by Don Tapscott
The watchwords are agility, openness, and consensus: identify the work to be done, distribute the load among the people eager and able to do it, agree on their roles, responsibilities, and compensation, and then codify these rights in “explicit, detailed, unambiguous, self-enforcing agreements that can serve as the glue to hold all of the business aspects of our relationships together,” he said. Some agreements pay for performance, others mete out annual salary in ether, and still others are more like “requests for participation” with bounties attached to task completion such as writing a line of code. If the code passes the test, then the bounty is automatically released. “Everything can be surfaced and appropriately transparent. Incentives are explicit and granular,” he said. “This leaves us free to communicate, be creative, and adapt based on these expectations.”
Dare we coin the neologism blockcom, a company formed and functioning on blockchain technologies? That’s the goal, to run as much of ConsenSys as possible on Ethereum, from governance and day-to-day operations to project management, software development and testing, hiring and outsourcing, compensation, and funding. The blockchain also enables reputation systems where members can rate one another’s performance as collaborators, thereby syndicating trust in the community. Lubin said, “Persistent digital identity or persona and reputation systems will keep us more honest and well behaved toward one another.”
These capabilities blur the boundaries of a company. There are no default settings for incorporation. Members of the ConsenSys ecosystem can form spokes by reaching consensus on strategy, architecture, capital, performance, and governance. They may decide to launch a company that competes within an existing market or provides an infrastructure for a new market. Once it is launched, they can adjust those settings.
Decentralizing the Enterprise
The blockchain will reduce friction for companies everywhere. “Lower friction means lower costs as the price of valuable intermediation is determined via the most efficient price discovery mechanism: decentralized free markets. No longer will incumbents be able to leverage legal, regulatory, informational, and power asymmetries to extract far more value from a transaction in their role as intermediary than they add to it,” Lubin said.
Could ConsenSys build some kind of truly decentralized autonomous organization owned and controlled by its nonhuman value creators, governed through smart contracts rather than human agency? “All the way!” said Lubin. “Massive intelligence on a decentralized global computational substrate, an underlying layer, should change the architecture of the firm from a large collection of specialized departments run by humans to software agents that can cooperate and compete in free markets.” Some agents will organize for longer periods of time to serve ongoing customer needs, such as utility and maintenance. Others will swarm around a short-term problem, solve it, and dissolve just as quickly, having served their purpose.
Is there a risk that radical decentralization and automation removes human agency in decision making (e.g., the risk of rogue algorithms)? “I am not concerned about machine intelligence. We will evolve with it and for a long time it will be in the service of, or an aspect of, Homo sapiens cybernetica. It may evolve beyond us but that is fine,” Lubin said. “If so, it will occupy a different ecological niche. It will operate at different speeds and different relevant time scales. In that context, artificial intelligence will not distinguish between humans, a rock, or a geological process. We evolved past lots of species, many of which are doing fine (in their present forms).”
ConsenSys is still a tiny company. Its grand experiment may or may not succeed. But its story provides a glimpse into radical changes in corporate architecture that may help unleash innovation and harness the power of human capital for not just wealth creation but prosperity. Blockchain technology is enabling new forms of economic organization and new portfolios of value. There are distributed models of the firm emerging—ownership, structure, operations, rewards, and governance—that go far beyond enhancing innovation, employee motivation, and collective action. They may be the long-awaited precondition for a more prosperous and inclusive economy.
Business leaders have another opportunity to rethink how they organize value creation. They could negotiate, contract, and enforce their agreements on the blockchain; deal seamlessly with suppliers, customers, employees, contractors, and autonomous agents; and maintain a fleet of these agents for others to use, and these agents could rent out or license any excess capacity in their value chain.
CHANGING THE BOUNDARIES OF THE FIRM
Throughout the first era of the Internet, management thinkers (Don included) talked up the networked enterprise, the flat corporation, open innovation, and business ecosystems as successors to the hierarchies of industrial power. However, the architecture of the early-twentieth-century corporation remains pretty much intact. Even the big dot-coms adopted a top-down structure with such decision makers as Jeff Bezos, Marissa Mayer, and Mark Zuckerberg. So why would any established firm—particularly ones that make their money off other people’s data, operate largely behind closed doors, and suffer surprisingly little in data breach after data breach—want to leverage blockchain technologies to distribute power, increase transparency, respect user privacy and anonymity, and include far more people who can afford far less than those already served?
