length approach, awaiting developments from the industry.
What is it going to cost?
Another critical challenge is the potentially high costs, both financial and organizational, associated with the implementation of blockchain technology, even for a pilot phase.
Companies need to weigh the potential but uncertain benefits that may result from the adoption of blockchain against the present and real costs of testing use cases.
These costs include issues of integration with legacy systems as well as the limited pool of qualified human capital needed to bring a blockchain project to fruition.
Firms in the financial sector are forming consortia with a view to mutualize costs so that the blockchain infrastructure can serve as an interoperable industry utility, yet issues of alignment and conflicts of interest among the various players remain.
These roadblocks, while not insurmountable, indicate that blockchain most likely will not have an immediately disruptive effect across industries. Adoption is likely to be gradual over the next five to ten years, and widespread onboarding will be necessary to attain full economies of scale and leverage the full network effects.
The financial services sector is the first to mobilize in a concerted manner, as they are currently investing and are adopting a try, learn, and adapt approach.