Introduction.
How Blockchain Rewrites Trust, Work, and the Role of HR.
The following piece is a reflective exploration inspired by experience and ongoing study. It is not a formal academic paper, but a thought experiment on the future of human resources, the cost of information, organizational trust, and technology. At times, it may feel like a collection of interconnected ideas, as it forms part of a larger work that could one day evolve into a book or a proper research project.
Before analyzing the overall cost of transaction and information spread in historical hierarchies, it is mandatory to introduce the two most significant costs arising from information asymmetry: Adverse Selection and Moral Hazard.
Adverse Selection (Pre-Contractual Asymmetry).
Adverse Selection focuses on how hidden information before a contract leads to negative market outcomes. This arises when one market actor, such as an insurer or a bank, does not know the exact risk profile of its own client (information asymmetry), potentially leading to a negative selection of clients (e.g., only high-risk individuals seeking insurance). Companies are consequently forced to spend more money on information assessment and monitoring, leading to increased prices throughout the market to compensate for risk.
The core problem is articulated by George Akerlof in his foundational work on the “Market for Lemons”:
“The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence…. The presence of people who wish to pawn off bad wares as good wares tends to drive out the legitimate business.”
— Akerlof (1970, p. 489)
Moral Hazard (Post-Contractual Asymmetry).
Moral Hazard is a post-contractual risk that involves one party changing its behavior in a way that is detrimental to the other party because they are shielded from the full consequences of their actions. In financial markets, a borrower might take on excessive risk with loaned funds because they are not fully bearing the potential cost of failure.
A classic example of systemic moral hazard is the anticipation of government bailouts for major financial institutions (the “Too Big to Fail” problem) during the 2008 financial crisis (Tirole, 1996). To mitigate the risk of opportunistic behavior and maintain contractual incentives, organizations must consider additional agency costs in the form of monitoring and bonding expenditures, which ultimately increase operational costs across the market (Jensen & Meckling, 1976).
The evolution of transaction cost throughout history.
The structure of human organizations, or dominant hierarchy, has always evolved in response to the economic problem of information and trust, with each era adopting a new technological solution to reduce transaction costs. The cost of transacting, verifying information, enforcing contracts, and mitigating risk ultimately dictates the optimal boundaries and management structure of an organization.
Historical Solutions to Information Asymmetry.
In Ancient Empires (c. 3200 BCE), the key challenge was high verification and memory cost. Hieroglyphs and writing created the first non-personal, external ledger of verifiable facts, reducing reliance on individual memory and enabling complex systems for tracking property and taxes.
Later, in the Classical/Medieval Age (c. 1300 CE), large ventures faced significant fraud and accountability costs (Moral Hazard), where agents might act against the principals’ interests. The solution was double-entry bookkeeping, a self-checking mechanism that provided internal reconciliation and dramatically reduced the risk of opportunistic behavior (Jensen & Meckling, 1976).
The early modern era saw Nation-States and Elite Institutions grappling with High dissemination costs and information asymmetry between the governing elite and the populace. The invention of the printable press (Movable Type) acted as a massive cost-reduction technology, enabling wider information to spread and reducing regional information asymmetry (Dittmar, 2011).
The Digital Age Bottleneck.
The digital age (c. 1970 CE), characterized by Global Financial Networks, introduced the fundamental economic problem of high digital trust cost (Adverse Selection). The very nature of digital assets being infinitely copyable means their validity cannot be guaranteed without a powerful, trusted intermediary (like a bank, government, or central clearinghouse). This systemic reliance on intermediaries to prevent issues like “double-spending” creates massive points of failure and high transaction costs, which the entire global market must absorb.
This historical trend highlights a crucial point: organizational hierarchies have traditionally been the human solution to the technological problem of trust. Management layers, HR departments, and oversight structures are essentially expensive, internal mechanisms designed to mitigate Adverse Selection (vetting) and Moral Hazard (monitoring).
The bitcoin age (c. 2009 CE) offers the first structural solution to the Digital Trust Cost. Satoshi Nakamoto’s invention of the Blockchain and Proof-of-work (PoW) Consensus (Nakamoto, 2008) provides a mechanism of cryptographic proof and distributed agreement. This innovation fundamentally eliminates the need for the intermediary, structurally mitigating both Adverse Selection and Moral Hazard (smart contracts) by making the transaction history universally and cheaply verifiable. This reduction in the cost of trust serves as the catalyst for the evolution of HR and organizational hierarchy, which we will now explore by analyzing the underlying Blockchain fundamentals.
Blockchain Fundamentals: The Mechanism of Trust Reduction.
Blockchain technology serves as the technological countermeasure to the systemic trust and information costs defined by Adverse Selection and Moral Hazard. It achieves this not by introducing a new, powerful intermediary, but by eliminating the need for one altogether.
Blockchain: Solving Adverse Selection (Trustless Verification).
A Blockchain is a distributed, immutable ledger shared across a vast network of computers (nodes). Its function is to create a universally verifiable, single source of truth, thereby addressing the problem of hidden information (Adverse Selection).
Distributed Consensus: Instead of a single central authority (like a bank or an HR server) controlling the data, all network participants must agree on the validity of new data (consensus mechanism). If one copy is tampered with, the thousands of other copies will invalidate it.
Immutability and Hashing: Transactions are grouped into blocks and linked cryptographically using a hash (a unique digital fingerprint). Changing a single transaction requires re-calculating the hash of that block and every subsequent block in the chain, an economically prohibitive task.