Transaction Costs and the Structure of the Firm
Let’s start with a little economics. In 1995, Don used Nobel Prize–winning economist Ronald Coase’s theory of the firm to explain how the Internet would affect the architecture of the corporation. In his 1937 paper “The Nature of the Firm,” Coase identified three types of costs in the economy: the costs of search (finding all the right information, people, resources to create something); coordination (getting all these people to work together efficiently); and contracting (negotiating the costs for labor and materials for every activity in production, keeping trade secrets, and policing and enforcing these agreements). He posited that a firm would expand until the cost of performing a transaction inside the firm exceeded the cost of performing the transaction outside the firm.5
Don argued that the Internet would reduce a firm’s internal transaction costs somewhat; but we thought, because of its global accessibility, it would reduce costs in the overall economy even more, in turn lowering barriers to entry for more people. Yes, it did drop search costs, through browsers and the World Wide Web. It also dropped coordination costs through e-mail, data processing applications like ERP, social networks, and cloud computing. Many companies benefited from outsourcing such units as customer service and accounting. Marketers engaged customers directly, even turning consumers into producers (prosumers). Product planners crowdsourced innovations. Manufacturers leveraged vast supply networks.
However, the surprising reality is that the Internet has had peripheral impact on corporate architecture. The industrial-age hierarchy is pretty much intact as the recognizable foundation of capitalism. Sure, the networks have enabled companies to outsource to low-cost geographies. But the Internet dropped transaction costs inside the firm as well.
From Hierarchy to Monopoly
So companies today remain hierarchies, and most activities occur within corporate boundaries. Managers still view them as a better model for organizing talent and intangible assets such as brands, intellectual property, knowledge, and culture, as well as for motivating people. Corporate boards still compensate executives and CEOs far beyond any reasonable measure of the value they create. Not incidentally, the industrial complex continues to generate wealth, but not prosperity. In fact, as we have pointed out, there is strong evidence of a growing concentration of power and wealth in conglomerates and even monopolies.
Another Nobel laureate, Oliver Williamson, predicted as much,6 and pointed out the negative effects on productivity: “Suffice it to observe here that the move from autonomous supply (by the collection of small firms) to unified ownership (in one large firm) is unavoidably attended by changes in both in
centive intensity (incentives are weaker in the integrated firm) and administrative controls (controls are more extensive).”7 Peter Thiel, cofounder of PayPal, wrote in praise of monopolies in his enormously readable and equally controversial book, Zero to One. A Rand Paul supporter, Thiel said, “Competition is for losers. . . . Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.”8
While Thiel might be right about striving to dominate one’s industry or market, he provided no real evidence that monopolies are good for consumers or society as a whole. To the contrary, the entire body of competition law in most democratic capitalist countries derives from a contrary notion. The idea of fair competition dates back to Roman times, with the death penalty for some violations.9 When firms have no real competition, they can grow as inefficient as they want, raising prices in and outside the firm. Look at governments. Even in the technology industry, many argue that monopolies may help with innovation in the short term but may harm society in the long term. Companies may amass monopoly power through cool products and services that customers love, but the honeymoon eventually ends. It’s not so much that their innovations no longer delight; it’s that the companies themselves begin to ossify.
Most thinkers understand that innovation typically comes from the edge of the firm, not from its core. Harvard University law professor Yochai Benkler agrees: “Monopolies may have lots of money to invest in R&D but typically not the internal culture of pure and open exploration that is required for innovation. The Web didn’t come from monopolies; it came from the edge. Google did not come from Microsoft. Twitter did not come from AT&T, or for that matter even from Facebook.”10 In monopolies, layers of bureaucracy distance the executives at the top from market signals and emergent technology at the edges, where companies bump up against one another and other markets, other industries, other geographies, other intellectual disciplines, other generations. According to John Hagel and John Seely Brown, “The periphery of today’s global business environment is where innovation potential is the highest. Ignore it at your peril.”11
Executives should be excited about blockchain technology, because the wave of innovation coming from the edge may well be unprecedented. From the major cryptocurrencies—Bitcoin, BlackCoin, Dash, Nxt, and Ripple—to the major blockchain platforms—Lighthouse for peer-to-peer crowdfunding, Factom as a distributed registry, Gems for decentralized messaging, MaidSafe for decentralized applications, Storj for a distributed cloud, and Tezos for decentralized voting to name a few—the next era of the Internet has real value attached to it and real incentives to participate. These platforms hold promise for protecting user identity, respecting user privacy and other rights, ensuring network security, and dropping transaction costs so that even the unbanked can take part.
Unlike incumbent firms, they don’t need a brand to convey the trustworthiness of their transactions. By giving away their source code for free, sharing power with everyone on the network, using consensus mechanisms to ensure integrity, and conducting their business openly on the blockchain, they are magnets of hope for the many disillusioned and disenfranchised. As such, blockchain technology offers a credible and effective means not only of cutting out intermediaries, but also of radically lowering transaction costs, turning firms into networks, distributing economic power, and enabling both wealth creation and a more prosperous future.
1. Search Costs—How Do We Find New Talent and New Customers?
How do we find the people and information we need? How do we determine if their services, goods, and capabilities are best for us as we seek to bring the tonic of the market to bear on our internal operations?
