Bitcoin vs. Firms: The Organizational Nature of Bitcoin
With Bitcoin, Satoshi Nakamoto struck the blow that broke the spine of firms. Modern-day incorporation is on its deathbed, and smart contracts are taking over the throne.
Bitcoin is a decentralized digital currency, meaning that there are no banks or credit card companies involved in the transactions. The technology behind this digital currency makes it even more groundbreaking. Its blockchain technology enables smart contracts. So what exactly is a smart contract, how does it differ from traditional contracts?
The majority of people in today’s society belong to one or another organization. Whether it is a company, a club, or simply being part of a community, people are used to being part of something larger than themselves. There are numerous benefits to being in an organization. Organizations provide:
Organizations also give people a sense of identity and belonging. However, one potential downside of being a part of an organization is that it limits choice. People have to follow the rules and regulations set by their organizations to keep their membership.
The Strengths and Weaknesses of Firms
They also can become more like governments than firms. Additionally, they may stray away from their core values as they grow and focus on issues not relevant to the firm’s mission or purpose.Firms are the most common type of organization they can be for-profit or not-for-profit. They have a clear hierarchy, with a board of directors or trustees who make decisions on behalf of the firm and employees who carry out those decisions.
Firms are good at making large-scale decisions and carrying out complex tasks. They can pool resources, ultimately achieving scale efficiencies. However, it’s also a crucial weakness of firms because the larger they get, the more challenging it is to keep everyone aligned with the mission.
Another vulnerability of firms is that they may lose sight of their initial mission as they grow. Meandering happens when an organization grows too large for the board members to monitor what is happening at all levels.
Firms have a bureaucratic structure with standard operating procedures. It can be a strength because it ensures that tasks go on reliably. However, this can also be a weakness because it can lead to stagnation and a lack of creativity.
The Organizational Nature of Bitcoin
Bitcoin is quite different from firms as it’s not under any centralized control. Instead, it is a software algorithm that is maintained by a decentralized network of computers around the world.
Security and Transparency
Each computer in the network has its copy of the blockchain. Each copy provides an accurate history of all transactions since the beginning. The public ledger of transactions makes it virtually impossible for anyone to modify or forge transaction histories.
Bitcoin has no physical form because bitcoins are just entries in the blockchain ledger. They are more like shares of stock than they are dollar bills. The main difference is that the blockchain ledger records how many bitcoins you own, whereas a company’s shareholder register lists of how many shares of the company you hold.
Trusted third parties like banks or credit card companies don’t process Bitcoin transactions. Instead, computers in this network have to “mine” bitcoins by solving computational puzzles.
These computers are incentivized to mine bitcoins by receiving transaction fees and newly created bitcoins as rewards for their efforts.
These features of Bitcoin make it highly resistant to control by any organization or group of people, which is one of its main appeals. There is no central authority that can be corrupted or shut down.
However, this also makes Bitcoin very different from firms. People do not go to work for Bitcoin to receive income or benefits. They do not earn wages or salaries.
While people can buy bitcoins on exchanges with U.S. dollars or other currencies, their primary motivation is probably the desire to be part of the Bitcoin community and use the currency for transactions.
Enter Smart Contracts
Smart contracts are a recent development that could potentially change the way organizations operate. They are computer programs that automatically execute the terms of a contract, and they deploy on blockchain networks.
For example, suppose you wanted to rent an apartment from someone. You could use a smart contract to agree on the terms and set up automatic enforcement of the terms, including setting dates for:
- Paying rent
- Refunding the security deposit.
Smart contracts typically render the notion of firms redundant and ineffective. Firms exist to coordinate crowdfunding and management of shared resources, but these functions can be handled more effectively and securely through smart contracts.
In addition, firms are often opaque to their customers and stakeholders. Smart contracts are transparent by design because all terms are programmed into the contract and enforced automatically.
Smart contracts could also support other activities such as voting, managing supply chains, and handling logistics.
The possibilities are endless, and we are still in the early days of their development. However, they could reform how organizations operate and eventually lead to a more democratic world.
Why Investors Need Bitcoin to Replace Traditional Firms
The current financial system is centralized and controlled by a few people, making it ripe for abuse and manipulation. We have seen ample evidence of this in recent years.
Bitcoin is a decentralized system, and it is not under the control of any person or organization. Thus, it is more secure and less prone to manipulation. Moreover, Bitcoin is deflationary, meaning that its value increases over time. It’s in stark contrast to the current financial system of inflation.
1. Overcoming International Barriers
Bitcoin is also a global currency that can be used for transactions anywhere in the world. It eliminates the need for traditional firms, which are limited to specific geographic regions.
2. Minimizing Transaction Costs
Transaction costs are also much lower for Bitcoin transactions, especially cross-border transactions that usually require currency conversions and additional fees.
3. Streamlining Decision-Making
There is no need to debate or rely on the collective agreement when making decisions. Stakeholders vote, and the majority wins, eliminating the need for bureaucracy.
4. Creating Incentive Systems for Behaviour Design
Bitcoin allows users to create incentive systems to motivate people to engage in certain behaviours. For example, miners enjoy newly created bitcoins as rewards for their efforts. The same can apply to carbon emissions trading, where businesses can be rewarded for reducing their carbon footprint.
5. Leveraging Intellectual Properties via NFTs
Non-fungible tokens (NFTs) are a recent development that could have a tremendous impact on the management and protection of intellectual properties. They are cryptographic tokens that represent unique items or assets. For example, a music publisher could issue an NFT for a song, sell or license it to others.
It would allow users to securely and transparently track the ownership and usage of intellectual properties.
6. Opening up New Peer-to-Peer Collaboration Opportunities
Bitcoin allows users to create decentralized organizations that collaborate to achieve shared goals. Collaboration can take place across different organizations, countries, and continents without the need for any middlemen.
DAOs could have a significant impact on how business is conducted. For example, an organization that needs help building or designing something could hire someone across the world if they’re willing to work for the right price.
Bitcoin has many advantages over firms. It can be used to overcome international barriers, minimize transaction costs, streamline decision-making, create incentive systems for behavior design, leverage intellectual properties via NFTs, and open up new peer-to-peer collaboration opportunities.