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Julian G. Pennington

Professor Bhargava

MGMT 6: Business Ethics

8 November 2018

Cryptocurrency and the DAO Problem: Blockchain’s Responsibility Sink

Blockchain technology deserves recognition as one of the most precocious systems of the

21st century--even Bitcoin alone, which is tean years old as of October 31st, could certainly

podium for a top spot. Even after the cryptocurrency frenzy of last year died down in spectacular

fashion, blockchain has made billions of dollars for crypto startups, blockchain users, and

speculators alike; however, in this frenzy of .com-boom financial alchemy, many often overlook

blockchain’s inherent structural and legal limitations, which beget massive future ethical issues

and ensuing loss of faith in what is otherwise a revolutionary system.

In this paper, I will argue that that the implementation of decentralized autonomous

organizations and the resulting automation of corporate governance, retained earnings,

management, compensation and so-on, would allow companies to be considered persons which

would in turn create moral hazard (1) due to the decentralized autonomous organization nautre to

defer blame upon itself over the otherwise responsible individuals and (2) the potential for that

deferred blame to stifle progress. The two articles that will be fundamental to my argument are

Peter A. French’s “The Corporation as a Moral Person” and Manuel G. Velasquez’s “Why

Corporations Are Not Morally Responsible for Anything They Do”.

Prior to diving into the main argument of why using decentralized autonomous

organizations (DAO) poses a moral issue, it is important to understand exactly how this idea was
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conceived, its intended potential benefits, and the various ways it manifests itself within a

company. Fundamental to the function of blockchain is decentralization; open ledgers, nodes,

smart-contracts, transfers--all essential characteristics and capabilities of blockchain

cryptocurrencies. However, some hard rules must be emplaced in order to facilitate the smooth

function of any system--let alone a technology as modular as blockchain.

Now. Hard-coding rules exists across a spectrum in cryptocurrencies. In the first

category, comes technologies developed for value transfer--currencies. These would fall on the

less DAO-intensive end of cryptocurrencies, wherein miners solve complex mathematical

problems to create coins; transfers are verified within a matter of minutes and held on an open

ledger; and “forks” result in either split consensus or a change in protocol. Cryptos that function

as such are generally used for speculative purposes or for value transfers (as money). DAOs are

used, but moreso as a passive part integral to the proper functioning of the cryptocurrency.

The second category of hard-coding rules--which I will focus on--regards the intensive

use of decentralized autonomous organizations that are either used as an asset management tool

or as an upper-level managerial system. These more involved issues are developing as DAOs are

versatile and can be easily applied to any business with the added benefit of confidentiality as no

person would ever manage or even necessarily have access to whatever information the DAO is

working with. Furthermore, DAOs have the added benefit of being bound to hard-coded rules for

investor compensation and managing corporate events.

While DAOs have technical benefits, there are certain technical deficiencies that later end

up playing into ethical issues. One such issue is that DAOs facilitate democratic corporate

governance wherein investors may vote on corporate events with their coins; but voting is
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contingent on users actually voting, which means lower standards to participation; crypto

scientist Dominic Williams confirms by stating:“it is therefore possible that when voting on

proposals commences, support of only 4.3% will be needed to trigger a $10MM payout and

support of only 19.2% will be needed to trigger a $100MM payout” (Williams, Dominic). Poor

voter turnout and voting through equity in a perfectly anonymous, decentralized system is

concerning--but that is the topic of an entirely different paper that I plan on writing. Although,

such low involvement thresholds for critical decisions certainly augments all of the issues I

highlight in my argument. Now that I have given some technical background, I will start picking

apart the specific moral and ethical hazards of DAOs.

In “The Corporation as a Moral Person”, Peter A. French’s argument for why

corporations can and should be held morally responsible is proofed by the concept of a

Corporation’s Internal Decision​ Structure (CID), which is “the requisite redescription device

that licenses the prediction of corporate intentionality” (French, 211). Within the CID, French

focuses on “(1) an organizational or responsibility flow chart that delineates stations and levels

within the corporate power structure and (2) corporate decision recognition rules” (French 212).

Although traditional corporations are a collection of individuals, and therefore cannot be

considered persons, DAOs do fit the CID requirement pretty well. They are autonomous, for one;

although they are not “AI” or “intelligent”, DAOs certainly have intentionality to decide in a

certain direction and possess an inherent i.e. corporate decision recognition rules are a

fundamental aspect to DAOs. Furthermore, DAOs possess the ability to both act as the

organizational or responsibility flow chart and create a corporate power structure. However, my

reasoning only goes so far to understand the fundamentals of DAOs, but it does not clarify the
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scope of applications that DAOs may cover and what ethical issues might arise from them. For

this reason, a hypothetical example would certainly be conducive to understanding the potential

dangers of DAOs better.