Although the architecture of the firm is basically intact, the first era of the Internet dropped such costs significantly and enabled important changes. Outsourcing was really just the beginning. Tapping into ideagoras (open markets for brainpower), companies like Procter & Gamble are finding uniquely qualified minds to innovate a new product or process. In fact, 60 percent of P&G’s innovations come from outside the company, by building or harnessing ideagoras like InnoCentive or inno360. Other firms like Goldcorp have created global challenges to search for the best minds to solve their toughest problems. Goldcorp, which published its geological data and talent outside its boundaries, discovered $3.4 billion worth of gold, resulting in a hundredfold increase in the company’s market value.
Now imagine the opportunities that arise from the ability to search the World Wide Ledger, a decentralized database of much of the world’s structured information. Who sold which discovery to whom? At what price? Who owns this intellectual property? Who is qualified to handle this project? What medical skills does our hospital have on staff? Who performed what type of surgery with what outcomes? How many carbon credits has this company saved? Which suppliers have experience in China? What subcontractors delivered on time and on budget according to their smart contracts? The results of these queries won’t be résumés, advertising links, or other pushed content; they’ll be transaction histories, proven track records of individuals and enterprises, ranked perhaps by reputation score. Get the picture? Said Vitalik Buterin, founder of the Ethereum blockchain, “Blockchains will drop search costs, causing a kind of decomposition that allows you to have markets of entities that are horizontally segregated and vertically segregated. That never really existed before. Instead you had kind of monoliths that do everything.”12
Several companies are working on search engines for blockchains, given the potential bonanza. Google’s mission is to organize the world’s information, so it would make sense for it to assign considerable manpower to investigate this.
There are three key distinctions between Internet search and blockchain search. First is user privacy. While transactions are transparent, people own their personal data and can decide what to do with it. They can participate anonymously or at least pseudonymously (anonymity through a false name) or quasinymously (partial anonymity). Interested parties will be able to search for information that users have made open. Andreas Antonopoulos said, “Transactions are anonymous if you want them to be anonymous. . . . but the blockchain enables radical transparency a lot easier than it enables radical anonymity.”13
Many firms will need to rethink and redesign the recruiting process. For example, human resources or personnel staff will need to learn how to query the blockchain with yes/no questions: Are you a human being? Have you earned a PhD in applied mathematics? Can you code in Scrypt, Python, Java, C++? Are you available to work full time from January through June next year? And other qualifications. These queries will scurry about the black boxes of people on the job market and yield a list of people who meet these qualifications. They could also pay prospective talent to place pertinent professional information on a blockchain platform where they can sort through it. HR staff must master the use of reputation systems, moving forward with candidates without knowing anything irrelevant to the job, such as age, gender, race, country of origin. They also need search engines that can navigate various degrees of openness, from fully private to fully public information. The upside is an end to subconscious or even institutional bias and headhunter or executive recruiting fees. The downside is that precise queries lead to precise results. There is less possibility of serendipity, the discovery of a candidate who lacks the qualifications but has great capacity to learn and to make the random creative connections that a firm desperately needs.
Ditto for marketing. Firms may have to pay just to query a prospective customer’s black box, to see whether that customer meets a firm’s target audience. That customer may decide globally to withhold certain data such as gender, because a no answer is still valuable. But in so doing, the firm will learn nothing more about the prospect beyond the yes/no results of the query. Chief marketing officers and marketing agencies will need to rethink any strategy based on e-mail, social media, and mobile marketing: where the infrastructure may lower communications costs to zero, customers wil
l raise costs to a figure that makes reading a firm’s message worth their while. In other words, you’ll be paying customers to listen to your elevator pitch, but you will have tailored your query to pitch only to a sharply defined audience so that you will be reaching exactly the people you want to reach without invading their privacy. You can test different queries to learn about different microniches at every stage of new product development. Let’s call it black box marketing.
The second distinction is that search can be multidimensional. When you search the World Wide Web today, you search a snapshot in time, as indexed over the last several weeks.14 Computer theorist Antonopoulos called this two-dimensional search: horizontal, a wide search across the Web, and vertical, a deep search of a particular Web site. The third dimension is sequence, to see these in the order of uploading over time. “The blockchain can add the additional dimension of time,” he said. The opportunity to search a complete record of everything that ever happened in three dimensions is profound. To make his point, Antonopoulos searched the bitcoin blockchain to find its famous first commercial transaction, the purchase of two pizzas done by someone named “Laslo” for 10,000 bitcoins. “The blockchain provides an almost archaeological record, a deep find, preserving information forever.” (To save you from doing the math, if the pizza costs $5 when $1 was equal to 2,500 bitcoins, that would be worth $3.5 million as of the writing of this book . . . but we digress.)
For firms, this means a need for better judgment: managers need to hire people who have demonstrated good judgment, because there’s no walking back poor decisions, no spinning the order of events, no denying an executive’s disreputable behavior. For really important decisions, firms could implement internal consensus mechanisms whereby all stakeholders vote on mission-critical decisions to end the chorus of ignorance and denial of prior knowledge. Or use prediction markets to test scenarios. If you’re an executive of a future Enron, no scapegoating. As for New Jersey governor Chris Christie, good luck telling a prosecutor that you knew nothing of plans to close the George Washington Bridge.