The Next Big Thing: A Robotic ‘Nexus’ of Contracts

robotThe next big wave of innovation to hit the financial world is likely the automation of much of the decision-making one customarily associates with the (human) management of business concerns. A corporation (or other entity) may run itself with only minimal actual human involvement, with an algorithm effectively entering into contracts with its stakeholders.

The DAC is the platonically pure form of one of the dominant theories of corporate law today, the one that treats a corporation as a “nexus of contracts” – contracts with those leasing assets, with those contributing work, or with those offering capital, whether as equity or as debt.

For example, a self-replicating cloud service might contract with buyers of computing services on the one hand and with a range of participating providers (Amazon and others) on the other. There may no longer be much need for human involvement in such a fairly routine middle-critter role. Yet there may still be money to be made in that role. So why not cut out the administrative overhead that humans bring with them and let the Mechanical middle-critter do the job?

Terminology and Transparency

The proper terminology for such entities is much contested. One important theorist in the field, David A. Johnston, thinks the automatic entities ought to be called “distributed apps” or Dapps for short. In a recent publication on the “general theory” of Daps, Johnston and others maintain that such entities “will some day surpass the world’s largest software corporations in utility, user-base, and network valuation.” They also offer a pronunciation guide; “Dapp” is to be pronounced, “dee-app,” after the analogy of “e-mail.”

Other theorists and/or promoters of the idea call such entities “decentralized autonomous corporations” (DACs). Daniel Larimer, one of those who uses that term, agrees with Johnston that transparency is key. It will prevent DACs, or whatever, from pursuing some of the same criminal goals that human-run corporations are sometimes employed to pursue. Larimer says, “Although DACs can still be designed to have a robotically invincible intention to rob you blind, to enter the open source arena they must be honest about their plans to do so.”

The idea behind DACs emerged from ongoing arguments over bitcoin and analogous crypto-currencies. Bitcoin has a block-chain at its heart, that is, an open ledger of every transaction that has been distributed to every node in its ecosystem. DACs could have the same beating sound in their mechanical chests.

Consider again that self-replicating cloud service mentioned above. An automated entity could start with a short list of cloud providers, but over time figure out how to contract with and offer buyers the services of providers beyond that initial list. It could also evolve – again, with only a little human tinkering at the margins – ever more sophisticated ways of marketing its go-between services to either or both sides of the deal. Since every new deal builds upon the state of the “nexus” at the moment the deal was entered into: a blockchain is called for.

Examples?

There seem to be disputes among promoters over whether there are any DACs properly speaking in the world just yet. That depends upon the outcome of definitional contentions of the sort I seek to avoid.

But what is clear is that when this takes off, legal systems themselves will have to evolve to accommodate it. Laws have of course changed to accommodate changing business forms before: the development of LPs, LLPs, LLCs, etc. comes to mind. Laws will change again.

Houman Shadab has given the matter a good deal of thought. Shadab, a professor of law at New York Law School, is also the editor in chief of the Journal of Taxation and Regulation of Financial Institutions. He suggests on his blog that state legislatures enact “Digital Company Enabling Acts.” He has even done some of the drafting for the legislators, awarding a company that “operates primarily on the basis of software code” the same rights and powers as “limited liability companies under the Delaware Limited Liability Company Act.”

How will investors profit from DACs? Well, the algorithm has no desire for money.

 

 

 

 

 

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