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Crypto Transaction Dispute Resolution (54 Pages)

 By Wulf A. Kaal & Craig Calcaterra
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Prof. Wulf A. Kaal, Ph.D.

CraigPic

Prof. Craig Calcaterra, Ph.D. 

 
Abstract
The rapid evolution of anonymous, autonomous, and distributed blockchain-based smart contracting creates friction and enforceability issues with existing legal and jurisdictional principles, calling the future governance of blockchain technology into question. The effective governance of blockchain technology and smart contracting is essential to ensuring its continuing evolution. Based on the mathematical principles underlying the disposition of blockchains, we propose and evaluate an alternative approach to the existing legal exercise of jurisdiction that is inherent in blockchain technology itself. We call this distributed jurisdiction.
 
This contribution is not merely theoretical. Several Ethereum smart contracting crypto startups demonstrate that anonymity can be perpetuated in blockchain technology, despite blockchains’ eternal storage of information and its growing size working against anonymity. Startup applications highlight that the technology itself offers means of internal controls that help ensure effective governance in the continuing evolution of the technology.
 
Based on the concept of distributed jurisdiction, we suggest an open source platform ecosystem for smart contracting dispute resolution that allows users to opt into a conflict resolution mechanism that enables more nuanced crypto solutions and produces greater certainty in the process. Anonymized arbiter expertise via rankings in combination with a representation option for crypto disputes provide a resolution mechanism for legacy businesses that desire to participate in the growth of crypto business opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence.
 
Keywords: Blockchain, Distributed Ledger Technology, Artificial Intelligence, Innovation, Entrepreneur, Start-up, Big Data, Smart Contract, Jurisdiction, Governance, Ties Network, Aragon, OpenBazaar, Ethereum, Platform, Ecosystem, Dispute Resolution, Arbitration
 
JEL Classification: K20, K23, K32, L43, L5, O31, O32
 
Suggested Citation:
 
Kaal , Wulf A. and Calcaterra, Craig, Crypto Transaction Dispute Resolution (June 26, 2017). Available at SSRN:

Smart Contract Dispute Resolution – The Need for an Open Source Blockchain Platform Ecosystem

by Wulf A. Kaal & Craig Calcaterra

Abstract

An open source platform ecosystem for dispute resolution of crypto transactions allows users to opt into a conflict resolution mechanism that enables more nuanced crypto solutions and produces greater certainty for legacy businesses than existing solutions such as the Aragon network or OpenBazaar. The ecosystem provides anonymized arbiter expertise via rankings in combination with a representation option for crypto disputes. It provides an effective resolution mechanism for legacy businesses that desire to participate in the growth of crypto business opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence.

Introduction

Any existing business logic can be coded into a blockchain. Blockchain technology is a computer architecture for an open and secure distributed database. A blockchain, in essence, is an autonomous dynamically growing chain of blocks of encrypted data generated by a decentralized group of users. Most blockchains, such as Ethereum (but not Bitcoin) are Turing complete, or computationally universal, meaning any calculation possible can be simulated within a blockchain design. In other words, blockchain can do what any other computer program can do–from controlling a Mars lander to moderating online competitive video games between Europe and China. Accordingly, any existing business logic can be coded into the blockchain, giving it extremely wide applicability in almost all industries and subject areas.

Because of its very expansive and near universal applicability, it is crucial for the broadening evolution of blockchain technology to find jurisdictional means for the governance of the crypto economy that is facilitated and sustained by blockchain technology. A lack of governance and conflict resolution mechanisms would undermine the democratized trust created by blockchain technology and hinder its broadening evolution and applicability. Jurisdictional means are the basis for effective conflict resolution mechanisms applicable to crypto transactions in the blockchain. Not having the required jurisdictional means necessary for conflict resolution mechanisms for Ethereum blockchain-based smart contracting, may invoke consumer mistrust in the new technology. This can then undermine the evolution of the blockchain-based crypto economy.

Regulatory alternatives for blockchain-based conflict resolution are necessitated by the impossibility of consistently identifying the parties in any dispute in the context of crypto transactions on the blockchain and the associated problems of applying the existing legal infrastructure. We cannot conceptualize opportunities in the crypto transactional universe that could possibly enable and allow a court in the existing legal infrastructure to decide and enforce any disputes between crypto transactional parties. Because of the severity of these challenges for the existing legal and jurisdictional infrastructure, we conclude that the sensible approach for including good governance in crypto transactions necessitates instituting governance solutions inherent in the blockchain technology itself. Accordingly, we introduce the concept of a distributed jurisdiction, which we hereinafter evaluate.

Limited Regulatory Oversight

The regulatory oversight over blockchain-based transactions is severely limited. Courts arguably cannot have jurisdiction over blockchain-based smart contracts because it is unlikely a court could find out who transacted via the anonymized blockchain. Furthermore, the court could not change or otherwise affect the transaction as it was coded because once the coded parameters were fulfilled the transaction auto-executed on the blockchain. Because of automated execution, contractual breach and damages are less likely to occur in smart contracts, especially as compared to traditional contracts.  If a given smart contract transaction disadvantages one of the contracting parties, courts would have to change the blockchain in order to institute remedies in the traditional sense that could pertain to the smart contract in question. However, that scenario is computationally and practically impossible.

Assuming the parties to a given smart contract were known, courts could require the parties to create a new transaction to reverse undesirable outcomes of the coded and executed transaction that was disputed. This is a possible solution because courts are unable to affect the initial outcome of a disputed smart contract transaction. Courts cannot require a retroactive change in the blockchain because that is computationally near impossible. Given that the requirements for a court to exercise jurisdiction over a disputed smart contract are fundamentally different from courts’ jurisdiction over contracts in the existing legal infrastructure, contracting parties would likely second-guess courts’ decisions pertaining to smart contract disputes. In other words, real world court decisions even if attainable may not have the same legitimacy and authority as other intra-blockchain dispute resolution mechanism may have.  In summary, courts would only be able to force the parties to execute a secondary transaction or otherwise pay remedies for a smart contract that created damages for one of the parties. Courts would not be able to actually change or interpret the terms of the given smart contract that was executed according to its parameters and added to the blockchain where it is immutable.

Because of these inherent limitations, courts will generally not be able to effectuate resolutions to disputes arising from blockchain-based smart contracts. Courts do not have the power over the coder and the code that was used by the parties that may have been injured. Courts do not have the authority to dictate to a programmer how, when, and where to change the existing code used by consumers.  Even if courts were given such authority, no programmer so coerced by the court would be able to override the will of the majority of anonymous international blockchain users to make an effective change. Therefore, blockchain-based resolution mechanisms are the only possible recourse for smart contract disputes.

Our proposal for courts to leave dispute resolution to blockchain-based mechanisms is not a mere theoretical postulate. Rather, this need was already introduced in the second and third prongs in Aragon’s whitepaper about blockchain-based solutions for consumers facing code execution problems in smart contracts.

