Exploring the Potential of DAO from a Histological Perspective: From Distributed Systems to European Cooperatives

This article is from medium.com by Markus Büch and compiled by DAOSquare.

In the real world, the legal community in Germany and some DAO-like structured enterprises have long hoped to incorporate the DAO concept into a legal society. Influenced by this, we have developed the idea of exploring the organizational studies related to DAOs.

The concept of DAO is a responsibility obligation. It is not just a new organizational thought but means more. Its goal is to break free from the traditional centralized management controlled by a small number of people, hoping to facilitate a new mode of economic cooperation and participation without capital and power orientation. Next, we will focus on the dominant concept in DLT systems: decentralization. The term "decentralization" itself has no intrinsic meaning, as it was created to contrast with "centralization." Nevertheless, decentralization is still regarded as a pillar of DLT and blockchain systems.

Decentralized Systems

When exploring the concept of decentralization, the technical factors are generally the first focus, such as whether it is manifested in a peer-to-peer network form. The distributed network connection structure consists of nodes across the entire network; although there is no central node, each node is directly or indirectly connected. Ideally, each node is a network participant. Without such a network structure design, it is impossible to talk about establishing a truly distributed system. Therefore, compared to the "client-server" model of a star network, decentralized networks are the functional core components of such blockchain technologies. Of course, there are also network systems in a peer-to-peer form without a central node, such as linear bus systems (BUS) or token-ring structures.

For the prototype Bitcoin, only with the help of a fully meshed network infrastructure can the double-spending problem be solved. The concept and main goal behind Bitcoin do not actually aim to create a decentralized financial system through the establishment of a distributed network structure; rather, it cannot function properly without decentralizing the data. In the process of exchanging electronic or digital information, the data to be transmitted will still be reused; thus, digital transactions are merely a copy-paste process.

Indeed, a truly virtual payment system cannot be established on this basis. A truly innovative payment system can only be realized through systematic replication of digital transmission beyond the scope of copying. At a deeper level, Bitcoin has a fundamental paradox: only when a certain piece of data can be copied and distributed across infinite storage locations can a truly original digital piece of information be created, allowing all participants to understand the principles of network and data distribution. If the above functions can be realized, it will achieve the so-called token economy by creating and transferring virtual assets.

Distributed Systems Are Not Just a Technology

However, the technology of distributed systems goes far beyond merely creating a new database for data distribution. In non-technical aspects, it can even influence the governance structure of traditional companies. Especially for large internet platforms and online businesses, decentralization has greater potential compared to peer-to-peer network structures. In summary, internet platforms operating globally can be seen as isolated large data storage facilities and intermediary institutions that everyone relies on, with their monopolistic information and power concentration viewed as a threat to further social and economic development.

As the concept of Bitcoin has already indicated, a "peer-to-peer electronic cash system" should serve as an alternative to traditional financial institutions, providing users with more freedom. Of course, there is a certain paradox here: to avoid power being concentrated in one participant within the network, each participant must be granted equal power. Naturally, distributed system technology will not affect the current people or objects, but it does help to neutralize power factors. There are two ways to achieve this: in an economic system, the information or data derived from assets must be evenly distributed to everyone, because if everyone has the same rights, no one will depend on another person. If this principle is violated, then rights, property, data, and information will no longer be distributed and provided to anyone else. In short: either everyone owns everything, or no one can own a dime.

Decentralization = X

Defining the term "decentralization" is not easy. This is determined by its inherent characteristics. It is no longer an independent term, as it is derived in contrast to "centralization." Generally speaking, the prefix "De" combined with a noun indicates that the process has been canceled or has never been done. This means that the "process" or "result" has long been centralized. Therefore, grammatically, decentralization is merely the opposite of centralization; in terms of the effects produced by decentralization, it is a reversal of the centralization effect. Thus, this term lacks true meaning. Therefore, anyone who wants to understand the issue of "decentralization" must first understand the structure of "centralization."

From a company's perspective, centralization can be described on one hand as the consolidation or combination of related business activities. On the other hand, centralization can also describe the partial concentration of company assets. Ultimately, decision-making power can be centralized in a single decision-maker—this is the basis of a typical corporate hierarchy. It should be noted that the above aspects are purely economic in nature and also pursue specific goals. For example, the background of task centralization is to avoid redundancy within the company, thereby reducing costs. On the other hand, bundling decision-making capabilities promotes specialization and accelerates the decision-making process. The goal of the enterprise is to reflect its own value by condensing corporate value into a single entity. Furthermore, asset concentration is also a fundamental prerequisite for the formation of independent enterprises. The existence of a legal entity as the carrier of the company is currently an intangible but undeniable fact.