Since reading Brennan and Jaworski’s “Markets without Symbolic Limits”, I have found

myself very interested in the prospect of Policy Analysis Markets (PAM), which the writers use

in one of their examples of perceived-to-be morally dubious markets. It seems as if PAMs were

made for blockchain because of their ability to circumnavigate any accusations of “betting” on

global events and also leverage the wisdom of the masses. Moreover, the use of a DAO per

global event or outcome would allow for traders to buy equity within the DAO i.e. a company

that represents that event or outcome. Again, for example, my hypothetical company Pennington

Predictive sets up a token and a matched DAO on the Ethereum blockchain to represent the

binary event of terrorist attack in Paris, France that kills more than 100 people by January 1st,

2020. Then, the DAO manages call options and put options, wherein the “coins” or “tokens” act

as option premiums as to yes or no regarding the market, respectively. Such an inherently

intelligence-heavy market would incentivize the collection and interpretation of data, for

example, regarding the ​real​ terrorist threat level in France, Europe, and globally. This would be

highly illegal if a company were to issue a traditional security similar to mine, as this would be

considered gambling on global events and even the death of other. However, in Pennington

Predictive case it is not “gambling” in the technical sense as the option premium simply

represents the body of the buyer’s information regarding all the factors that play into the

event--in other words, the token is a reflection of the buyer’s research and intelligence efforts on

the topic at hand.

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Then, let us say that on October 27th, 2019, there is a terrorist attack in Paris that kills

157 people. Horrible. The DAO automatically compensates those who believed that the event

would happen by the difference of the buy-in value to the pre-event value of the underlying coin

(asset). Perhaps even the terrorist who committed the atrocious act bought “yes coins” for the

event, and it is therefore clear that in this case the DAO’s prediction market is neither an accurate

nor fair representation of global information on the event at hand. The terrorist has the right to

gain $100,000 on a $5,000 option premium. Automatically.

Yet Pennington Predictive cannot do anything to change the compensation as the DAO

has done it automatically and irreversibly. Who is held responsible? Certainly, the terrorist is

literally responsible both physically and morally. The government and public might point to

Pennington Predictive as behaving morally corrupt and ultimately morally responsible for

creating a predictive market--DAO company--and coins to reflect the odds of a real-world event.

They would be wrong. Pennington Predictive created a DAO to do that, just as it would for any

other event regardless of how gruesome or benign the binary event may be.

Moreover, it was the DAO that ascribed the compensation structure as it is not at a

pre-set number, but rather, contingent upon the ratios of “yes”/“no” option premiums: any

“odds” would be set by the DAO. The DAO also compensated everyone who made fraudulent

gains as the entire market was corrupted by the terrorist attack--like a basketball player throwing

a game for the team. So are we to hold the DAO morally responsible? Looks like it; according to

French, we certainly can. Shall we sanction the DAO? Lock it up? Pull it from the server? Make

a new one? Frown is disdain and proceed to write angry articles?

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Many might object as they find this absurd: Pennington Predictive created the DAO and

must have considered the odds of the event happening; what is Pennington Predictive’s business

if not to allow itself and others to make money off events? Pennington Predictive’s business is to

efficiently gather information by creating upside incentives for contributing said

information/intelligence. The payout is simply a necessary method of keeping that information

flowing. As for considering the odds: Pennington Predictive only creates the DAO, and

Pennington Predictive is not a moral person as it is only a body of separate individuals, who

individually act to create outcomes for the business.

With all this being said, there is certainly a moral issue at hand with DAOs making

anonymous and intractable payouts made to fraudulent parties--be it a terrorist, teenage

scammer, or large financial institution. Why not bake in security features against fraud? Current

security features like two-party verification and smart-contracts are inherent to the function of

DAOs and blockchain, but only prevent fraud within the blockchain system; issue being, that

when blockchain technology is applied to organic systems--like global security and

politics--deceit and obfuscation cannot be managed effectively as even the open-ledger system so

fundamentally advantageous to blockchain technology lacks the requisite transparency for all

actors to be equal. Moreover, any sort of verification process--i.e. Making sure you are not a

government official or a policy maker--would nullify the assumed anonymity that blockchain

systems tout. Yet, applying DAOs to a Policy Analysis Market highlights a very specific issue

that one could argue is unique to Policy Analysis Markets and not DAOs--that being the issue of

easily creating otherwise illegal securities. We need some more up-front, approachable

examples.
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Pennington’s Provincial Produce is an online grocery store that is ruled by a DAO on the

