New Corporate Structures on the Crypto Frontier
In our last post regarding the DAOification of companies and their processes, we offered a very cursory overview of how crypto could transform modern businesses. Such a broad description, however, fails to capture the details of such a shift. In examining the small adjustments made possible by blockchain-based smart contracts, novel possibilities for corporate structure emerge. Not all amendments will be groundbreaking, however. Some might continue in a traditional hierarchy with only a few minor efficiencies. Others might flatten this configuration entirely in exchange for agility and flexibility.
An investigation into the various corporate structures possible for both startups and corporations inevitably reveals a quadrant of four principles: centralization vs. decentralization and hierarchy vs. flatarchy. Understanding this matrix will also explain a lot about what a company values, what it incentivizes, and the objectives it is trying to achieve. More importantly, such an investigation will reveal the reasons why companies might integrate blockchain-based technologies.
Taxis and the Military
The United States military is likely the most well-known example of a centralized hierarchy. There is a very strict chain of command that moves from top to bottom. Ideation typically only happens among higher-ranking officers such as starred-generals and admirals. The conclusion of these discussions is then disseminated to lieutenant generals, major generals, colonels, majors, captains, lieutenants, all the way down to privates. With only a few exceptions, after a command is given, little can be done to deviate from this command.
To ensure that a command is fulfilled all the way down the chain of labor, positive and negative incentives exist. The promise of promotion inspires low-ranking officials to perform their duties to the best of their ability. Conversely, the threat of court marshal prevents others from disrupting the plan. In the world of business, such models also exist, albeit are much less extreme. Someone won’t be sent to prison, for instance, for failing to do their job. They might just get fired.
One will rarely find such a clear cut example of a centralized hierarchy, but there are characteristics of the military that many large corporations have adopted. A centralized organization bases its ideation, direction, and communication on a single group or individual. If this organization is a hierarchy, it also usually means that these ideas, direction, and communication are being dispersed from the top down. Decision making is ultimately only happening at the tip of the pyramid.
Taxi services offer an interesting counterpoint to this model. In large cities like New York, London, and Paris, taxis often wait for “commands” from a central dispatch center. Customers call a specific taxi service and the dispatcher announces the pick-up to a fleet of taxis. Some taxis might be too busy, already driving another customer, or are too far away to be of service. Other idle taxis will, therefore, swoop in and claim the pick-up. The taxis that reject the work aren’t fired, they simply miss out on a potential customer.
In both sectors, the centralized organizational model is advantageous, but for different reasons. Much of the information that top generals are exposed to is highly-sensitive. If everyone were to have access to such information, the military would become immediately vulnerable. It also makes executing complex plans across a number of different locations far easier.
Conversely, dispatch centers have a much broader view of a sector and thus can quickly find the first available taxi. This available driver need only follow these instructions to earn more business. This structure is much flatter than a hierarchy as both the driver and dispatch rely on one another equally. Both parties are needed to make a decision, and these decisions can move in both directions freely.
Naturally, these two examples are highly-simplified. A large portion of the modern military does incorporate a number of processes to adjust top-down commands. Similarly, the degree to which an individual owns their own taxi or is part of a private fleet adds a different element to the taxi service example.
The above illustration does, however, highlight the power of Uber and Lyft; these two services have merged the dispatch center with the driver. Dissolving this barrier results in greater efficiency and lower costs. Unfortunately, these additional profits line the pockets of the CEOs and investors rather than the labor that keeps these two companies in operation.
The Rise of the Firm
At first glance, pretty much all major corporations resemble a decentralized hierarchy. Microsoft, Google, Amazon, and many others beyond the world of tech offer numerous products and services.
Naturally, the CEO doesn’t head each of these projects. Each project empowers a middle manager figure to oversee the development of the product or service. They have relative autonomy insofar as the objective is achieved. It is only in the case of grave issues or the conclusion of the project that higher-ups will step in to review.
There are many variations in how this process is managed. The study of such organizational efficiencies has even earned the attention of academic communities all over the world.
The rise of remote work thanks to applications like Slack and the general pervasiveness of the Internet has also stimulated inquiries into more radical models. Lean startups tend to adopt decentralized flatarchies due to low overhead costs and high-quality applications.
This model is also advantageous for smaller organizations that are working through various ideas but have yet to define how these ideas will turn into concrete projects. A decentralized flatarchy allows every member of the organization to propose ideas on how to define and achieve their goals. After the group reaches a certain size, however, this can become difficult to maintain as there will be too many voices contributing to the discussion.
Often is the case that a startup that thrives in this model in the beginning and enjoys growth will need to adopt some features of a hierarchy. In reducing autonomy and implementing mechanisms for inducing change, a firm can operate more efficiently. The trade-off, of course, is agility; large companies, like large ships, typically move too slow to continue capturing a market.
An exceptional case of a large and successful flatarchy is that of Zappos. Although the company is still smaller than Google, at 1,500 employees they have have been one of the first companies to openly adopt a holacracy.
The term falls along the spectrum of decentralized flatarchies in that it replaces the people which make up hierarchies with ideas. Instead of pursuing the objectives laid out by a middle manager, CEO, or a small group of board members, a community will design and pursue the completion of various tasks.
Each member of the community is still responsible for their actions, whether they are good or bad. They are also able to work on whatever project interests them the most. As each individual runs into conflicts or issues in fulfilling one of their roles, they can express these problems to the larger community. With the decision-making process being distributed evenly, better solutions will be ushered in as well. Often CTOs of traditional companies miss out on new tools or opportunities because they are over-reliant on old models or systems. This vulnerability results in other more risk-averse companies adopting newer and sometimes better models.
The feedback loop inspires change and slowly, but surely, the organization adapts and evolves to meet a changing environment.
Just Add Crypto
All of these structures are theoretical models for organizing the social unit that is a business. But as culture begins to adopt more interconnective technologies, these theoretical models may no longer serve emerging trends. Remote work, for instance, is not possible within a number of these models despite its growing popularity and arguable necessity. Often times the highest quality labor isn’t in the same country, and if it is, it usually isn’t priced according to the global market.
Other changes to the nature of work, including the rise of freelancing, project-based work, and contracting all reveal the ways in which technology can scale individual labor by magnitudes. Some individual content creators reach larger audiences than many companies. Startups of five to ten people now have the power to disrupt whole sectors.
These trends are confirmed with the rise of blockchain-based technologies like smart contracts and decentralized autonomous organizations (DAOs). It allows for the same efficiency of centralized hierarchies, but with the agility of a decentralized flatarchy. Large communities can instantiate their ideas in the form of smart contracts and then move at the pace of a freelancer to implement them.
Incorporating a token creates a barrier to entry; in order to participate in the ideation, new users would need to contribute to a treasury of sorts. The exchange would grant incoming users voting power for new ideas. These ideas would result in tasks which users could complete in exchange for the token. Tokens could, in turn, be exchanged for another cryptocurrency, fiat, or used to vote on newer proposals.
The end result is an organizational structure in which every member of the community is a CEO, a middle manager, the labor, and the board of trustees.
Imagine companies as ground-breaking as Uber, but with the added benefit of more equitable working standards. Each member profits from the positive work of every other member. These profits can be exchanged for a greater voice. Thus, those who do the most effective work within a DAO-based company would be rewarded with more influence. Not only that, but this influence would be available to anyone with an Internet connection.
In time, as well as alongside the rapid clip of technical development, these circular meritocracies will begin popping up. They may not replace current organizational structures, but their lessons, both positive and negative, will inspire new businesses never before seen.
If the Internet was the democratization of communication, blockchain technology will surely be the democratization of labor and the future of startups in the Information Age.