Anonymity of Blockchain Transactions

The lack of identifiable parties in crypto transactions creates a distinct separation between real world and crypto transactions that has lasting implications for the application of existing jurisdictional principles. The aforementioned anonymity gained by the use of public-key encrypted identities and VPNs prevents the identification of the parties to a smart contract.  Without identifiable parties, jurisdictional principles such as subject matter jurisdiction, personal jurisdiction, diversity jurisdiction, and federal question jurisdiction become irrelevant. To illustrate this point, proving personal jurisdiction by means of 1. Physical Presence, 2. Domicile/Place of Business, 3. Consent, and 4. Minimum Contacts becomes impossible as none of these elements are known of the parties in a smart contract. Physical presence is anonymous, as is domicile, consent, and minimum contacts. Subject-matter jurisdiction, e.g. a given court can exercise power over a claim that the laws of the jurisdiction authorize such court to hear, is inapplicable because no given law would be able to authorize such power. But even if a given State or even the Federal Government were to pass a law that would grant such authority to a court, it is hard to see how the court would in fact exercise such authority, short of limiting access to the internet itself.

Not all smart contracts are fully anonymous and untouchable by traditional jurisdictional means. Some smart contracts will not automatically anonymize the parties because there is a physical element to such a consumer contract. For example, a powerful traditional corporation may wish to execute a complicated, non-hostile takeover of another company, using their reputation as leverage. The transparent, public, and perfectly logical structure of a smart contract could theoretically improve communication in such a negotiation. However, many other smart service contracts can be completely anonymous. For instance, a service contract involving services pertaining to cyberspace, such as programming services to create a given webpage, will be completely anonymous. It is important to note that as the technology becomes more widely accepted, such service contracts are going to become a highly important part of any given economy.

Even outside of cyberspace services, it is clearly possible that bounties for anonymous work executed via smart contracts will make traditional service contracts that require personal knowledge and physical appearance redundant. A bounty contract for anonymous work allows an anonymous employer to put a bounty on a given job and offer such a job on an anonymous smart contracting network to an anonymous counterparty. The contract acceptance and performance is dictated to some extent by reputational factors that link the counterparty and the performance under the contract. Part of the value of anonymity in such instances is the clear efficiency advantage. The bureaucracy that attends traditional employment is in this case greatly reduced, if not eliminated.

Enforcement of Smart Contracts

The enforcement of smart contracts with traditional legal means is limited. First, disputing a smart contract with traditional means (in court, arbitration, mediation, etc.) is only marginally possible because of the aforementioned anonymity in blockchain transactions. Moreover, while smart contracts are coded as self-executing contracts, they do not necessarily provide effective mechanisms for enforcement if one party breaches his or her obligations in the smart contract. Semantically, it may be argued that breach of a smart contract is not even possible: the contract simply will not execute if a parameter is not fulfilled.

The literature is split on remedies for breaches of smart contracts. Some argue that because the smart contract replaces the existing legal contract in some circumstances, the smart contract will be governed by the same legal principles as the existing legal contract. Others argue that the breaching party may not live in an area where the courts have jurisdiction, thus the breaching party cannot be liable. In that case, assuming the operator knows the identities of the contracting parties, the operator of the blockchain platform should have a legal obligation to identify who the breaching party was and serve as the counterparty in a dispute scenario.  These experts argue the operator of the blockchain should establish governing rules of the blockchain and specifications for dispute resolution. However, these specifications would have to be disclosed upfront and agreed upon by the parties to the smart contract in order to be enforceable.

Courts may be substantially challenged in interpreting smart contracts. Unlike the interpretation of a contractual dispute in the existing legal infrastructure where courts will assess what the contentious language in a given contract may mean to a reasonable human observer, smart contracts are not coded for a human observer. Rather they are intended for computer programming in a network of nodes (and in the future for artificial intelligence). To the extent that consumers are using smart contracts, the human element may be increased via the coding of graphical user interfaces. The basic premise of smart contracting remains emphasized on computer programming (and in the future artificial intelligence) not human interaction. Because of the emphasis on code for computer programming (and artificial intelligence), courts may not be able to hypothesize a reasonable human’s interpretation of a given smart contract. Courts may also be limited in their ability to consult programmers to interpret the coded language at issue in a given case because the meaning and logical reasoning of coded language is substantially different from human language.

From an evidentiary perspective, it is unclear who would own smart contracting blockchain contributions and whether there would be any applicable protections, such as work product or confidentiality. Without ownership rights for a blockchain transaction, it is also unclear who would be able to claim privileged information or how discovery would operate via existing laws. However, when the parties to a smart contract choose to reveal their identities, arguably privileged information or discovery laws should apply as if it was a written contract despite the fact that the contract was written in code.

Contract law remedies may not apply to smart contracts which raises possible enforceability issues. If a transaction in a smart contract fails to be completed or is partially completed but not added to the blockchain, it is unclear how liability will be allocated if those eventualities have not been accounted for in applicable code. Because of the blockchain’s decentralized nature, it is unclear who or what is accountable and could require regulation. Without solutions for those issues, liability for failed transactions or conflicts between parties have little guidance as to being resolved.

Distributed Jurisdiction

The nature of smart contracting necessitates crypto dispute resolution mechanisms. Problems with smart contracts tend to be two-fold. First, while smart contracts can be coded for and encapsulate a substantial portion of possible breaches of contract, subjectivity in human relationship, bounded rationality of coders and contracting parties, incomplete foresight, incomplete information, and opportunistic behavior will make breaches or other problems in smart contracts inevitable. Second, the first DAO has demonstrated that software and coding bugs will be inevitable in the evolution of the crypto economy. As the existing jurisdictional infrastructure is bound to produce suboptimal results for such crypto disputes, intra-blockchain distributed jurisdictional means are needed.

Our proposal in this paper for a distributed jurisdiction over blockchains has to fulfill two core requirements: 1. The anonymity of blockchain-based smart contracting has to be maintained as the technology evolves. Without anonymity of blockchain-based smart contracting the existing jurisdictional means (in personam jurisdiction) can apply to smart contracting which would undermine the evolution of the crypto economy and make distributed jurisdictional means unnecessary. 2. Distributed jurisdictional means necessitate governance from within the blockchain technology itself to effectively address the problems inherent in blockchain-based smart contracts. Without internal blockchain-based governance, a fully self-sufficient crypto economy may not be possible as legacy systems and governance intermediaries in the existing legal infrastructure will attempt to interfere with crypto transactions, resulting in suboptimal outcomes that cannot be fully resolved in the existing legal infrastructure.

Both requirements for the development of distributed jurisdictional means, full anonymity and intra-blockchain jurisdictional means, can already be accomplished. First, the Ties Network project demonstrates that anonymity can be perpetuated in blockchain technology, despite blockchains’ eternal storage of information and its growing size working against anonymity. Second, the Aragon Network demonstrates that the technology itself offers means of internal controls that help ensure effective governance in the continuing evolution of the technology.