Furthermore, the concentration of company assets into a single corporate entity also has legal considerations, as on one hand, the increase or decrease of shareholder assets is accompanied by the corresponding increase or decrease of their responsibilities and obligations. On the other hand, due to the liquidity of share ownership defined by law, a unified asset platform is easier to use or control. Centralization creates a stable corporate structure and a visible corporate profile. Only in this way can a company participate in market competition with organized human and material resource structures. Ultimately, it can be concluded that in the initial state of entrepreneurship, everyone actually possesses decentralized characteristics, but only through the process of centralization can the current corporate organization be formed.

Centralization is clearly imperfect. When a company is filled with centralized and monopolistic nature, causing other market participants within the economic cycle to become dependent on it, problems arise. Power centers generate gravitational pull like black holes, first disrupting the stability of market structures and mechanisms, and ultimately completely "devouring" them. This development is particularly evident in large internet platforms. It is no longer just a matter of collecting user privacy data. The market power of certain platforms and the resulting influence are increasingly viewed as a threat to the economy, politics, and society. Therefore, in the blockchain community, distributed system technology is seen as an opportunity to counter existing platforms. However, it must be noted that the so-called platform economy in this field has not yet been scientifically developed. There are still many unresolved questions about how platforms work and how network effects are generated. Before declaring war on these platforms, we should take a close look at their unique ecosystems. Large platforms not only have the intermediary function of gaining user trust but also establish highly complex market structures that help coordinate platform users in a complicated manner. Especially when no one truly knows whether decentralized platforms are better, a single technology cannot change the status quo.

Distributed Systems as a Blueprint for Corporate Structure Development

Ideally, the uniqueness of distributed system technology lies in its ability to leverage the advantages of centralization without producing the aforementioned negative effects. The fully meshed network structure and the resulting power structure play a major role. Since the "server" in the middle is omitted, this structure lacks a place where influence can be concentrated. Most importantly, stability and functionality no longer depend on a central point but increase with the growth of network effects and the number of network participants (nodes).

Participants in the DLT field are trying to transfer the decentralized network structures they create into a legal society in various ways. The pioneer in this regard is undoubtedly the Ethereum project, which established the Ethereum Foundation in 2014 (under Swiss law) to absorb payment means generated from collective financing (mainly Bitcoin). The foundation's purpose is "to promote the development of the Ethereum protocol and corresponding technologies, as well as to promote and support the applications using Ethereum technology or protocols." As everyone can see, there is a significant concentration effect accompanying assets, which initially bears little resemblance to previous corporate and organizational structures. However, the foundation is a memberless organizational structure that exists as a legally independent special-purpose fund. It is undeniable that the organization can possess such specially purposed assets because they are part of the general concept of organization.

However, the difference between the foundation and other organizations, especially corporate organizations, lies in the absence of a decision-making body, aiming to constrain assets (ideally) and the immutable structure of the foundation. The principle of the freezing period stipulated by the Foundation Law refers to the fact that the purpose and structure of the foundation are fixed at the time of its establishment, binding all stakeholders, including the founders. Here, we can see its striking similarity to the immutability principle of blockchain or the immutability principle of data contained in the blockchain, which are also immutable. Another common feature is autonomy, which is an inherent legal form of a foundation and every blockchain system. A foundation can develop its own business, forever decoupled from the founders. Similar independence can be found in blockchain systems; once launched, they operate independently of developers, initiators, and all network participants. Foundations and blockchains are striving to achieve a functional autonomous governance system independent of individuals.

In the Ethereum project, the foundation's non-member system is designed to ensure that funds obtained from collective financing are not misused. However, it should be noted that the legal form of the foundation—also applicable in the legal fields of Switzerland and Germany—has an inherent protective flaw due to the lack of a membership mechanism. This is particularly true in the operational field, where such mechanisms are primarily used for controlling the past, so the supervision of the foundation may be quite limited. Therefore, strictly speaking, the risk of founders benefiting from crowdfunding has not been eliminated; it has merely shifted from the decision-making level to the management level.

Nevertheless, the Ethereum Foundation has set a precedent, as the foundation-centered organizational structure has at least created a carrier for DLT and blockchain projects. This organizational design has been imitated worldwide. Particularly in Europe, foundations under Swiss law and the Dutch foundation variant (Stichting) are increasingly being used. However, not all opportunities are the same. Generally speaking, the term "foundation" is also used as a component of a company name (company), even though it is merely a company with a structure similar to a foundation, rather than a true foundation. Therefore, the term "foundation" is only used to evoke certain associations regarding the nature of the organization in the market. The term "fund" is often used for projects involving so-called third-party participants. However, the legal form of a foundation does not default to "non-profit organization." A foundation is a legally independent operating tool for assets and thus also a purely private (asset) permanent preservation tool. Additionally, there are some self-sustaining corporate foundations. At least in the legal systems of Germany and the Netherlands, public interest orientation or charitable purposes are not prerequisites for establishing a foundation. From this perspective, foundations that merely have the appearance of a foundation are unreliable.

