Blockchain technology proposes to create value by decentralizing the creation,
verification, validation, and secure storage of economic transactions, both within
and between organizations. Since 2015, central banks across the world are
exploring the possibility of issuing money on a blockchain (Del Castillo, 2017).
This could streamline monetary policy implementation at a global level, help
combat counterfeiting and tax evasion, and potentially affect the business models
of retail banks.
While the changes that would result from implementing large-scale blockchain solutions are worth studying in themselves, we also need to gain a deeper
understanding of how these blockchain solutions would be operated and by
whom. Put simply, we need to ask: How does blockchain governance work, and
what are the implications? To answer these questions, we look at the cryptocurrency setting and argue that cryptocurrencies represent the first real-world
instances of blockchain-based
organizations. In this chapter, we thus shift the
level of analysis from the global economy level to the organizational level. Theorists define organizations as “collectivities oriented to the pursuit of relatively
specific goals and exhibiting relatively highly formalized social structures”
(Scott and Davis, 2007: 29), and in the following we use theory on organizational and corporate governance to unpack how blockchain-based organizations
operate.
In the organizational literature, corporate governance is defined as “the study
of power and influence over decision making within the corporation,” which
defines the “rights and responsibilities of […] different stakeholders toward the
firm” (Aguilera and Jackson, 2010: 490). Since cryptocurrencies reside to a large
extent in cyberspace, they are not embedded in the specific institutions of any
one country in particular. As such, for the purpose of this study we treat them as
global organizations (Lee, 2015: 380). We anchor our arguments on the notion
that blockchain represents a new “institutional governance technology of decentralization” (MacDonald et al., 2016: 5) that can be implemented in various ways.
across blockchain-based organizations. We then link these various implementa
–
tions to a measure of organizational value-creation in order to assess their effectiveness for governance.
Cryptocurrencies differ in terms of software design, ownership structure,
decision rights, and degree of decentralization. These variations in governance
design features could have profound implications on investors’ evaluation of a
cryptocurrency’s value, as reflected in cryptocurrencies’ returns on investment.
Indeed, prior research suggests that cryptocurrency returns are driven by much
more than media hype and speculative behavior. Wang and Vergne (2017) show
that the continuous improvement of the technology behind a cryptocurrency is
the primary predictor of price increases (as captured by weekly returns). Thus,
treating cryptocurrencies as traditional currencies or as commodities is misleading, since behind each cryptocurrency, there is a team of people who work hard
to develop the technology. For instance, whereas developers such as programmers and technologists write the blockchain software program, miners validate
and update transactions by devoting computing power to the network. In other
words, cryptocurrencies are best conceived of as a new kind of transnational
organization. Understanding how these organizations then are governed is essential and will help devise formal policy recommendations at a macro level
(Wright and De Filippi, 2015).
Blockchain governance is about determining who has authority (internal and
external actors); how these actors are endowed (e.g., ownership rights vs. decision authority), in what form (formal and informal governance forms/structures),
and at which level (Narayanan et al., 2016). In the context of cryptocurrencies,
whose success relative to one another is captured by superior market returns (a
relative price increase from one period to the next), little is known about how
internal governance (at the blockchain and protocol levels) and external governance (by the broader cryptocurrency community) affect cryptocurrency returns.
Drawing on the corporate governance literature in organizational and management studies, we thus examine the relationship between internal and external
governance design features and cryptocurrency returns.
To shed light on this relationship empirically, we collected weekly panel data
on five cryptocurrencies with varying degrees of decentralization and predict
weekly returns in regression models using a number of governance-level indicators. In line with corporate governance research (Hambrick et al., 2008;
Yermack, 2017), we look at several internal governance design choices: at the
blockchain level, direct control by cryptocurrency owners over the consensus
schemes; at the protocol level, the existence of formal voting mechanisms for
miners to participate in decision-making; at the organizational level, the existence of centralized funding backing the cryptocurrency creators. In addition, in
line with the idea that the media act as agents of external governance for corporations (Aguilera et al., 2015; Walsh and Seward, 1990), we also study the
effects of both social (e.g., Reddit, Twitter, and Facebook) and traditional media
(i.e., mainstream newspapers) governance on cryptocurrency returns, after controlling for a number of factors such as cryptocurrency supply and liquidity. Our findings reveal a paradoxical pattern, namely, decentralization at the
blockchain level affects returns positively – as one would expect, since the
promise of blockchain is decentralization as a way to create value – but we also
find that decentralization at both the protocol and organizational levels affects
returns negatively. This is to say, while decentralization stands as an important
value proposition that provides opportunities for the cryptocurrency community,
this very feature can present challenges for investors. Investors generally value
commercialization opportunities managed by centralized organizations. They
also have more confidence in financing coordinated through centralized funding
as a reliable source to motivate innovations. In this regard, decentralization
brings about different opportunities and challenges for various stakeholders. Not
unlike open source software projects, blockchain-based organizations can also
be governed by decentralized communities, by centralized corporations, or
jointly by both as hybrids. Our findings imply a wide range of blockchain-based
organizational governance design options, which address various implementation settings. This study also highlights the need to investigate novel organizational forms, including “decentralized autonomous organizations” (DAO;
DuPont, this volume). In the following, we review the corporate governance
literature, introduce cryptocurrency and our methodology, describe our analyses,
and finally, we discuss our findings and contributions to the governance
literature.
