Post-blockchain Smart Contracts Creating a New Firm


The new cryptocurrencies and post-blockchain smart contracts make it possible to leave behind the simplistic finance model of the industrial corporation.

What is still the mainstream model of the firm was born when the typical company owned and operated a manufacturing plant. Entrepreneurial investors put up the capital which was used to build the factory. The initial investors, the shareholders, were the only parties with significant assets tied up and at risk in the enterprise. This is the historic reason why shareholders are the “residual claimants” to the firm’s income. Residual claimant means that the shareholders get their compensation last, if something is left after creditors and employees are paid. Claims by creditors are fixed and employees typically have negotiated compensation principles in advance of doing something. Payments to creditors and employees are thus seen as independent of the performance of the company.

But fewer and fewer corporations actually look and behave like the factory model. Much of the wealth-creating capacity of most modern firms is based on the skills and contributions of the various people involved and the ability of the organization to invite and to put those contributions to work.

According to the industrial-era argumentation, employees are risk-averse, but shareholders are risk-neutral; they can invest in diversified portfolios, meaning that, contrary to workers, they don’t put all their eggs in the same basket. Therefore it makes sense to give employees fixed wages and let shareholders bear the risk of fluctuating returns.

The thinking that was used to explain the balance of rewards between employees and investors in a company also assumes that workers contract for compensation that is roughly the same as they would earn in alternative situations elsewhere and equity holders get to keep the rest.

But what if the future of work looks like a diversified portfolio also for the worker? What if the reality of work today with shorter assignments and diverse gigs were to be incorporated into our financial models?

The decisive difference is that the contributions of post-industrial workers can no longer be understood as (fixed-wage) generic inputs, but can easily be understood as risk investments, in the very same way as we today understand shareholders’ financial contributions. We should now ask whether the current social construct of allocating risks and rewards is inevitable for some reason, or whether it is an outdated industrial artifact that should be redesigned.

Building on the idea that property is really a bundle of rights, Ronald Coase argued that if (property) rights are clearly established and if all parties can contract freely over the use of resources, then those resources will be used efficiently. We can be fairly sure that in the future more people will more often be in a situation where being able to make smart contracts matters. Less efficient (dumb) contracting would accordingly mean sub-optimal use of resources.

Technology does not determine social and organizational change, but it does create new opportunity spaces for new social practices. Some things are becoming much easier than before and some things, such as totally new economic spaces with new contracting rules are becoming possible.

Perhaps startups in the future won’t even seek to create jobs because of their industrial-era nature, but will see themselves as platforms for all kinds of contributions from all over the network they are an active part of.

Our model of industrial management creates a systemic inefficiency in creative, knowledge-based work. It can only be removed if the worker’s role includes a more active responsibility. The change would mean that employees would explicitly bear the entrepreneurial accountability for the success or failure of the companies they work with and benefit from any possible long-term upside, just as shareholders do.

With programmable cryptocurrencies, we don’t need to think that wages and equity are opposite ends of the rewards spectrum. Liquidity and rights for future earnings potential can be coded into compensation principles, into smart contracts.

Smart, programmable money can be both currency and equity at the same time.

By creating and integrating more relationships, the networked business broadens its opportunity space and increases its intellectual capital as the nodes of the network do the same. The zero sum job market changes into a network with increasing returns.

Firms are social and legal constructs. They are what we think firms are. It is time to renew our old construct of the firm as a newer version, a creativity- and innovation-based view of the firm, utilizing the new post-blockchain smart contracts and network effects.

Credits: Akseli Virtanen, Pekko Koskinen, Harri Homi and Margaret Blair

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