The world's most valuable internet companies owe much of their wealth to the networked markets (aka platforms) they have built. Using information technologies, they integrate networks with markets to solve matchmaking and other inefficiencies. They dramatically minimize information-based search and transaction costs, by privately regulating quality standards, manipulating market price structures, and aggregating suppliers. Search ranking algorithms direct you to products, reviews enable you to evaluate products, and your product history feeds into future recommendations. These are the capabilities underlying most of the platforms we use today, from Uber, to Amazon, to Apple's App Store.
So great is the success of networked markets that many predicted the demise of the firm. An unbundling of the firm was prophesied, which we see now in part with the rising gig economy. This hypothesis finds its foundation in the original theory of the firm, which states that firms need only exist when market transactions are costlier than the firm's internal coordination. Introduce new technologies that minimize market transaction costs, relative to the cost of coordinating in a firm, and we theoretically minimize the existence of the firm itself.
However, these theories ignore the firm's unique strengths, which are perhaps not so easily explained by the economics of transactions:
Organizations are not mere substitutes for structuring efficient transactions when markets fail; they possess unique advantages for governing certain kinds of economic activities through a logic that is very different from that of a market.
Firms have an unmatched ability to organize communities of meaning around shared purpose and learning. In fact, it is this strength that traditional firms will have to emphasize in the face of competition from networked production. Firms offer community, stability, and security. Conversely, networked markets are hyper-competitive, erode worker rights, and expose them to short-term income cycles. Could networks be used to optimize firms rather than markets? Might this offer a compelling alternative for today's imperfect networked economy?
To achieve effective coordination, firms must employ managers who can monitor worker loyalty and performance. The boundary of the firm is limited by the decreasing returns to scale of employing more managers, "due to the inefficiencies of centralized control", and ends at the point where the firm's monitoring costs exceed market transaction costs.
Sound familiar? This is the inverse of the original theory of the firm.
By the same logic, new technologies that minimized the cost of monitoring, or unlocked new capabilities for decentralized control, would lead to a rebundling of the firm, a reversal of the networked marketization trends of the last few decades, and the rise of the networked firm.
The networked firm would still be a platform by its architectural nature, i.e. a standardized protocol with parameters that facilitate interdependence between flexible third-party applications. Where the networked firm would differ from the networked market is in programming for the division of labour rather than exchange, enabling flexible production rather than consumption, and optimizing for coordination effectiveness rather than matchmaking efficiency.
This new phenomenon would be enabled by organizational technologies capable of minimizing monitoring costs. These technologies might automate monitoring by recording an organization's activities on a shared ledger and decentralizing control to a network. They might, due to their ability to unlock large-scale online coordination, be described as socially scalable.
These are not hypotheticals. What I'm describing has been realized in perhaps the most exciting use case of blockchain technology: the Decentralized Autonomous Organization (DAO).
The DAO phenomenon is an example of the networked firm in practice. It has been described as an organizational structure with an automated centre (standardized protocol) and human edges. This organization is powered by smart contracts which many believe, due to the nexus of contracts theory of the firm, can replicate the governance capabilities of the firm. For this reason, it has been speculated that blockchains will kill the traditional firm, rendering its boundaries porous and fluid and decentralizing the activities that once resided within its hierarchies.
Organizational Technology (OrgTech)
OrgTech is an emerging blockchain sector that digitizes the firm, unlocking exciting new capabilities for decentralized governance, work, project, and financial management.
Note: In the interest of brevity, I have not listed every OrgTech project. I simply seek to present an introduction to the range of capabilities. Check out a more complete list here.
Work: Token and Reputation Incentives
The first function is enabling organizations to incentivize and measure contributions, by defining tasks as smart contracts which pay out money, ownership tokens, and/or reputation. This is the foundation for an automated peer-monitoring system that distributes control relative to contribution.
- Aragon Projects (Autark) and Rewards (Autark): Enables organizations to allocate bounties to GitHub issues and distribute rewards to highest-earners.
- Bounties Network (ConsenSys): A freelancing marketplace powered by StandardBounties. Currently a networked market, but could lay the foundation for more persistent coordination.
- Collective One: Integrates contribution value accounting with an interface of communication channels, Kanban boards, and docs.
