In an effort to create an alphabet soup of new organizational models (do not ask why), several “new” enterprise models have surfaced in the crypto community. While this article will focus on BORGS, it’s important to know that the DAO came first.
So, what is a DAO?
Put most simply, a DAO, an acronym for Decentralized Autonomous Organization (pronounced dow), is a structure built with blockchain technology. Think of a DAO as a sort of crypto cooperative organization that allows a group with a common purpose to use a crypto-based governance structure built on smart contracts for decision making. Basically, the group think of the crowd replaces the centralized management structure typically employed by traditional organizations (owners – board – officers), which in theory allows the group to make decisions in a transparent and, some say, democratic fashion. And DAOs got popular. According to a Harvard Business Review article from May 10, 2022, “communities are forming DAOs around a wide range of concepts, including investments, management of other blockchain-based projects, and content production.”
However, while DAOs were all the rage in 2022, they are now out. And the BORGs are in! And we are not talking about borg –“blackout rage gallon” – the drink.
From DAOs to BORGs
A BORG (or a CybOrg) is a type of decentralized autonomous organization (DAO) that is designed to operate within a hybrid governance model. According to Delphi Labs, a BORG is “a traditional legal entity that uses autonomous technologies (such as smart contracts and AI) to augment the entity’s governance and activities.” Delphi Labs also notes that “BORGs do not merely use autonomous technologies… BORGs are legally governed by autonomous technologies through tech-specific rules implanted in their charter documents.”
With a hybrid governance model, a BORG can serve as a decentralized platform that allows stakeholders to participate in the governance of a particular network or ecosystem, while still maintaining some level of centralized control or oversight. It’s a mash up between a DAO and a entity, sort of like the limited liability company is a mash up of a corporation and a partnership – sort of.
How BORGs Function
BORGs are typically designed to operate on a blockchain platform, which allows for transparent and immutable record-keeping of all transactions and decisions. This can help to increase transparency, accountability, and trust in the governance process, as well as reduce the risk of fraud or corruption.
In a BORG, stakeholders can participate in the decision-making processes through a variety of mechanisms, such as voting, staking, or delegating authority to trusted representatives. The rules and governance structures of a BORG are typically encoded in smart contracts, which execute automatically on the blockchain and ensure that decisions are made in a transparent and decentralized manner.
Unlike DAOs, BORGs are compatible with established regulatory frameworks, and can be assimilated into companies’ existing bylaws. Implementing a BORG can be done by nearly any existing entity because its existing, traditional off-chain legal structure can also be enforceable using on-chain, trustless, self-governing smart contracts.
The advent of decentralized blockchains and artificial intelligence (AI) has made possible a new type of organization: the trust-minimizing BORG.
But Why Bother with BORGs? The Importance of Blockchain Organizations
The utility of a BORG arises where the human incentives of stakeholders and intermediaries are imperfectly aligned. The traditional corporate governance models have many costly “frictions” or tensions, like proxy fights and mandatory disclosures, that could be governed by BORGs. A corporation can hard-code its charter into smart contracts and bind itself to on-chain shareholder votes. It also could use self-directed AI within a BORG to handle burdensome disclosures, financial accounting, and reporting.
Since BORGs are neutral programs, they can be calibrated and customized to varying business circumstances within existing SEC regulations. However, as blockchain-native entities, they can be rendered immune to state interference.
Legislative Developments Regarding DAOs and Blockchain Organizations
In California, Assembly Bill 1229 proposed a change in the state’s corporate code to include DAOs (Decentralized Autonomous Organizations), blockchain networks and smart contracts. This bill potentially provides legal clarity and regulatory relief for these types of entities which have been considered either LLCs or Partnerships. If passed, this legislation could set a precedent for other states to follow and provide clarity for the regulatory landscape for DAOs and blockchain as a whole.
Avisen Legal Law Clerk Beau Raymond-Iaquinto plunged feet and head first (at the same time) into the world of DAOs and BORGs to create this article with Avisen Legal’s Kim Lowe. Often referred as that weird entity nerd, for anyone who wants to create, manage and operate a business (even a cooperative or unincorporated association), reach out to Avisen Legal.