Blockchain-Powered Autonomous Organizations Will Enable New Scalable Business Models
Decentralized and Immutable nature of Blockchains enable creation of Autonomous Organizations using smart contracts. Those Autonomous Organizations in turn enable creation of new scalable and transparent business models that were not possible earlier.
For those who are familiar with the concept of DAO — I am talking about similar concept with few exceptions (a) we would not use cryptocurrency (b) Blockchain-Powered Autonomous Organizations will be subject to a jurisdiction and be in legal compliance within that jurisdiction (c) governance is not just limited voting and (d) compliance is largely automated.
Autonomous Organizations are Self-Governing
Unlike a traditional Enterprise / Corporation, Autonomous Organizations will be governed by its members = peer governance powered by smart contracts.
Decision making structure in an Enterprise is hierarchical with multiple layers of [good or bad] bureaucracy. On the other hand, in autonomous organizations decision making is more democratic — any member can introduce a proposal and other members can vote. Depending on bylaws of the organization (which are coded into smart contracts), the decision gets made based on several voting parameters.
Transparency leads to Trustlessness
Traditional organizational structures such as Partnerships allow peer governed organization models. However, partners in those organizations traditionally work together based on bylaws which (a) typically tend to have lot of legalese that is not well understood (b) as a result are only useful to parties that trust each other.
Smart Contracts running on Blockchain enable these traditional organizations to become Autonomous Organizations by: (a) programming bylaws into smart contracts (b) enabling decision making through member participation(using voting and other decision making methods) (c) storing member participation data securely on the Blockchain. When all these are accomplished, large part of governance becomes transparent and leads to less disputes which in turn will allow people to work in a trustless manner (i.e. no one peer needs to trust another peer in order to participate).
Peer-to-peer organization structures traditionally haven’t been popular because governance was hard, transparency was lacking and trust was necessary to participate. Blockchain and smart contracts remove all those barriers and open up enormous possibilities for New Business Models.
Shareholders = Management; Reduced cost of Management
In a traditional organization such as a Public Corporation, Mutual Fund or a REIT (Real Estate Investment Trust), decisions are largely made by the management and executed on behalf of shareholders — who can merely vote the management in or out on a periodic basis but cannot really influence any decisions or day-to-day operations. Opportunistic managerial behavior in the form of selfish decisions can lead to reduced shareholder returns (referred to as Principal-Agent Problem in Economics). In order to address the Principal-Agent problem, Management needs to be incented to align Management goals with Shareholder goals — which may reduce opportunistic behavior but would not completely eliminate it. In addition, net cost of Management alone could consume a significant percentage of Organizations’ profits.
In a traditional Organization where Shareholders and Management are separate (a) Shareholders have little control over Organizations’ decisions and thus little control over returns on investment (b) Management expense could consume a significant portion of the profits.
In Autonomous Organizations, Shareholders themselves are Managers. Thus, there is neither conflict of interest nor cost of Management.
But we need someone do the work that Management would otherwise do. Right? Shareholders = Managers only works when there is someone to drive decisions and execute on those decisions.
Autonomous Organizations are suitable only for certain cases
Since someone has to do the work, suitability of Autonomous Organizations is limited to cases where (a) shareholders have reasonable knowledge to make decisions (b) enough information is publicly available to shareholders to make decisions (c) execution / operations can either be performed by shareholders or can be outsourced to a third party with reasonable expectations on outcomes.
Autonomous Organizations for Real Estate Investment
At Fracsn, we are building a platform for Tokenized (aka Fractional) Real Estate Investments. So, we considered both “Managed” model and “Autonomous” model and figured that Autonomous model has serious merits and if done right can help us build a highly scalable platform.
- We can use wisdom of crowds and incented experts for property selection. As Real Estate data becomes increasingly public, investors will be able to make independent decisions.
- Property Acquisition and Property Management have become standard processes that do not require whole of innovation or complex coordination.
- Most of the work related to Real Estate Investment can be outsourced to third parties with commoditized skills.
- All other decisions such as rental values, exit timing can be made by shareholders themselves under Blockchain-Powered Autonomous Organizations.
Above all these benefits, no single investor need to worry about Management (or managing entity) making selfish decisions or Management costs being too expensive or Managing Entity ever going out of Business.
Autonomous Organizations = Scalability
When you automate governance and empower shareholders to make decisions — then it is less work and more benefit for both investors and for platforms that empower those investors. That leads to more scalable platforms — thanks to Blockchain and Smart Contracts.