The Need for an Open Source Blockchain Platform Ecosystem for Smart Contract Dispute Resolution

Based on the concept of a distributed jurisdiction, we suggest an open source platform ecosystem of smart contracting dispute resolution that allows users to opt into the conflict resolution mechanisms that enable more nuanced crypto solutions and produce greater (legal) certainty in the process. First, an open source platform based ecosystem for dispute resolution of crypto transactions could help ensure anonymity in blockchain transactions by facilitating anonymity for transaction parties to opt into the platform. Second, the platform would allow users to identify the highest possible expertise of their judges and arbitrators by way of reviewing the record of decisions of their judges across different fora and different types of conflicts. The proposed platform ecosystem would significantly boost consumer confidence in the non-arbitrary and fair resolution of their disputes. Our proposal constitutes an open source ecosystem hybrid that provides effective solutions for the shortcomings in the Aragon and OpenBazaar models.

In contrast with the OpenBazaar solutions, our proposed open source ecosystem allows dispute resolution only if and when a smart contract has resulted in a dispute. This solution ensures that smart contracting transaction costs remain near zero and the cost of paying an arbiter/notary/judge only occurs in cases of smart contract dispute resolution issues which will be a fraction of the overall quantity of smart contracts executed in the evolving crypto economy. As such, our proposal helps stimulate the evolution of the crypto economy. We envision a further improvement in comparison with OpenBazaar’s approach which includes an open review system for evaluating the reputations of arbiters. Arbiters would submit their judgements to the community for review, removing all personal information to ensure anonymity. The community could upvote or downvote such judgments. Arbiters could improve their reputations by submitting comments and counter-judgements for upvotes in an open forum.

This proposal has several benefits that can be distinguished from the Aragon network in several important ways. It involves the same necessarily democratic solution as in the Aragon system, except for several core differences: 1. The cases are not bound to binary decisions (it’s unclear how 5 anonymous judges would collaborate to give a nuanced answer in Aragon). 2. Crowdsourcing the judgments leads to more efficient appeals. 3. Decisions would be open to re-evaluation for all eternity, so the judges’ reputations are subject to a greater ideal than mere contemporary popularity. Further, this approach still promotes the eternal anonymity of parties and arbiters, as judges who revealed private information would be severely downvoted.  Thus, our proposal provides more nuanced and better outcomes with better representation for parties in smart contract dispute resolution.

By way of analogy, just as federal courts in the existing legal infrastructure often provide better outcomes for litigants than state courts, because of the better qualifications of judges and the higher stakes involved, among other factors, our open source ecosystem would allow litigants more choice among dispute resolution mechanisms, enable better representation, and facilitate increased quality of arbiters. For claimants who have an interest in the best possible outcomes and are willing to wait analog times (≈1 month) the platform provides ideal fora to settle disputes.

Legal Equivalence

Stakeholders in legacy systems will likely hesitate transferring their legacy infrastructure businesses, and revenue streams derived therefrom, to an uncertain blockchain infrastructure and crypto systems without significant and sufficiently incentivizing assurances that they are not sacrificing any attained existing legal rights in exchange for smart contract efficiency in a blockchain system. Accordingly, the adjudication, dispute resolution, and enforcement of smart contracting disputes in the evolving crypto economy have to provide equivalent measures that assure legacy businesses that they can operate in crypto systems without a surrender of existing rights.

Legal equivalence can be assured in the implementation and transition phase of the crypto economy via dual integration. Dual integration refers to the use of legacy legal infrastructure in smart contracting dispute resolution, such as via the Ricardian contracts, among other measures, in combination with intra-blockchain systems for the resolution of smart contract disputes.

For participants in the crypto economy who wish to minimize the transaction costs of dual integration and retain anonymity our proposed open platform ecosystem is more likely than all other solutions to provide legal equivalence of dispute resolution mechanisms. Our proposed system would maintain the importance of good education and reputation on the principles of law. Yet, it would still eradicate much of the corrupting collection of power that specialized knowledge and relationships give to analog lawyers.

Anonymous Arbiter Expertise

The platform ecosystem would allow users to identify the highest possible expertise of their anonymous judges and arbitrators by way of reviewing the record of decisions of their judges across different fora and different types of conflicts. We propose using the open and eternal ledger for purposes of listing the following information pertaining to a given decision maker in smart contracting disputes: 1. Contractual Subject Matter, 2. Cases, 3. Decisions, 4. Justifications for Decision, 5. Dicta. Based on such disclosures, we propose an open system that allows comments which could be up-voted or down-voted.

The system allows for the expertise of judges to be determined by anonymous rating systems or anonymous reputational reporting.  In a DAO tokenholders can earn additional tokens by making proposals for the improvement of the DAOs.  If a tokenholder’s proposals was voted in by the DAO community but the tokenholder proponent whose proposal was voted in cannot perform in the implementation of such proposal, such proponent will rarely get a second chance at making and implementing a given optimization proposal. We see our system of anonymous rating for judges as a parallel to the tokenholder voting system for optimization proposals in a DAO. Judges who do not receive sufficient upvotes simply may not get additional chances to work as a judge in a given smart contracting dispute.

To mitigate the inevitable centralization that comes with expert involvement in a decentralized dispute resolution platform and ecosystem we provide several solutions. Because our proposed system is based on upvotes from users who have an interest in the subject, abuse of authority that happens naturally in the non-anonymous world (on mathoverflow among others) would be rather limited if not non-existent. And, crucially important for the success of the system in a legal realm, any abuse of authority would quickly be dis-incentivized by the deluge of downvotes such infamy would bring. Our solution allows anonymous contributors to gain reputation in certain areas of disputes based on whether their opinions are well-received. Such systems already exist in non-dispute resolution contexts. Reputation may also accrue and promote decision makers in dispute resolution by means other than erudition, such as network recognition, connectivity, among others.

Optimized Representation

The open source platform ecosystem of dispute resolution in a distributed jurisdiction also facilitates optimized representation of a given party who in the Aragon system would only informally be able to use lawyers and perhaps would use lawyers from the existing jurisdictional infrastructure. The ecosystem allows for a more diverse allocation mechanism for smart contracts disputes to the most appropriate decision-making body/forum. But also, a platform ecosystem of dispute resolution fora would allow the integration of user representation in a given dispute.

The Aragon network does not facilitate a representation system for dispute resolution. In the Aragon network, a user who wishes to dispute the execution of a contract in the Aragon Network posts a bond and prepares a brief on their argument. Such briefs are not necessarily written by a representative of the user. However, as the stakes get higher in the crypto economy and smart contracting, users may want to seek smart contract representation on their behalf to optimize their chances of success in front of decision makers in their respective disputes. Such representation in the platform ecosystem of decentralized jurisdictions would be enabled. The ecosystem would allow for a matching of representation and dispute resolution fora.

Conclusion

Distributed jurisdictional means for blockchain technology enabled smart contracting provides much needed governance from within the blockchain technology itself. Intra-blockchain distributed jurisdictional means such as via distributed jurisdiction are needed because the existing jurisdictional infrastructure produces suboptimal results for smart contract disputes. Distributed jurisdictional means effectively address the problems inherent in blockchain-based smart contracts. Our proposal in this paper for a distributed jurisdiction over blockchains ensures the maintenance of anonymity of blockchain-based smart contracting as the technology evolves.