blockchain; PPP--for short--takes voice orders from home assistant systems and curates a

selection of high-quality local animal products and vegetables. PPP”s management structure and

decision making process is determined by the DAO. One of the DAO’s hard rules regards quality

control standards for tomatoes. Sadly, there’s an e-coli outbreak that makes a bunch of people

sick. Our only option would be to point to the DAO as morally responsible. Even if the tomatoes

were mishandled or tampered with, the DAO’s protocol was not sufficient to prevent the

outbreak. As previously stated, DAOs confirm Peter A. French’s CID criterium: why might this

be an issue in this case? It is an issue because it draws individuals--regulators, lawyers, the

public--to blame the DAO company disproportionately over other potential weak links like

suppliers and staff. Manuel G. Velasquez addresses the implications of this assumption by

making clear that “...if we accept the view that moral responsibility for wrongful corporate acts

rests with the corporation, we will tend to be satisfied with blaming or punishing only the

corporate entity” (Velasquez, 15). Even if an upper-level employee at PPP did something

immoral with residually negative effects upon the public or shareholders, the corporation would

take much of the punishment as the ruling DAO is as an autonomous system of rules and

procedures that serves as the brain of the company. One might object to my portrayal of the

DAO as such and state that the DAO is a democratic instrument by which owners of the

company vote their coins (ownership) and therefore circumvent c-level and board member

biases, which DAO proponent and pioneer, Ralph C. Merkle goes so far as to claim would

“allow us to design a new form of democracy which is more stable, less prone to erratic

behavior, better able to meet the needs of its citizens, and which better uses the expertise of all its
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citizens to make high-quality decisions” (Merkle, 1). However, a sort of perfect corporate

democracy established through a DAO would only complicate matter as the DAO would now be

responsible for the decisions imposed upon it by its anonymous-voting owners--only needlessly

complicating the issue. Shall we sue or sanction the anonymous voters for favoring a managerial

decision on dividends that ended up sinking company and killing 500 jobs?

The application of a DAO certainly has the potential to create many moral issues wherein

accountability is disproportionately held by the corporate person that the DAO is…but what does

society have to lose from this? It is this link between a question of ethics and morality to the real

world that is so crucial; the widespread application of DAO’s puts innovation in jeopardy as the

corporation is easily held legally responsible. Moreover, the individual aspect of upper

management and analysis is greatly diminished, with the conformity of business operations to the

investor’s will being prioritized over managerial interpretation.

Decentralized autonomous organizations have the potential to revolutionize business at

all levels--from upper management to their use as markets--and the benefits are broad; however,

the application of DAOs also comes with a number of morally hazardous uses and resulting

situations, chief of which regards the use of DAOs as a sink for liability that would otherwise be

considered illegal, unethical, or negligent if sanctioned by a person. In my paper, I have applied

French’s CID structure requirement to DAOs, and then synergized Velasquez’s counter-example

to French and used it as reasoning to why DAOs create a moral hazard. Moreover, I have

covered both an aggressive application of DAOs in Pennington Predictive example, along with a

broader application of DAOs as management instruments in the Pennington’s Provincial Produce

example. With this being said, remedying many of the ethical sticking-point issues with DAOs is
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a simple as applying developer prudence and focusing on managing those responsible for

creating potentially malicious DAOs.

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Works Cited

Brennan, Jason, and Peter Martin Jaworski. “Markets without Symbolic Limits.” ​Ethics,​ vol.

125, no. 4, July 2015, pp. 1053–1077. ​U Chicago Press​, doi:10.1086/680907.

French , Peter A. “The Corporation as a Moral Person .” ​North American Philosophical

Publications​, vol. 16, no. 3, July 1979, pp. 207–215. ​JSTOR​, Ethics .

Merkle, Ralph C. “DAOs, Democracy and Governance.” ​(No Title) ,​ Ralph C. Merkle, 31

May 2016, merkle.com/papers/DAOdemocracyDraft.pdf.

Velasquez, Manuel G. “Abstract of ‘Why Corporations Are Not Morally Responsible for

Anything They Do.’” ​Business and Professional Ethics Journal​, vol. 2, no. 4, 1983, pp.

1–18. ​Philosophy Documentation Center​, JSTOR, doi:10.5840/bpej19832416.

Williams, Dominic. “Part II of DAOs: New Horizons and Challenges in Depth.” ​Medium,​

Medium, 18 May 2016,

medium.com/@dominic_w/part-ii-of-daos-new-horizons-and-challenges-in-depth-5aca3f4

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https://medium.com/@dominic_w/part-ii-of-daos-new-horizons-and-challenges-in-depth-5aca3f

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