Improving Processes for Business and Stakeholders. What is Decentralized Company and How it Works

April 01, 2019

Most people see STO as just one of the ways to raise funds, but it’s more than just a fundraiser. Issuing a security token you can build a decentralized company. Let’s take a deeper look at the concept of the decentralized company.

Basically, a decentralized company is a business or organization whose decisions can be made electronically by written computer code or through the vote of its members. In essence, it is a system of hard-coded rules that define which actions an organization will take.

How it works

A decentralized company runs through rules encoded as computer programs called smart contracts. It is an entity that lives on the internet and exists autonomously, but also heavily relies on individuals to perform certain tasks that the automaton itself cannot do.

A vital requirement for the existence of the decentralized company is some kind of internal property that is valuable, tokens that can be spent by the organization or used to reward certain activities within it. Secondly, tokens give users their voting rights and possibly the ability to influence the way it operates. The funding takes place directly upon the creation of the organization.

In order to be fully functional, all corporate documents and legal compliance must be implemented into the smart contract. In order to withdraw or move funds from a company, a majority of its stakeholders (this percentage could be specified in the code) must agree on the decision.

DAO

There are different approaches to the concept of a decentralized company. The level of decentralization can be different and decided by the company itself.  Let’s take a look at the concept of Decentralized Autonomous Organization (DAO) where all actions are decided by stakeholders and executed automatically disrupting the traditional top-down management. The concept of DAO has been around the market for a number of years and has a number of followers, but is still rough and it’s hard to imagine a fully working DAO in the current world.

In this system, proposals are the primary way of making decisions. Stakeholder that has a certain amount of tokens has a right to propose any change to the company. To avoid people overloading the network with proposals, a company could require a monetary deposit to prevent people from spamming the network. After submitting a proposal, voting takes place.

Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system, this concept involves a set of people interacting with each other according to a protocol specified in code and enforced on the blockchain.

Drawbacks

The main problem with this concept is its legal status. Currently, the term for such an organization is a “general partnership” which means that every participant is liable for any legal actions and debts the company may face.

Another hardship that arises is the difficulty of changing the code of a DAO or the smart contracts once deployed in the blockchain. On one hand, this is good because one single entity cannot change the rules, but the disadvantage is that debugging cannot be done. This is what happened in the past with The DAO company, attackers slowly drained all funds by simply exploiting a bug in the system.

Communication with the real world can be a problem as well. DAO heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do. In order to hire a contractor, voting must take part. Basically, that means that tokenholder’s participation in the business processes will be bigger than it is in the traditional system. There are both good and bad sides to that, the positive point is that a single person can’t make a decision without having a clearance from tokenholders, but in most cases, a hired professional knows business processes better than an investor.

Our Vision

Due to the problems mentioned above, we believe that full decentralization isn’t possible at the time, but partial automatization and decentralization of processes is needed and legally possible. Stakeholders voting, investor relations, you name it, almost any process can be automated. It works using the same principles using smart contracts and blockchain technology, requires tokens to be operational just like with DAO, the number of processes that will be automated is decided by the company before the funding.

With Tokenomica’s Security Token Issuance Platform, you can manage your companies activities from your account after STO is conducted. Our goal is to help modern companies eliminate excessive paperwork and automate back office. Our platform will allow you to create the code for the execution of your plans and will also automatically create the necessary legal documents that will legitimize the established restrictions, as well as the execution of token holders decisions.

Conduct stakeholders voting, manage dividend payments, prepare corporate documentation, publish P&L statements, annual reports, news and updates directly from your account to your companies dedicated webpage on the platform.

For example, in the traditional system, stakeholders voting process is conducted once or twice a year. The reason for it is that voting has to be conducted at a certain time and place. While in the decentralized model, each stakeholder can take part in a voting process from anywhere.

On our platform, the issuer can customize which actions require the participation of stakeholders and conduct as many votes as needed, requirements are specified in the code of smart contract. These decisions can be:

  • Change the CEO;
  • Dividends payout;
  • Approvement of an annual report;
  • Contract a vendor to get his/her service;
  • Issue the stake to someone because that person/address is adding more value.

The results of these actions will be automatically reflected in the legal documents. The stakeholders, on the other hand, can play a bigger role in the work of the company, along with that they are provided with tools that give them protection from fraudulent activities.