Building on the concept of distributed jurisdiction, we propose an open source platform ecosystem for smart contract disputes. Our proposal ensures full anonymity in blockchain transactions by instituting a requirement of anonymity for transaction parties to opt into the platform.  The platform also ensures users can identify the highest possible expertise of their judges and arbiters. Our proposed system maintains the importance of good education and reputation on the principles of an evolving crypto law. Yet, through its anonymization it also eliminates the corrupting collection of power that specialized knowledge and relationships give to analog lawyers.

Implementation of the proposed platform ecosystem for smart contract disputes would significantly boost consumer confidence in crypto transaction through the non-arbitrary, low to no-transaction cost, inducing effective and fair resolution of possible crypto disputes.

For participants in the crypto economy who wish to minimize the transaction costs of dual integration and retain anonymity, our proposed open source platform ecosystem is more likely than all other available solutions to provide legal equivalence of dispute resolution mechanisms. For legacy businesses that desire to participate in the growth of crypto business opportunities, hope to avoid legacy system intermediation and the associated transaction costs, but require legal legacy system assurances and crypto dispute resolution equivalence, our proposed system offers a preferable and indispensable solution. By attracting legacy businesses and instilling confidence in the legal equivalency of dispute resolution in crypto transactions, our proposed solution makes an indispensable contribution to the evolution and significant growth of the crypto economy.

 

Blockchain Technology’s Distributed Jurisdiction

By Wulf A. Kaal & Craig Calcaterra

 

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Prof. Wulf A. Kaal, Ph.D. 

CraigPic

Prof. Craig Calcaterra, Ph.D. 

Abstract

The rapid evolution of anonymous, autonomous, and distributed blockchain-based smart contracting creates friction and enforceability issues with existing legal and jurisdictional principles, calling the future governance of blockchain technology into question. The effective governance of blockchain technology and smart contracting is essential to ensuring its continuing evolution. Based on the mathematical principles underlying the disposition of blockchains, we propose and evaluate an alternative approach to the existing legal exercise of jurisdiction that is inherent in blockchain technology itself. We call this distributed jurisdiction.
This contribution is not merely theoretical. The Ties Network demonstrates that anonymity can be perpetuated in blockchain technology, despite blockchains’ eternal storage of information and its growing size working against anonymity. The Aragon Network highlights that the technology itself offers means of internal controls that help ensure effective governance in the continuing evolution of the technology.

Introduction

Because of its very expansive and near universal applicability, it is crucial for the broadening evolution of blockchain technology to find jurisdictional means for the governance of the crypto economy that is facilitated and sustained by blockchain technology. A lack of governance and conflict resolution mechanisms would undermine the democratized trust created by blockchain technology and hinder its broadening evolution and applicability. Jurisdictional means are the basis for effective conflict resolution mechanisms applicable to crypto transactions in the blockchain. Not having the required jurisdictional means necessary for conflict resolution mechanisms for Ethereum blockchain-based smart contracting, may invoke consumer mistrust in the new technology. This can then undermine the evolution of the blockchain-based crypto economy.

Regulatory alternatives for blockchain-based conflict resolution are necessitated by the impossibility of consistently identifying the parties in any dispute in the context of crypto transactions on the blockchain and the associated problems of applying the existing legal infrastructure. We cannot conceptualize opportunities in the crypto transactional universe that could possibly enable and allow a court in the existing legal infrastructure to decide and enforce any disputes between crypto transactional parties. Because of the severity of these challenges for the existing legal and jurisdictional infrastructure, we conclude that the sensible approach for including good governance in crypto transactions necessitates instituting governance solutions inherent in the blockchain technology itself. Accordingly, we introduce the concept of a distributed jurisdiction, which we hereinafter evaluate.

Lack of Regulatory Recognition

The lack of regulatory recognition of blockchain technology creates uncertainty for the blockchain community. The lacking recognition hinders the implementation of the technology across industries and undermines infrastructure conversion via blockchain technology. The regulatory uncertainty derives from insufficient or non-existent regulatory guidance, sparse court decisions, uncertainty over jurisdiction, and a sense in the user community of interacting in an environment that is generally free of law. As the technology applications grow and the value of crypto currencies rises, the evolution of blockchain-based crypto economy will depend to some extent on users’ trust in the efficacy of blockchain-based dispute resolution mechanisms and the immutability of the technology.

Courts have not yet recognized blockchain technology or addressed legal implications of blockchain-based applications. For the most part, the technology industry agrees that blockchain technology is immutable and secure. However, a review of published court opinions suggests that no court has had to review, assess, or scrutinize the uses and applications of blockchain technology at the time of publication of this article, which creates uncertainty in how courts may perceive and treat blockchain technology.

Some may argue the technology is no different from other virtual technology that courts have evaluated. However, we claim that blockchain technology provides a challenge that is qualitatively different from any other technology that has been brought to traditional courts in the past.

Blockchain ledgers do not exist in a physical sense, and therefore have no specific location. The blockchain is distributed, meaning the nodes in any public blockchain network can be located all over the world. Arguably blockchain transactions can therefore be subject to the legislation of any given node in the network. However, the nodes themselves are autonomously run, extremely redundant, and may be anonymized with encrypting protocols.

Therefore, the infrastructure does not fall under any traditional jurisdiction, but the users of the infrastructure also naturally evade any sense of traditional jurisdiction. All parties may transact entirely anonymously on a public blockchain.

Anonymity of Blockchain Transactions

The lack of identifiable parties in crypto transactions creates a distinct separation between real world and crypto transactions that has lasting implications for the application of existing jurisdictional principles. Every user on a public blockchain is anonymized by the use of public-key encrypted identities. The tandem use of virtual private networks (VPNs) can then prevent the identification of the parties to a smart contract.

Without identifiable parties, jurisdictional principles such as subject matter jurisdiction, personal jurisdiction, diversity jurisdiction, and federal question jurisdiction become irrelevant. To illustrate this point, proving personal jurisdiction by means of 1. Physical Presence, 2. Domicile/Place of Business, 3. Consent, and 4. Minimum Contacts becomes impossible as none of these elements are known of the parties in a smart contract. Physical presence is anonymous, as is domicile, consent, and minimum contacts. Subject-matter jurisdiction, e.g. a given court can exercise power over a claim that the laws of the jurisdiction authorize such court to hear, is inapplicable because no given law would be able to authorize such power. But even if a given State or even the Federal Government were to pass a law that would grant such authority to a court, it is hard to see how the court would in fact exercise such authority, short of limiting access to the internet itself.

Not all smart contracts are fully anonymous and untouchable by traditional jurisdictional means. Some smart contracts will not automatically anonymize the parties because there is a physical element to such a consumer contract. For example, a powerful traditional corporation may wish to execute a complicated, non-hostile takeover of another company. The transparent, public, and perfectly logical structure of a smart contract could theoretically improve communication in such a negotiation. Other smart service contracts can be completely anonymous. For instance, a service contract involving services pertaining to cyberspace, such as programming services to create a given webpage, will be completely anonymous. It is important to note that as the technology becomes more widely accepted, such service contracts are going to become a highly important part of any given economy.

