Decentralized organizations and potential issues.
In addition to being able to store funds, smart contracts on blockchain networks can participate in the processes that raise funds and even in the voting mechanisms. This functionality means that on a digital network, there would be no discrimination that may occur during the creation of a regular contract between people or during a voting process when people that can’t get to a polling station or do not have a valid id can’t vote.
Decentralized Autonomous Organizations
Developers on blockchain network can also create organizations the rules of which are described in smart contracts. Such organizations are known as dao or decentralized autonomous organizations, not to be confused with “The DAO,” which was a project on the Ethereum network.
The possibility to create decentralized autonomous organizations can bring true democracy to how people interact with each other because such organizations would have no chief executive officer, no politics and no unexpected changes in rules.
Just like public blockchains do not belong to any person or organization, decentralized organizations on such networks also do not belong to anyone. For this reason, people that buy tokens from such organizations or from a network such as Ethereum do not buy an ownership stake in an organization or network. This is one of the reasons why the Security and Exchange Commission of the United States does not approve of the initial coin offerings and so many organizations do not want United States residents participating in their ICOs. With a typical stock or a share, the party that buys the stock buys the ownership in the company and the company has legal duties to the stock holders as described and enforced by the rules of the Securities and Exchange Commission. With public blockchain networks, there is no ownership, which means there is no compliance with the current rules and regulations.
Potential problems with smart contracts and decentralized organizations
It may seem that decentralized organizations on blockchain networks are a perfect solution to many of the problems that cripple businesses and non-profit organizations today. Decentralized autonomous organizations can have no discrimination, no political games, no corruption, be free and secure.
However, the problem with these organizations is that they are only as good as the code that they run on. In computer terminology there is a phrase “garbage in, garbage out.” This phrase means that a machine can only execute the code it gets. It can’t transform bad code into good code or bad data into good data.
Practically speaking, this means that rules of a decentralized organization can have mistakes and flaws in them. For this reason, even with all the benefits of blockchain functionality, a decentralized organization is only as good as visionaries who have outlined its rules and software developers that turned those rules into computer code. This is also why it still makes sense for many people and organizations to hire legal help when creating smart contracts. A blockchain network does not need an attorney to help monitor and enforce a contract, but people still may need qualified attorneys to explain to them all ins and outs of a contract and help them create contracts covering multiple scenarios that a good attorney will think about and a person not experienced with law may not even know exist. For example, in a partnership agreement these scenarios may include situations in which one of the partners is still getting a salary but stops performing his or her duties or wants to leave the company before a certain previously agreed point such as the sale of the company.
There is another issue that exists with blockchains and smart contracts on blockchain networks.
Changing the rules
Consider the scenario of two people entering in a regular partnership agreement, crafting an agreement on paper and getting legal help going over all the details. In case the parties realize later that they have forgotten something or that they want to change an item in the agreement, they can visit an attorney, make editions to the contract and sign a new version of the contract. This is something that may not be possible with the rules of a smart decentralized organization on a blockchain network.
The problem here is that once such an organization goes live, it may be impossible to change the rules and fix the bugs because nobody owns the organization and nobody is in control. There is no single third party such as an attorney that can make changes and make the changes go live. A human error or failure to foresee a certain scenario may lead to a myriad of problems and issues. Hackers can also look for weaknesses in smart contracts and other code and there may be no way to prevent them from making changes to the code in case they discover vulnerability in the code.
This is the same issue that exists on the Bitcoin blockchain where there is no support and no way of recovery of the funds in case a user sends them to a wrong address. With a regular bank, it is possible to call the bank and reverse the transaction. With Bitcoin, there is no way to do so. There is no phone number to call, no support center, no chatroom where there’s an agent waiting to help users deal with issues they may encounter.