Next 20 years: Future governance – decentralised systems and new management

23rd July 2020
How may we govern organisations in the future, and what new organisational models will evolve from an increasingly decentralised yet interconnected world? One possible model, Distributed Autonomous Organisations (DAOs), is built on a distributed ledger that can coordinate tasks, information and resource allocation in an efficient, verifiable and permanent way. This very model is also behind what powers cryptocurrencies, which represent a new breed of organisations without the need for hierarchies. We wanted to find out how this decentralised model might impact organisations. Imperial Tech Foresight reached out to Dr Ying-Ying Hsieh, Assistant Professor of Innovation and Entrepreneurship, to find out more. Her research explores coordination and governance mechanisms within blockchain-based, DAOs. In our conversation, we found out about the potential emerging shifts in organisational design driven by technology and what may come next in trust-based coordination.

Why should society know about your research?

My research revolves around the overarching theme of organisational innovation. Organisations are ubiquitous in today’s capitalist society. If you consider your job, your education and how you manage day-to-day businesses, almost everything is performed by organisations. All of the organisations we daily interact with, large or small, public or private, have a structure of coordination. Yet, we often take these structures and their underlying (centralised) organisational designs for granted. The emergence of digital technologies enables novel forms of organising, which could potentially transform how we interact with the world around us. This very aspect motivates my research, which investigates the nature and implications of innovative forms of organisations. Specifically, I study decentralised autonomous organisations (DAOs)— a structure that allows us to automate decision-making through the use of blockchain*. So, why should society care about these seemingly futuristic forms of organising? Think about how, in the past decade, cryptocurrencies have grown from nothing to such a sizable economy of over $250 Bn—without CEOs, managers and any of the traditional hierarchical organizational components. This is intriguing. Given the ubiquity of organisations, changes to their structures will necessarily impact our lives – our job descriptions, the way we conduct businesses and the way we exchange value and information. On a broader level, the emergence of DAOs implies a potential reorganization of the economy and the society. The potential impact is profound, and this is why as a society we need to understand and explore the implications of these new forms of organisation.

 

Could you give a short description of blockchain and its potential benefits for organisations?

Given blockchain’s ability to disintermediate, when collaborating with one another, organisations can potentially achieve greater efficiency and transparency by adopting blockchain technology. Blockchain is particularly useful for organisations in industries where trust is much needed in the exchange of value (e.g., in the payments industry) or in the exchange of data (e.g., in supply chain management). Similarly, within an organisation, blockchain can potentially help to reduce the number of hierarchies required for internal coordination. The result is a flatter and more decentralised organisational structure.

 

What are some of the assumptions that individuals have about blockchain? 

Launched in 2009, Bitcoin is the first and best-known blockchain implementation. In the early days, blockchain was mainly associated with Bitcoin, a decentralised cryptocurrency without a central bank or administrators. It was used for fraudulent activities and by criminals due to the anonymity in the transactions. Initially, blockchain had a bad reputation. It was viewed as  a good tool, which was being used for the wrong purposes. Fast forward to around 2015-2016, the cryptocurrency industry started to take off rapidly by gaining traction from more reputable players and organisations. Blockchain was further legitimised by financial institutions (e.g., JP Morgan) launching their own cryptocurrencies. Here we began to see a status shift, where the positive features of the technology gained more prominence. 

There are various benefits blockchain technology can offer, such as efficiency in transactions and security of record-keeping through immutability. This means that it is nearly impossible for a bad actor to tamper with a record as it is distributed across a large network of nodes. If you want to change one record, you need to change it across the entire history of the network. These benefits have meant that we have seen a more positive perspective focusing on the innovation opportunities blockchain technology brings to the table. Today, despite concerns around how to regulate and track a blockchain implementation still exist, the rhetoric has largely moved to its unique features and potential benefits.

 

How might organisational culture and trust evolve if we start integrating these technologies?

Based on management literature, we traditionally investigate trust across three categories: relational, institutional and calculative trust. Relational trust is based on interpersonal repeated transactions, e.g. “I trust you because we have done deals before or you have social status in the local community”. As the scope of exchange grows, we need to build this sense of trust amongst strangers, and this is when the need for institutional trust emerges, hence the establishment of banks or other third-based intermediaries. We trust these organisations as they are known, large institutions regulated by governments. And the third category, calculative trust is based on contracts and the execution and enforcement thereof. We trust the contract as it has legal enforcement powers. Those are the three traditional types of trust.