Even outside of cyberspace services, it is clearly possible that bounties for anonymous work executed via smart contracts will make traditional service contracts that require personal knowledge and physical appearance unnecessary. A bounty contract for anonymous work allows an anonymous person to put a bounty on a given job and offer such job on an anonymous smart contracting network to an anonymous counterparty. The contract acceptance and performance is dictated to some extent by reputational factors that link the counterparty and the performance under the contract.

Enforcement of Smart Contracts

The enforcement of smart contracts with traditional legal means is limited. First, disputing a smart contract with traditional means (in court, arbitration, mediation, etc.) is only marginally possible because of the aforementioned anonymity in blockchain transactions. Moreover, while smart contracts are coded as self-executing contracts, they do not necessarily provide effective mechanisms for enforcement if one party breaches his or her obligations in the smart contract. Semantically it could be argued that breach of a smart contract is not technically possible: the contract is entirely coded with mathematical logic and simply will not execute if a parameter is not fulfilled.

The literature is split on remedies for breaches of smart contracts. Some argue that because the smart contract replaces the existing legal contract in some circumstances, the smart contract will be governed by the same legal principles as the existing legal contract. Others argue that the breaching party may not live in an area where the courts have jurisdiction, thus the breaching party cannot be liable. In that case, assuming the operator knows identities of contracting parties, the operator of the blockchain platform should have a legal obligation to identify who the breaching party was and serve as the counterparty in a dispute scenario. These experts argue the operator of the blockchain should establish governing rules of the blockchain and specifications for dispute resolution. However, these specifications would have to be disclosed upfront and agreed upon by the parties to the smart contract in order to be enforceable.

Courts may be substantially challenged in interpreting smart contracts. Unlike the interpretation of a contractual dispute in the existing legal infrastructure where courts will assess what the contentious language in a given contract may mean to a reasonable human observer, smart contracts are not coded for a human observer. Rather they are intended for computer programming in a network of nodes (and in the future for artificial intelligence). To the extent that consumers are using smart contracts, the human element may be increased via the coding of graphical user interfaces. The basic premise of smart contracting remains emphasized on computer programming (and in the future artificial intelligence) not human interaction. Because of the emphasis on code for computer programming (and artificial intelligence), courts may not be able to hypothesize a reasonable human’s interpretation of a given smart contract. Courts may also be limited in their ability to consult programmers to interpret the coded language at issue in a given case because the meaning and logical reasoning of coded language is substantially different from human language.

From an evidentiary perspective, it is unclear who would own smart contracting blockchain contributions and whether there would be any applicable protections, such as work product or confidentiality. Without ownership rights for a blockchain transaction, it is also unclear who would be able to claim privileged information or how discovery would operate via existing laws. However, when the parties to a smart contract choose to reveal their identities, arguably privileged information or discovery laws should apply as if it was a written contract despite the fact that the contract was written in code.
Contract law remedies may not apply to smart contracts which raises possible enforceability issues. If a transaction in a smart contract fails to be completed or is partially completed but not added to the blockchain, it is unclear how liability will be allocated if those eventualities have not been accounted for in applicable code. Because of the blockchain’s decentralized nature, it is unclear who or what is accountable and could require regulation. Without solutions for those issues, liability for failed transactions or conflicts between parties have little guidance as to being resolved.

Distributed Jurisdiction

The nature of smart contracting necessitates crypto dispute resolution mechanisms. Problems with smart contracts tend to be two-fold. First, while smart contracts can be coded for and encapsulate a substantial portion of possible breaches of contract, subjectivity in human relationship, bounded rationality of coders and contracting parties, incomplete foresight, incomplete information, and opportunistic behavior will make breaches or other problems in smart contracts inevitable. Second, the first DAO has demonstrated that software and coding bugs will be inevitable in the evolution of the crypto economy. As the existing jurisdictional infrastructure is bound to produce suboptimal results for such crypto disputes, intra-blockchain distributed jurisdictional means are needed.

Our proposal for a distributed jurisdiction over blockchains has to fulfill two core requirements: 1. The anonymity of blockchain-based smart contracting has to be maintained as the technology evolves. Without anonymity of blockchain-based smart contracting the existing jurisdictional means (in personam jurisdiction) can apply to smart contracting which would undermine the evolution of the crypto economy and make distributed jurisdictional means unnecessary. 2. Distributed jurisdictional means necessitate governance from within the blockchain technology itself to effectively address the problems inherent in blockchain-based smart contracts. Without internal blockchain-based governance, a fully self-sufficient crypto economy may not be possible as legacy systems and governance intermediaries in the existing legal infrastructure will attempt to interfere with crypto transactions, resulting in suboptimal outcomes that cannot be fully resolved in the existing legal infrastructure.

Both requirements for the development of distributed jurisdictional means, full anonymity and intra-blockchain jurisdictional means, can already be accomplished. First, the Ties Network project demonstrates that anonymity can be perpetuated in blockchain technology, despite blockchains’ eternal storage of information and growing size working against anonymity. Second, the Aragon Network demonstrates that the technology itself offers means of internal controls that help ensure effective governance in the continuing evolution of the technology.

Securing Anonymity

The current blockchain characteristics undermine the continuing anonymity of blockchain-based transactions. Anonymity removal in blockchain transactions is a serious problem that in fact undermines the evolution of the technology as it undermines trust in the technology-supported transactions. First, because the blockchain is immutable, blockchain-based transactions will be eternally stored and cannot be removed or deleted. Eternal storage itself works against anonymity. Second, as blockchain-based transactions increase in popularity, the size of the blockchain grows rapidly which will eventually require special equipment that can only be afforded by large corporations in the existing legal infrastructure. With such power for large corporations comes the possibility of dangerous centralization and a threat to undermining anonymity.

Automatic Blockchain Solutions

In a simple sense blockchain technology provides its own solutions for jurisdictional issues, governance, and conflict resolution. Blockchain technology resolves disputes of contracting parties by calculation. If a transaction is invalid it is checked automatically and quickly by any node and ignored. This is the inherent meaning of “self-executing, self-regulating”. If two competing/contradictory transactions are valid, then the system automatically resolves the primacy of one over the other according to computing power. Whichever transaction is embedded in the longer computation chain will have primacy. No decisions can be made once a transaction is added to the network. No governing body currently exists to petition for recourse.

Aragon

Despite the dispute resolution mechanisms embedded in blockchain technology, smart contracting in a commercial setting will eventually require additional dispute resolution mechanisms. Problems with smart contracts are inevitable because of the subjectivity in human relationship, bounded rationality of coders and contracting parties, incomplete foresight, incomplete information, and opportunistic behavior. Such human limitations will eventually make breaches or other problems in smart contracts inevitable, despite coders’ attempts to optimize code in an effort to avoid such human traits in smart contracting. Add software and coding bugs to the human limitations and conflict resolution mechanisms become a necessity in the evolution of the crypto economy.