Moreover, the shareholder level still exists within organizational structures like foundations, so the existence and purpose of the organization will be influenced by the use of assets. However, even if a "real" fund is used, it does not mean that the interests of third parties are offset. The specific form of the foundation is decisive, as some foundations' laws retain the flexibility for changes that benefit the founders. This makes subsequent modifications to the foundation structure possible—albeit under specific conditions. Article 86a of the Swiss Civil Code (ZGB) is an example of such options. Dutch foundation law is the most flexible foundation law in Europe, providing various options for the construction of foundations according to Article 293 of the BW, allowing founders to protect their influence over the foundation and its assets for a period after its establishment. The end result is that most projects do not know what assets the foundation actually holds. This has also led to a persistent lack of transparency in the foundation industry.

Typically, alongside the foundation, there is another legal entity that operates like an operating company. Depending on the structure, this "sister company" obtains foundation funds for this purpose. In the German legal system, if the structure of the foundation aims to achieve non-profit status under tax law, such transfers are not permitted, as this financing does not belong to the quasi-non-profit status recognized by German tax law (Abgabenordnung).

Hybrid Structures and Ownerless Platforms

Although the above organizational models have little decentralizing effect, and careful study reveals that some design details do not truly differ from traditional corporate structures, they at least point in the right direction on a macro level. However, to create a decentralized corporate organization and provide a real model for these platforms, the use of foundations is one of many options. Below, we provide a conceptual model for a decentralized corporate platform.

Utilizing the currently existing legal environment, we consider advancing through a special combination of foundations and cooperatives. The starting point for this approach is to first divide the rights of existing company assets (for example, in the form of agreements, networks, or other platform infrastructures) into ownership and usage rights. Furthermore, the ownership of these corporate assets is subsequently transferred to the established foundation, while the newly formed cooperative receives the corporate assets (in the form of payments) and can use them essentially for free. The cooperative can thus utilize the transferred assets (agreements, networks, or other infrastructures) for its own business model or provide these assets to its members for their business activities. Since cooperatives are essentially not hierarchical relationships, the members communicate with each other—similar to the basic idea of a peer-to-peer network—as equal organizational participants.

Decision-making in the cooperative is democratically determined by the members, as voting rights do not depend on the capital shares of the members. One of the two organizations, or one of them, can take on the custodial task for further development of corporate assets. However, neither the cooperative nor the members, nor the foundation, can dispose of these infrastructures. This will create an environment similar to the Bitcoin network, simply put, where everyone can use the Bitcoin network, rather than one person owning it alone. Unlike the Bitcoin network, this organization is still organized through a mix of donations and cooperation, thus maintaining a responsible entity. By intertwining their respective management and control entities, a specific governance structure can be established to oversee other organizations or companies regarding the maintenance and use of the infrastructure.

Through the hybrid use of Stichting and European Cooperative (SCE), this model can also be easily implemented for cross-border operations. The advantage of SCE is that it has virtually no formalistic clauses, thus having great potential for digitization. In this regard, Stichting is preferred, as establishing an SCE requires at least two legal entities from EU member states, allowing it to serve as a founding member of a cooperative. Another argument supporting Stichting is that it has a significant degree of inherent freedom in shaping the structure. For example, Dutch entrepreneurial law does not prohibit establishing a foundation for self-serving purposes. This means that, in addition to maintaining corporate infrastructure, the organization structure can also be taxed for statutory purposes. Although this may provoke opposition from some traditional legal formalists, it is ideal for the independence of DLT systems. Dutch foundation law also makes it practically possible to authorize legal entities as management bodies of the foundation. For example, relative to the drawbacks of Dutch foundation regulation (even deficits are regulated), foundations can now establish institutional ticket holders under German law and the supervision of the German Foundation Supervisory Authority.

Conclusion

The idea of decentralized organizations has tremendous innovative potential, and both the business world and organizational law will further develop equally. This effectiveness exists independently of the world of blockchain technology, as the core concept of decentralized organizations is technological neutrality. Of course, it may be that due to being too closely linked to the technical characteristics of DLT structures, its features have not yet been fully depicted. However, DAOs are not merely a vision of peer-to-peer networks. Fortunately, our journey has just begun.