Darcy WE Allen – Chris Berg

Institutional acceleration

With Darcy W.E. Allen and Jason Potts. Forthcoming at Cambridge University Press.

This Element develops a theory of institutional acceleration to explain the transformation to a digital economy through a cluster of frontier technologies: artificial intelligence, blockchain, quantum computing, cryptography, and low-earth orbit infrastructure. Unlike previous technological revolutions, these technologies transform not how we organise things, but how we coordinate economic activity. The authors’ supertransition thesis explains why these digital technologies shouldn’t be understood in isolation, but rather should be understood in how they combine to create new institutional possibilities, leading to more open, complex, and global economic systems. Drawing on evolutionary economics and institutional theory, this Element shows how this evolutionary process is reshaping our institutional economic architecture. Ultimately, institutional acceleration drives greater computation and knowledge into our economic systems.

(Will be) available here

Response to CP 381 Updates to INFO225: Digital assets: Financial products and services

Response to a request to comment on an ASIC inquiry into the regulation of digital assets. With Darcy Allen. Available in PDF here.

Summary: Today we are living through a deep shift in our digital economic institutions. Crypto and digital assets might look like an isolated example, but they underpin a broader stack of innovations and technological trajectories. We have written widely about the opportunities from artificial intelligence, advanced cryptography and the low earth orbit economy. Each of these technologies are reshaping markets and spawning new industries. A diversity of digital assets will play an important role in accelerating, funding and governing their development.

In the absence of legislative clarity — or even non-binding guidance clarity — Australians will not capture these opportunities. We are not raising some hypothetical concern. While Australia debates how a regulator might interpret traditional financial law for crypto assets, other nations are establishing clear, forward-looking regulatory frameworks. The risk is not just that Australia will fall behind — we have already done that — it is that our approach is destined to become obsolete in real time.

We conclude that:

Guidance is a poor substitute for clear legislation and that ASIC should use their position to advocate for timely, clear legislation.
There are fundamental limits on regulatory enforcement in a permissionless, decentralised, global and open economy.
Trying to squeeze digital assets into existing regulatory frameworks distorts the economy and incentivises regulatory arbitrage.
Investors in digital assets have specific needs that have not been contemplated by current practices under the Corporations Act.

Dynamic Competition and Digital Platforms: Submission to the Australian Treasury Consultation on a New Digital Competition Regime

With Darcy W. E. Allen, Dirk Auer, Aaron M. Lane, Geoffrey A. Manne, Jason Potts, Lazar Radic

Executive Summary: The Australian Treasury’s proposed competition regime for digital platforms is flawed and should not proceed.

The policy rationale for an ex ante regime is unjustified. The Competition and Consumer Act 2010 (CCA) already provides a comprehensive framework to address concerns such as market power, unfair contract terms, and self-preferencing. The Australian Competition and Consumer Commission (ACCC) has not demonstrated any compelling reason existing competition laws are insufficient to regulate digital platforms and has not sought to enforce them against digital platforms.

The proposed regime is based on a misunderstanding of competition in the digital economy. Digital markets are characterised by dynamic competition, where innovation and technological change are the primary drivers of consumer welfare. The proposed ex ante regime, with its focus on static competition, may dampen innovation incentives and create barriers to technology diffusion, harming Australian consumers and businesses in the long run. Competition policy for digital platforms should be based on a dynamic competition approach that fosters innovation.

The proposed regulatory mechanisms are problematic. The reliance on subordinate legislation for crucial policy decisions is inappropriate, reducing parliamentary oversight. This approach lacks transparency and accountability, and may lead to unintended consequences for the digital economy.

We urge the Australian Treasury to reconsider its approach to regulating digital platforms. Instead of imposing an ex ante regime, the focus should be on enforcing existing competition laws and fostering a dynamic environment of innovation. This approach would better serve Australia’s long-term economic interests and the continued growth of the digital sector.

Available in PDF here.

DAOs are adaptive governance engines

With Darcy WE Allen, Aaron M Lane, and Jason Potts. Available at SSRN.

Abstract: We develop a new theory of Decentralised Autonomous Organisations (DAOs) that explains why they exist in terms of what they do. In New Institutional Economics, firms exist because they minimise the transaction costs of using a market. DAOs, which are a species of firm but made of smart contracts, would prima facie seem to extend this logic to further economise on lower transaction costs. Our argument here is that this is almost correct, but misses a critical factor that becomes readily apparent when you actually observe how DAOs behave in the wild, which we do by studying three DAOs-Shapeshift, Uniswap, and Optimism. Our theory is that the value of a DAO largely accrues to the dynamic adaptation in governance that the institutional form affords. DAOs enable low cost and fast change in governance structures in order to adapt to dynamic regulatory, competitive, and financial environments. A DAO is therefore not just a type of automation to distribute and minimise agency costs through token-governed smart contracts, as simple transaction cost theory explains. Rather, a DAO is a mechanism for cheap and fast variation in governance to enable an organisation to adapt to a complex dynamic economic environment. When the benefits of this mechanism exceed the costs we predict the existence of a DAO.