- Colony: Reputation rewarded to contributors based on peer evaluations. Aims to achieve a more meritocratic distribution of control than could perhaps be achieved by ownership tokens alone.
- Covee: Designed to limit free-riding in remote knowledge work by incentivizing voluntary contributions.
- DAOstack: Allocate contributors with reputation tokens based on their proposals to contribute.
- Gitcoin (ConsenSys): The other half of StandardBounties, which integrates with GitHub for more developer-centric bounties. Also with tools for recurring donations and unique (non-fungible) compliment tokens.
- IBM Patent: Patented in July 2018, this system would use smart contracts to track the collective contributions of programmers “for the purpose of credit, reward, and dispute resolution”.
- Tribute: Incentivize community contributions with a new form of equity, which may represent future rewards or profit shares.
Project Management: Directing and Dividing Labour
Extending permissions for smart contract interactions gives contributors the control to create and allocate tasks, essentially managing the strategy and direction of the organization.
- Aragon Token Manager and Permissions: Adjust voting power distributions by minting tokens and set global/local permissions for creating/casting votes, moving finances, and managing apps.
- Colony: The network's task structure is abstracted to allow "manager" roles to be assigned to individuals, multi-signature contracts, autonomous agents, or crowds.
- DAOstack: A prediction market helps organizations to prioritize project proposals, in a system that crowdsources the managerial role.
Governance: Making Decisions and Resolving Disputes
Because tasks are defined as smart contracts, they serve as reference points around which decisions can be made and disputes resolved. According to the property rights theory of the firm, firms exist to give their owners the ultimate authority in disputes with employees, where an equivalent contractor dispute might have been impossible to resolve. Blockchain-based organizations unlock novel incentive structures by distributing ownership, which along with dispute resolution mechanisms enables them to replicate this function of the firm.
- Aragon Voting and Range Voting (Autark): Vote on proposals, with your influence weighted by your token holdings (ownership), or range vote to dictate percentages of allocations.
- Colony: Voting only takes place if peers object to actions and a dispute arises. A permissive system that seeks to limit bureaucracy by localizing decisions to domain expertise. Ownership and control are separated by the measurement of reputation via peer evaluations.
- DAOstack: Seeks to optimize decision-making scalability with a prediction market, wherein members stake on decisions they predict will succeed. Ownership and control are separated by the distribution of non-transferable reputation tokens via proposals.
- Kleros: A dispute resolution service that lets you arbitrate with crowdsourced juries.
- Oath Protocol: Modeled on the common law jury system. Randomly allocates jurors, evaluates them with a credit level, and motivates them with tokens.
Financial Management: Fundraising and Budgeting
Being able to coordinate means nothing if resources aren't available where needed. These tools would empower the crowd to be as effective at fundraising and budgeting as an elite team of financial managers.
- Aragon Finance, Payroll, and Allocations (Autark): Manage an organization's cryptocurrency holdings, make payments/transfers, define persistent salaries, and propose budgeting decisions to be forwarded to the range voting app.
- Colony and BudgetBox: Members with sufficient reputation can allocate funds without voting, as long as there are no objections. BudgetBox enables crowd budgeting, dynamically aggregating financial preferences via pairwise comparison games.
- CONE: Focusing initially on financial management, with tools for internal marketplaces, transactions, and accounting, CONE will eventually enable you to plug other OrgTech modules (and existing ERP systems) into your corporation’s “Collaborative Network Economy”.
- Continuous Organizations: A continuous fundraising alternative to the ICO, which aligns stakeholder interests by setting up a bonding curve contract that manages claims to future cash-flows.
- DAOstack: Funding is requested by proposals, which are then evaluated by the prediction market.
- EthKan: A new funding model in which crowds fund specific tasks in a project's Kanban board.
- Greaterthan Cobudget: Enables members to propose projects and vote on fund allocations.
DAObase is a knowledge base for the Organizational Technology (OrgTech) sector.
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My goal is to foster a community of OrgTech practitioners, so I welcome reader contributions. Email me if you'd like to write a guest post or to highlight anything I should be paying more attention to.
I hope you'll join me in watching this industry blossom.
With thanks for the insights of Dr. Otto Kassi, Dr. Martin Dittus, Odysseas Sclavounis PhD, Laura Fritsch PhD, Andrew Kuznetsov PhD, Theodor Beutel, and the Colony team.