Decentralised autonomous organisations

Previous columns have discussed the impact of technology on law and regulation. For example, one column discussed financial technology, or fintech, and the concept of smart contracts (China Business Law Journal volume 7, issue 8: Fintech and smart contracts). Another discussed cryptocurrencies and the use of distributed ledger technology (China Business Law Journal volume 8, issue 9: Cryptocurrencies). A third discussed artificial intelligence and machine learning in the context of regulatory technology, or regtech, and corporate disclosure (China Business Law Journal volume 10, issue 7: Regtech and corporate disclosure).

This column continues the theme of technology and the law by examining an emerging form of business organisation called decentralised autonomous organisations. In English, these organisations are often referred to by the acronym DAO, which is the pinyin for the Chinese character dao [道], which means the “path” or the “way”, and represents the philosophy of Daoism [道教].

An interesting coincidence can be suggested between this new form of business organisation and the derivation of the character dao [道]. The character dao [道] is a combination of two elements: the character shou [首], which means “head” and the Chinese radical for foot [辶]. Together these elements symbolise the notion that the head and the feet are advancing along the same path.

Similarly, decentralised autonomous organisations can be described as the combination of artificial intelligence, which takes the place of human intelligence (in human heads), and blockchain technology, which records the pathway of transactions and interactions between different parties. Of course, time will tell whether decentralised autonomous organisations end up being the “way” or the “path” for business organisations of the future.

The column commences with a discussion of how decentralised autonomous organisations work. It then introduces a new book on technology and corporate law.

How do DAOs work?

Put simply, DAOs are organisations that are governed by artificial intelligence in the form of smart contracts, and which use blockchain technology to record transactions and interactions with and between their members and third parties.

Under a smart contract, the terms of a transaction are encoded as part of a computer program or algorithm, and are self-executing. In other words, the transactions are executed automatically without the need for human judgment or action. An early example of a smart contract is a vending machine that dispenses drink products. With a vending machine, the terms of a written contract for the purchase of a drink product between the customer and the vendor are replaced by an automatic process. Under this process, the customer’s act of inserting coins and selecting a particular drink product is converted into a product that is delivered to the customer by the vending machine dropping the drink product into the bottom compartment.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s other book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.law.asia. Andrew is currently on secondment to the ALRC as special counsel to assist with its inquiry into corporations and financial services regulation.