A Novel Model of Ethereum Based Corporate Governance

The blockchain technology is not only disrupting the framework of the global economy, but also the legal industry as well. Today, people can engage in business agreements that are based on smart contracts’ code, rather than conventional legislation. As such, if smart contracts’ code acts as law, then code flaws are also parts of the law. Businesses need business minded, detail oriented programmers of smart contracts to permit deployment of the blockchain technology in the legal industry.

A recently published paper proved how a model created on Ethereum’s blockchain can be governed similarly to today’s modern corporations. This model is just a single example of a governing structure among a countless number of possibilities. Such forms of virtual corporations can be formulated by legal personnel to adapt to the needs of their clients. Moreover, blockchain based virtual corporations can greatly minimize the administrative costs via offering directors and shareholders the chance to hold meetings and cast their votes via secure means without having to travel or go through conventional bookkeeping.

So, let’s take a look at the ethereum based corporate governance model presented through the paper:

An overview of the virtual corporation:

The proposed virtual corporation resembles that of a modern corporation. It is worth mentioning that the proposed structure is just a single example of a limitless number of ways via which a DAO can be designed. This model represents a corporate governance framework where shareholders choose the members of board of directors, which then appoints a Chief Executive Office (CEO) who would then be responsible for paying salaries and acquiring property on behalf of the corporation.

This virtual corporation model is coded using ethereum’s object based programming language, known as Solidity, which resembles JavaScript JS. The code written in Solidity will be implemented on ethereum’s testnet via a pre-designed virtual wallet. The virtual corporation will be comprised of three basic elements; shareholders, board of directors and an executive branch.

a. Shareholders:

To create a shareholders’ association, shares have to be created firstly in the form of a cryptocurrency contract. Executing the Solidity code will lead to creation of a basic cryptocurrency that will open up a constructor parameter that will enable the programmer to choose the cryptocurrency’s initial supply. An initial supply of 100 coins was selected and once that contract is implemented on the blockchain, the next step is to create a shareholders’ association using the newly created cryptocurrency in the form of voting shares, or “crypto shares”.

Once the contract is implemented , the last step in the process of creating a shareholders’ association is to transfer the ownership of the shareholders’ association to the contract itself. Once this is accomplished, only crypto shareholders will be able to submit proposals, accept proposals and also execute proposals, vote, change rules of voting and transfer ownership.

b. Board of Directors:

The first step to create the Board of Directors is to transform their votes into a cryptocurrency. Once the cryptocurrency code is executed, the initial supply will be set at eight to represent eight directors on the board. After the contract is executed, the following step is to create a governing body for the virtual board of directors and voting shares will be sent to the eight members of the board to the address of the virtual shareholders’ association; this will give the shareholders’ association the ability to issue voting rights for any addresses they choose. Practically, one vote will be appointed to eight wallet addresses, that represent the board of directors.

An important issue is that the board of directors will be unable to delegate tasks to certain committees. To overcome this, special committees can be organized into what is known as “Liquid Democracies”. The code of Liquid Democracy can give the virtual board of directors the ability to delegate their votes to other directors, who can cast their votes on the virtual board’s behalf.

c. Executive Branch:

As we mentioned earlier, a special committee of the Board of Directors can elect an executive via Liquid Democracy’s code. The special committee can be assigned a yearly budget by the board of directors, then delegate the responsibilities regarding how this budget should be spent to a single member of the board who can act as the corporation’s Chief Financial Officer (CFO) who can hire other executives and provide them with incentives. Whenever the CFO misappropriates the corporation’s funds, the board of directors can fire him/her and select a new delegate.