The Aragon Network already suggests dispute resolution solutions that can help the consumer acceptance of smart contracting and crypto transactions. Aragon will use a form of digital jurisdiction governed by a representational democracy of anonymous judges and regulators, whose power is based on their stakeholder share of the network and supplemented by a reputation system. Whenever a user wishes to dispute the execution of a contract in the Aragon Network, they post a bond (which will be returned if the dispute is decided in their favor) and a brief of their argument. 5 judges who have posted bonds will be randomly selected from all the users of the network. The judges read the litigants’ briefs and issue their judgements. Majority decisions determine the outcome of the dispute. If a judge ruled with the majority, they are rewarded monetarily; if not, they are punished with the loss of their bond. 2 appeals are possible. If either party disagrees with the judgment they may appeal by posting a larger bond with their argument. This opens a prediction market, where any user in the organization may become a judge by posting a bond. The arguments are read and all judges return their verdicts. Again majority determines the result of the dispute, with rewards or punishments for judges are given based on whether they sided with the successful party. The final appeal is made to a panel of 9 “supreme court” judges comprising the most successful judges in the network. A larger bond is posted by the appellant at each stage to prevent the wasting of system resources.

Ricardian Contracts – OpenBazaar

OpenBazaar is a distributed program that provides an online trading platform for any type of merchandise using cryptocurrencies. It does not use a blockchain for its core architecture, but it is a distributed network and all parties and transactions are anonymous. Because of these core elements in the OpenBazaar network we consider it appropriate to compare its dispute resolution mechanism.

The essential ideas of OpenBazaar’s system can be profitably employed on general distributed and anonymous business transaction platforms: 1. If both parties can agree on the type of transaction they are performing before signing a contract, a particular pool of arbiters can be chosen automatically. 2. A pseudonymous web of trust can be implemented to generate reputation for arbiters without compromising anonymity.

A core feature of the OpenBazaar dispute resolution mechanism involves so-called notaries. In the event of a dispute between parties, assuming alternative dispute resolution (ADR) had failed, the system includes a third party – the so-called notary. Users may choose not to involve the notary from the beginning of a transaction, in which case the smart contract has no transaction fees. However, the payment option without notaries involves risk because in that case, no arbitration is possible. The notary’s primary job is to electronically verify the contract has been signed by both parties and funds are available in escrow. Second, the notary verifies both parties are satisfied the terms have been fulfilled, then releases the bitcoin from escrow to the vendor. Finally, in case either party is not satisfied with the transaction, the notary acts as an arbiter in the dispute.

The allocation of notaries to contracts is an important mechanism for comparison of dispute resolution mechanisms. Similar to Aragon, notaries in the OpenBazaar system are generally randomly chosen and allocated to a given contract. However, in OpenBazaar the creators envision assorted pools of private notaries with varying expertise. Parties can theoretically agree which pool of notaries to choose before the contract is signed. This mechanism encourages the development of expertise within the system while satisfying the overarching goal of maintaining the anonymity of vendors and customers, since the details of a dispute are kept secret assuming the professionalism of the randomly chosen notaries.

The anonymity of the notaries is crucial to keep the system secure. Without anonymity, notaries could be coerced into revealing private information revealed in a given party’s case. Therefore, the notary pool is reviewed using a pseudonymous web of trust to determine reputation. Pseudonymity is achieved using public keys.

OpenBazaar provides many benefits to disputants that are not included in the Aragaon dispute resolution approach. Similar to Aragon’s system of appeals, OpenBazaar imagines an appeal system that includes randomly selecting new notaries from the agreed upon pools according to reputation. However, OpenBazaar’s more complex structure giving disputants the power of selecting between notary pools is a clear improvement over Aragon’s method of completely random selection from the entire group of users posting judge bonds. OpenBazaar’s approach naturally encourages notary pools to develop expertise in the various fields of law. Even though there is a chance that disputants’ private information may be revealed in the course of a dispute, the reputation of a notary depends on their professionalism in maintaining the privacy of their clients.

Aragon’s whitepaper is not specific about how much private information is broadcast to the blockchain, but it seems to suggest their judgements have minimal information. In fact, Aragon appears to not even post a summary of their arbiters’ reasoning which may cause the losing party to second guess the legitimacy of the entire dispute resolution mechanism in Aragon.

Limitations of Existing Solutions

Despite its much-needed introduction of dispute resolution and smart contract optimization improvements of the Ethereum network, the Aragon network still encounters several limitations. First, without full and continuing anonymity throughout the crypto evolution, the application and evolution of Aragon’s distributed dispute resolution mechanisms may not be viable in the long run as traditional jurisdictional means would attempt to take over without the assurance of full anonymity in blockchain transactions. Second, the random selection of judges from users of the Aragon network may only limitedly ensure the effective dispute resolution. Over time, users will inevitably demand the highest possible expertise of their judges and arbitrators. Without judge’s expertise in a given smart contract subject matter of a dispute user confidence in effective and fair conflict resolution is undermined which leads to overall less confidence in crypto transactions as a whole and can undermine the evolution of the crypto economy. Third, the democratic decision of a majority of judges giving binary decisions in the Aragon dispute resolution in combination with its judges’ lack of verifiable expertise may undermine user confidence in effective and fair dispute resolution. Fourth, users in the Aragon system would only informally be able to use lawyers or other consultants and perhaps would use lawyers from the existing jurisdictional infrastructure to help optimize their arguments in support of their claims. Support from lawyers trained in the existing jurisdictional infrastructure and without additional training in quantitative science and coding can lead to suboptimal results for transacting parties in smart contracts. Fifth, Aragon does not allow opting into different dispute resolution mechanisms. Only a user of Aragon can use their dispute resolution mechanisms. As other smart contracting platforms are being created, a need for more diverse, nuanced, and effective dispute resolution options emerges.

Several additional factors suggest that the dispute resolution scheme in Aragon could be improved. The random selection of user judges in the Aragon network introduces a level of arbitrariness to dispute resolution mechanisms that many private users but especially larger entities, including corporations in the existing legal infrastructure may not appreciate. Especially the submission of judges to the more popular vote and the economic incentives for judges to follow a more popular vote (in the Aragon system judges keep their bond if they voted with the majority), despite the overall anonymity of the voting, may call required notions of effective, non-arbitrary, and fair dispute resolution mechanisms into question. Users who are dissatisfied with such suboptimal conflict resolution mechanisms may wish to opt into a more nuanced conflict resolution network that helps them ascertain their rights and guarantees balanced outcomes.

Similarly, the OpenBazaar supported Ricardian Contract is subject to multiple shortcomings. Technically OpenBazaar does not use smart contracts. Instead “Ricardian” contracts are used, which have one extra layer of identification between the human-readable version and the code-readable version of the contract. The performance of the Ricardian contract is not always completely self-executing, and hence needs the third-party notary. The primary disadvantage of OpenBazaar’s system, compared with Ethereum’s smart contracts, is this extra layer of verification and the associated transaction fees. Because of these fees, the OpenBazaar dispute resolution mechanism creates substantial transaction costs that can be avoided by pure Ethereum-based self-executing smart contracts. Because every disputable Ricardian Contract has an arbiter/notary connected with them to automatically, check the contract, and hold funds in escrow until the contract is validated, such contracts follow the established legal order for contracting to a significant extent. Despite the clear gains they achieve with distributed, anonymous computing, still significant additional transaction costs remain because of the associated notary intermediator. Smart contracts make such transaction costs unnecessary but need a sound system for dispute resolution which we herein propose.