Trade integration through digital infrastructure

Submission to House of Representatives Inquiry into Australian Agriculture in Southeast Asian Markets, with Darcy WE Allen and Aaron M Lane

The core of our submission is to emphasise the importance of digital economic infrastructure (e.g. identity systems, payments, traceability) for trade and economic development. This digital infrastructure can not only lower costs to facilitate more trade, but also is a critical mechanism by which Australian agriculture can continue to develop a trusted premium market positioning in the region.

View the full submission in PDF here.

Towards legal recognition of Decentralised Autonomous Organisations

Abstract: Decentralised Autonomous Organizations (DAOs) are a typical organisation form in the Web3 economy. DAOs are internet-native organisations that are coordinated and governed by pseudonymous community members through a nexus of blockchain-based digital assets and smart contracts. There is over US$26 billion locked in over 2,300 active DAOs globally. This article examines the legal recognition of DAOs in an Australian context. A recent Australian Senate Inquiry recommended DAOs be recognised as a distinct business structure. This article makes three contributions towards this goal: (1) critically evaluate options for DAO recognition under Australian law; (2) a comparative analysis of United States DAO laws; and (3) an analytical outline of the key design features of an Australian DAO law.

Author(s): Aaron M. Lane, Darcy W. E. Allen, Chris Berg

Journal: Australian Business Law Review

Vol: 52 Year: 2024 Pages: 96–116

Available at: Australian Business Law Review, June 2024 and working paper at SSRN.

Cite: Lane, Aaron M., Darcy W. E. Allen, and Chris Berg. “Towards Legal Recognition of Decentralised Autonomous Organisations.” Australian Business Law Review, vol. 52, 2024, pp. 96–116.

Managing Generative AI in Firms: The Theory of Shadow User Innovation

With Julian Waters-Lynch, Darcy WE Allen, and Jason Potts. Available at SSRN.

Abstract: This paper explores the management challenge posed by pervasive and unsupervised use of generative AI (GenAI) applications in firms. Employees are covertly experimenting with these tools to discover and capture value from their use, without the express direction or visibility of organisational leaders or managers. We call this phenomenon shadow user innovation. Our analysis integrates literature on user innovation, general purpose technologies and the evolution of firm capabilities. We define shadow user innovation as employee-led user innovation inside firms that is opaque to management. We explain how this opacity obstructs a firm’s ability to translate the use of GenAI into visible improvements in productivity and profitability, because employees can currently privately capture these benefits. We discuss potential management responses to this challenge, outline a research program, and offer practical guidance for managers.

The Governance of Cosmos Interchain Security

With Darcy WE Allen and Sinclair Davidson. Available at SSRN.

Abstract: Interchain security (ICS) allows the Cosmos Hub to provide security to other blockchains (‘consumer chains’) and represents a significant revenue model for the Cosmos Hub. This paper investigates the economic and governance aspects of these ICS agreements with a focus on ensuring that the agreements are value adding and robust. The paper identifies potential risks such as vertical integration, challenges in adapting to incomplete contracts, and opportunism in asset-specific investments. It proposes recommendations to enhance the sustainability of ICS relationships, including the establishment of individual governance bodies for each ICS agreement, strategies to manage foreign exchange risks, and a decision tree for the Cosmos Hub to assess new consumer chains. A draft template for consumer chain onboarding is also presented, detailing essential elements like governance, payment terms, and exit clauses. This paper aims to offer actionable insights for improving the governance structures in ICS agreements, thereby fostering robust and enduring interchain security dynamics.

Allocating Capital in Decentralised Networks: Mechanisms for the Cosmos Hub

With Darcy WE Allen and Sinclair Davidson. Available at SSRN.

Abstract: This paper helps allocate shared capital effectively in the Cosmos ecosystem by examining a range of different allocation mechanisms. We identify the core challenges of allocating shared capital – with a focus on knowledge, opportunism and coordination problems. We outline four mechanisms that capital allocation DAOs can use to allocate capital in different contexts: grants, prizes, tenders and in-house production. Each have implications for the transparency and accountability of capital allocation. Our findings help capital allocation DAOs make decisions about how to allocate shared capital across the Cosmos ecosystem.

The exchange theory of web3 governance

With Jason Potts, Darcy W E Allen, Aaron M. Lane and Trent MacDonald. Published in Kyklos, June 2023. Working paper available on SSRN

Abstract: Blockchains have enabled innovation in distributed economic institutions, such as money (e.g., cryptocurrencies) and markets (e.g., decentralised exchanges), but also innovations in distributed governance, such as decentralised autonomous organisations. These innovations have generated academic interest in studying web3 governance, but as yet there is no general theory of web3 governance. In this paper, we draw on the contrast between a ‘romantic view’ of governance (characterised by consensus through community voting) and the ‘exchange view’ of governance from public choice theory (characterised by an entrepreneurial process of bargaining and exchange of voters under uncertainty). Our analysis is the first to argue that the latter ‘exchange view’ of governance is best to understand the dynamics of governance innovation in web3, providing the foundations for a new general theory of governance in this frontier field. We apply the ‘exchange view’ of governance to three case studies (Curve, Lido and Metagov), exploring how these projects enable pseudonymous, composable and permissionless governance processes to reveal value. Our approach helps illuminate how this emergent polycentric governance process can generate robustness in decentralised systems.