Now, how does blockchain change the way we perceive trust? With this technology, the participants in the network are anonymous, and do not need to know the identity or status of their peers. Therefore, trust is in the network and in the algorithm rather than in each known individual, hence that relational trust becomes irrelevant. For the second layer of trust – the institutions – trust can be partly replaced by the blockchain through disintermediation. The role of financial institutions in securely verifying, validating and recording transactions can be performed by the blockchain. The third part of trust, contracts, can also evolve by the use of blockchain. One can re-design contracts by programming and building a self-executing protocol to be part of the blockchain. These new forms of contract are called “smart contracts” and are a second layer of computer protocol written on top of the base layer of the blockchain code, which is similar to the Bitcoin protocol. These contracts can, therefore, trigger a series of required actions across the exchange process, with the cryptocurrency paying for the contracting services. You would write the definition of the contract onto the blockchain protocol so that it self-executes without the need for a lawyer or a third party. The biggest challenge is to strike a balance between the number of contingencies that can be defined in a contract and the amount of human interventions we still need. It is an aspiration to make these fully automated, but as contracts are never perfect, there will still be a need for human interventions.

 

What needs to happen to accelerate the research on blockchain technology? 

There are different dimensions to this question. On the technical side, there are still a few technological barriers that need to be overcome. For example, a major roadblock right now is scalability, which refers to the capacity of a blockchain in processing transactions. Currently, Bitcoin can process only 4.6 transactions per second, compared to 1700 and 5000 transactions per second by payment companies such as VISA and Mastercard respectively. New technologies have been proposed to improve scalability but consensus is still to be reached on the best solution forward. The second technology limitation is about energy efficiency. Currently, certain cryptocurrencies require that their validators use excessive amount of computing power to compete for the chance to validate transactions. In return, the validator receives the cryptocurrency as a reward for completing “blocks” of verified transactions, which are then added to the blockchain. This process is highly energy inefficient. Alternative validation algorithms have been launched to make network validation more sustainable.

For business, there are other types of challenges related to the integration of the technology. Firstly, how do you create an organisational design that can balance centralisation with decentralisation? As an example, large financial institutions may seek to adopt blockchain technology without necessarily changing their structure. This represents a significant tension, with financial institutions being highly hierarchical, whilst blockchain being a highly decentralised form of organising. We still have not seen a satisfactory solution for resolving this tension between centralised and decentralised structures.

How do you see your research evolving in the next five years?

I started working on blockchain about six years ago, with a focus on intra-organisational coordination within DAOs. Moving forward, governance is an important issue that calls for much academic attention in the blockchain space. By governance, I mean who in this network has power? Who makes decisions on code modifications? Who can vote? Who can join? There is a wide range of design metrics to choose from, but the optimal solution is yet to be found. For example, with delegated voting, participants can assign trusted nodes to carry out validations. However, to what extent can delegation, which is essentially a centralised concept, be performed in a decentralised system? Governance is recognised by the industry experts as one of the most pressing issues to resolve for the technology to advance.

In the long run, I will extend my research scope to study the inter-organisational interaction between different DAOs. That is, if you consider how Ethereum** organises its smart-contracts collaborations with different blockchain startups, at its core, they are offering a decentralised platform to facilitate collaborations with other decentralised organisations. Inter-organisational coordination is intriguing in the context of DAOs as there is minimal level of managerial hierarchies at play. How, then, are inter-operability and alignment between organisations achieved?

All these different types of governance design provide fascinating research themes and intriguing questions for my current and future research. I would be completely contented to keep working on this topic for another decade. Additionally, the prospect of working with industry partners on research to study a decentralised economy in the making is exciting. For the industry, important challenges arise when it comes to application — how does one design a governance system that aligns the interests of different stakeholders?

Imagine the world in 20 years, how do you envisage your research in this field changing over time? What might be different?  What may be the same?

I think in the next 20 years, we will see more blockchain-based coordination and governance modes implemented across different organisations. It remains to be seen whether blockchain adoption follows the adoption trajectory of other technological innovations (e.g., of the Internet). Many great proof-of-concepts will continue to be tested and potentially implemented to replace part or whole organisational and managerial functions. I would be delighted (but not surprised) to see more blockchain DAO projects come to fruition in 20 years’ time.

What will stay the same? Definitely the tension between decentralisation and centralisation. We will also still need to balance the human intervention with the automation aspect. The challenges facing smart contract design will still be there, as contracts are inherently imperfect, and building a self-executing smart contract adds another layer of complexity.

How would you encourage organisations to integrate blockchain technologies into their organisations?

Companies should ask themselves: “Do we need a blockchain? Why?” Fundamentally, blockchain is a governance and coordination technology, whose adoption may require that firms consider necessary adjustments to their own organisation designs.

Dr. Ying-Ying Hsieh is an Assistant Professor of Innovation and Entrepreneurship at Imperial College Business School. With a focus on organization theory and strategy, Ying-Ying’s research unpacks the coordination and governance mechanisms within blockchain-based decentralized autonomous organizations (DAOs).

What about your speculations?

Speculation
When do you think this will be true?