Proposal for a Distributed Jurisdiction

To address the above limitations, we recommend the creation of a distributed jurisdiction in the blockchain with the following tenets.

First, parties should agree on a pool of arbiters before the contract is signed. Random arbiters are elected from the chosen pool in the event of a dispute. This encourages specialization and the development of expertise within the community of anonymous arbiters.

Second, arbiters within the pool give written summaries of their judgments. Such explanations lessen claimants’ dissatisfaction in traditional courts, and opens the possibility for more nuanced resolutions.

Third, arbiters’ reputations are determined by a pseudonymous upvoting system of their judgment summaries. This may be protected from Sybil attacks by proof-of-timelock protocols and/or representative democracy based on reputation. This quickly improves the expertise of the pools while protecting anonymity, as judgments which reveal private information will be quickly discouraged with downvotes.

Conclusion

This article highlights the need for creating blockchain-based jurisdictional means as a basis for emerging conflict resolution mechanisms. Solutions for the incompatibility problem between blockchain technology and the existing legal jurisdictional infrastructure will evolve with the evolution of the technology itself.

While conceptually we believe in the incompatibility of the crypto evolution via blockchain technology with the existing regulatory infrastructure, it is important to appreciate the many gradations of blockchain technology and its broadening application bases. Given the gradations, it would be imprudent to claim perfect and universal solutions to the incompatibility problem we highlight in this article. Still there are some general principles that are applicable to broad situations.

We recommend the creation of a distributed jurisdiction in the blockchain which includes pools of randomly chosen arbiters based on reputation determined by an upvoting system.

The Need for a U.S. Sponsored Blockchain Platform

We have a problem in the United States: What is needed is the government creating a blockchain platform that crypto startups can build on. Think about historically what the government adoption of the Telegraph or the Railway, among other government initiatives, did for the U.S. economy. Without the legal certainty that the technology is supported, its great potential cannot be realized in the United States. We are partially limited because of our excellence in legacy systems. There may also be fears of loss in employment statistics but all this is all rather short sighted.
 
I see daily how clients/advisees are interested in crypto transactions but are holding back because of lacking regulatory guidance. Were the government to embrace the technology by way of a government sponsored blockchain initiative or platform, the US would undoubtedly become a leader in the crypto economy very quickly. It’s time to embrace Blockchain Technology quickly!!!!
 
Russia and Singapore are already embracing Blockchain technology and Ethereum. If Russia implements Blockchain Technology and Ethereum first, it will gain similar advantages to those the Western countries realized at the start of the internet age because Blockchain Technology may have the same effect on businesses that the emergence on the internet once had — it would change business models and create enormous opportunities for growth.
 
Adoption of Ethereum in Russia has already been brisk also in the private sector: last week, Bloomberg reports that Russia’s state development bank VEB agreed to start using Ethereum for some administrative functions. Steelmaker Severstal PJSC tested Ethereum’s blockchain for secure transfer of international credit letters.
 
See evidence of Russia’s ambitions in Blockchain:    http://www.zerohedge.com/news/2017-06-12/putin-meets-ethereum-founder-create-national-virtual-currency

The “Unmediated” and “Tech-driven” Corporate Governance of Today’s Winning Companies

Full article available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2922176

MARK FENWICK,* WULF A. KAAL,** AND ERIK P.M. VERMEULEN***

Recent corporate governance initiatives encourage a culture of long-term value creation and growth but cannot work as intended by policymakers. The current discussion about corporate governance ignores the transition from a centralized to a decentralized, unmediated, and interconnected world and from a world of vertical hierarchies to a world of horizontal, open, and autonomous networks. This transition process was initiated and is increasingly accelerated by rapid technological change, including developments in social media, blockchain-based smart contracts, decentralized autonomous organizations, big data, and artificial intelligence. This paper shows how policymakers, regulators, business people, consultants, and other corporate governance experts can re-conceptualize corporate governance in a technology-driven and interconnected world.

Keywords: Algorithms, Artificial intelligence, Big data, Blockchain, Board of directors, Communication, Corporate Culture, Corporate Governance, Decentralization, Decentralized autonomous organization, Dialogue, Platform company, Social media, Stewardship codes, Technology, Trust

JEL Classification: C88, D20, D23, F60, G30, K20, K22, L20, L25, L29, O10, O30, O40

Overcoming the Downsides of Corporate Hierarchies – DAO’s Value to Effort Workflow Optimization

Abstract

Traditional hierarchical corporate structures often results in suboptimal outcomes and unsustainable solutions for employees. By contrast, in the environment of decentralized autonomous organizations (DAOs), influence and outcomes are not created by hierarchy but rather determined by the value a token holder contributes to the DAO. This “value to effort focus of work flows” in the DAO structure has the potential to change the way society works and creates outcomes.

Decentralized Autonomous Organization

The first DAO was launched in May 2016, in the founders’ attempt to set up a corporate-type organization without using a conventional corporate structure. The founders’ central idea was that the wisdom of the crowd would lead to smarter and more game-changing investment decisions. The DAO had to operate as a kind of venture capital fund managed directly by the token holders.

The DAO governance structure was built on software, code and smart contracts that ran on the public decentralized blockchain platform Ethereum. The DAO did not have a physical address as it was merely computer code. And it was not an organization with a traditional hierarchy as we know it from traditional corporate structures where authority and empowerment flows downwards from investors/shareholders through a board of directors to management and eventually staff. Indeed, it had no directors, managers or employees. Because a series of smart contracts granted DAO token holders voting rights, the blockchain-based smart contracts imitated the role of articles of association or bylaws. Because the DAO code was open source, the token holders would not only vote on “investment proposals”, but also on any change made to the code. Accepted proposals would also be backed by a software code, defining the relationship (in terms of rights, obligations and performance metrics) between the DAO and the funded proposals.

During a crowdfunding campaign in May 2016, all investors could become a DAO participants by purchasing DAO Tokens. The DAO raised more than $168 million from approximately 10,000 “investors”. DAO Tokens were designed to be fully transferable and tradeable on “peer-to-peer” exchanges, similar to shares in a traditional listed corporation. The automated structure was intended to give “participants” in the DAO direct real-time control over contributed funds. Alas, things went terribly wrong with the DAO. Fundamental flaws in the DAO code enabled hackers to transfer one third of the total funds to a subsidiary account. This hack in combination with additional technological limitations ultimately brought down the DAO initiative. However, new DAOs are being created in the donation context which helps optimize the coding flaws and get the DAO ready for different consumer facing applications in different settings.

Compensation in the DAO Structure

The compensation of DAO members can take two core forms. First compensation of DAO members can be the increases in value of the DAO token the members own. In addition to the token appreciation, compensation for DAO members can take the form of earning tokens by performing tasks for the DAO. In other words, by supporting the DAO achieve its objectives DAO token holders can earn a separate income in addition to token value appreciation.

Compensation in the form of token appreciation originates from supply and demand and liberates DAO members from the shortcomings of existing corporate compensation practices. The compensation afforded to DAO members can take the form of increases in value of the DAO token the members own. Because the total outstanding and publicly held supply of tokens for any given DAO is fully transparent and pre-determined in code, the value of the respective DAO tokens increases with demand. Moreover, because the total supply of tokens is pre-determined in the DAO code, dilution by central administrators such as government officials or self-interested or biased executives/supervisors/CEOs is impossible. Moreover, the alignment of interests between shareholders and management in the existing corporate structures via stock options, among others, and their suboptimal effects on sustainability, reporting, and work environment, is no longer necessary.

The priorities and work schedules of DAO members are not determined in a classical top-down corporate hierarchy. In fact, the traditional forms of command and control, giving and receiving orders does not exist because the functionality of a supervisor, CEO or boss does not exist in a DAO structure. What facilitates the cooperation of DAO token holders is the compensation of DAO members that, in addition to the supply and demand of tokens and token appreciation, can take the form of earning tokens by performing tasks for the DAO. In other words, by supporting the DAO achieve its objectives DAO token holders can earn a separate income in addition to token value appreciation. While token holders in the DAO community may identify DAO requirements or needs, such as for instance a new or optimized webpage that helps the DAO community, such requirements are not identified in the form of a mandate. In other words, no particular DAO member is tasked with performing the identified optimization.

Replacing Corporate Hierarchies

DAO token holders are free from existing corporate hierarchies and their restricting effects. People who work for a DAO are not subject to a supervisor or CEO. Instead, DAO workers work in a dynamic set of working relationships that continuously and dynamically self-organize around projects and outcomes, not corporate hierarchies with implicit hierarchical biases and associated suboptimal outcomes.

Unifying Desire to Optimize DAO Value Replaces Corporate Hierarchies

The core common denominator for all DAO token members is the unifying desire to optimize the DAO structure and the DAO token value. If a member-identified optimization has the potential to make the DAO more meaningful, useful, or valuable to the token holder members, the DAO token holders will desire to perform such optimization tasks as it is in their very interest to do so to help increase the value of the DAO tokens. Accordingly, token holders are determined to increase the value of tokens rather than lower the value. To increase the value of its tokens, members can make DAO optimization proposals, e.g. optimize the voting procedure, webpage etc., that explain what actions ought to be taken to optimize and what value such actions will add to the respective DAO token holder community. The token holder community then votes on a given optimization proposal. If a proposal passes, the proposing DAO member will receive an award in the form of new tokens. Any such payment is added to the respective DAO blockchain but now requires for the proposing token holder to perform on the proposed parameters of optimization. In other words, once the optimization proponent has made a deal with the DAO, it’s in the blockchain and the proponent is required to deliver on the proposal or her contract is cancelled.

Performance assessment in the DAO structure is based on value optimization not on hierarchical or political processes. DAO workers’ performance are assessed in an anonymized proposal voting scheme which is the only basis for assessment and payment. If DAO members perform well, they will get remunerated regardless of politics, background, or education. The only thing that counts for purposes of assessment of DAO works is their performance of optimization parameters. This is an important difference between classical corporate hierarchies and DAO member performance of optimization proposals, e.g. the DAO’s non-discriminatory performance measures.

Non-performance penalties in the DAO structure are free from biases. If DAO community members do not deliver on a proposal that was voted in by the DAO token holder community they lose credibility in the DAO token holder community and may be perceived as lacking an ability to add value. In fact, non-performance on proposal comes with significant reputational penalties. Non performers in the DAO structure will be less likely to have future opportunities to earn tokens because the other token holders are unlikely to approve non performer proposals. Crucially, non-performance reputational penalties are entirely free from racial or cultural biases and associated implications as the token holders are unlikely to even know each other. Rather, they all work towards a common goal of optimizing the DAO and the token value.

The DAO token holders’ focus on adding value benefits all constituents. Because projects that cannot add value take token holders’ time away from more productive endeavors, token holders become focused on managing their time and efforts. Unlike in traditional hierarchical organization where face-time and unproductive meetings are the norm, the self-governing DAO token optimizer avoids any such corporate hierarchy inefficiencies and frees herself from top-down inefficiencies and bad outcomes. In essence, the DAO work proposal and value optimization structure allows the avoidance of bad projects, bad colleagues, and unproductive meetings. The only thing that counts is the value proposition. In other words, the focus shifts from political positioning and supervisor pleasing without performance to a laser sharp focus on adding active value to a given project. If value can be added, the tasks will be performed, if the assessment of the proposal suggests that the value proposition is in doubt token holders will try to spend their time and skills on more productive and value-adding tasks. Importantly, because the DAO structure functions without supervisors DAO token holders who decide they cannot add value on a given task can move to more productive endeavors that better utilize their skills without any penalties that would exist in the traditional hierarchical corporate structure.

Politics in the DAO structure have a different nature compared with traditional hierarchical corporate structures. In a traditional corporate hierarchy, position in the hierarchy and associated authority determine effort. In other word, the supervisor in the hierarchical structure can determine where, what, and when workers have to perform, resulting in suboptimal outcomes, attendance of unproductive and useless meetings, among many other negative effects. By contrast, in the decentralized DAO environment, influence is determined by the value a given token holder contributed to a project’s success.

Value to Effort Focus of Work Flows

The value-focused performance in the DAO structure helps optimize work flows and creates sustainable solutions for DAO token holders. The supervisor in the traditional hierarchical corporate structure can determine where, what, and when workers have to perform, which often results in attendance of unproductive meetings, facetime, support for suboptimal outcomes to please supervisors, among many other suboptimal outcomes. By contrast, in the decentralized environment of decentralized autonomous organizations (DAOs), influence and outcomes are not created by hierarchy but rather determined by the value a token holder’s contributions to a project’s success. Moreover, if a token holder adds substantial value to the DAO, other DAO token holders will want to add their skills in the same context which focuses the token holders’ efforts on the highest possible value proposition. This “value to effort focus of work flows” in the DAO structure has the potential to revolutionize the way society works.

Fiduciary Duties Become Unnecessary

The traditional regulatory infrastructure that attempts to overcome the corporate governance problems associated with the separation of ownership (shareholders) and control (management) relies heavily on fiduciary duties. In the DAO structure such duties are no longer needed. Because of the value to effort focus of work flows in the DAO structure, supervision of management and imposition of legal duties on management is less needed because there are no supervisors. Rather, token holders optimize the DAO together according to their best value propositions in accordance with their unique skillsets, backgrounds, and training.

Conclusion

In summary, DAO token holders have enormous incentives to create value for the DAO based on their respective beliefs and skillsets and not based on expectations of supervisors in traditional top-down corporate hierarchies. In other words, the DAO value creation efforts by DAO token holders is free of implicit biases and cultural norms, helping to create a freer and less unequal society.

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