The result is that information, such as an employee’s verified credentials or professional history, becomes tamper-proof and cheaply verifiable by anyone, thus drastically reducing the cost and risk associated with Adverse Selection in hiring.
Smart Contracts: Solving Moral Hazard (Trustless Enforcement).
While the core blockchain provides trustless data, the innovation of smart contracts provides trustless enforcement, which is key to mitigating hidden actions (Moral Hazard).
A Smart Contract is a computer program that automatically executes the terms of a contract when pre-defined, objective conditions are met. These contracts are stored on and enforced by the blockchain network itself.
Automation of Terms: If the contract states, “if the verifiable output of a task is delivered, then release payment to the agent,” the payment is executed automatically. This removes the need for human discretion, approval, or intervention that could lead to issues from either side. It’s irreversible, since once the funds are liberated, it is transmitted to the blockchain network, making it computational too expensive to reverse it.
Elimination of Agency Costs: In a traditional hierarchy, managers monitor employee performance (an agency cost) to guard against Moral Hazard. Smart Contracts, by codifying the rules and automating the outcomes, perform this monitoring and enforcement function autonomously.
By leveraging these two layers, the immutable ledger for verification and the smart contract for self-execution, Blockchain technology offers a path to organizational structures that rely on cryptographic proof rather than expensive human-based trust intermediaries, thus fundamentally challenging the economic necessity of large, tiered corporate hierarchies.
The dissolution of hierarchies: From firm to Decentralized Autonomous Organizations (DAO) and the challenges.
The drastic reduction in transaction costs enabled by Blockchain technology and Smart Contracts has profound implications for the optimal size and structure of the firm, challenging the very logic that necessitated managerial hierarchy.
Coese’s Theory and the shrinking firm.
Ronald Coese’s explains how modern organizations are structured and why in his work, The Nature of the Firm (1937). Coase argues that a firm organizes activities internally (through management and hierarchy) only when the cost of organizing internally is less than the cost of transacting externally (using the market), with an HR perspective, the cost of contracting a freelancer/consultant is higher than employing a full time person and build loyalty to the company, currently the cost involves high search cost (finding a reliable person), high negotiation cost (writing new contracts for every job), and high enforcement cost (monitoring quality and insuring payment, classical problems of adverse selection and moral hazard.
- The chain reaction: Since Blockchain provides (low search/vetting cost) and via Smart Contracts (low negotiation/monitoring cost), the external fall dramatically.
- The Shrinking Boundary: According to Coase’s logic, as the cost of organizing through the market plummets, the economic imperative to internalize activities via a rigid hierarchy disappears. This suggests a shift toward a “micro-firm” or networked model, where individuals contract fluidly for specific projects rather than being locked into permanent employment. The optimal firm boundary, therefore, shrinks to its essential, irreducible core.
The rise of the decentralized autonomous organization (DAO).
The DAO represents the organizational form that emerges when transaction costs are minimized by code. A DAO is a virtual entity governed by rules encoded in transparent, immutable Smart Contracts, removing the need for traditional, human-controlled central authority.
Flattening Power: In a traditional hierarchy, power is centralized by position or knowledge, in a DAO, power is distributed based on governance tokens or verified merit/reputation. This eliminates the structural mechanisms that enable the tyranny of the majority, where a concentrated group (e.g., top management or shareholders) can make decisions that disproportionately harm the broader collective of contributors or managerial opportunism (Moral hazard).
- Verified Merit/Reputation: Unlike a traditional CV, which is subject to reputation systems on a blockchain track a contributor’s actual, verifiable performance. This can be recorded as non-transferable tokens (Soulbound Tokens or SBTs) awarded for successful project completion, code review approval, or positive community feedback. This provides a trustless, objective metric of skill, allowing the DAO to allocate tasks and power based on proven competence rather than position or tenure.
Automated Governance: Decision-making shifts from the slow, bureaucratic process of a board or management committee to an automated, auditable token-based voting system enforced by the smart contract.
- Token Voting: This mechanism allows members to vote on proposals (e.g., budget allocation, new project parameters, rule changes) by staking their governance tokens. One token often equals one vote, aligning decision-making power with financial stake or vested interest in the DAO’s success. This process is transparent, automated, and eliminates the administrative cost and time lag associated with traditional corporate governance. This decentralization of decision rights, while presenting challenges (the of balancing autonomy, decentralization, and efficiency, Source 3.1), fundamentally changes the nature of corporate governance (Source 1.2).
The Current Hurdle to Adoption: If the DAO structure is economically superior due to its minimized transaction costs, why isn’t it universally adopted right now? The primary barriers are legal uncertainty and the high cost of decentralization.
- Legal Uncertainty: Most jurisdictions lack clear legal frameworks for DAOs, creating massive regulatory and liability risks. Many DAOs are currently operating as legally unincorporated associations, leaving contributors vulnerable to legal action.
- Coordination Cost: True decentralization is currently slow. The overhead involved in getting thousands of token-holders to agree on basic operational parameters can often be higher than the administrative cost of a centralized CEO making the decision quickly. The system itself is often still being iterated and optimized.
So basically, rigid hierarchies evolve from a top to bottom decision machine to a more flexible structure, with a core group responsible for coordination and strategic vision and a broader group (freelancers, gig workers, other DAO’s) that provide specific services with verifiable reputation, compensated by automatic smart contracts with its own terms and conditions that bound the service to certain SLA metrics.
The Reimagined Role of Human Resources.
The analysis has demonstrated that the historical evolution of the firm, and its costly managerial hierarchies, was fundamentally a human-based solution to the economic problems of Adverse Selection and Moral Hazard. The advent of Blockchain technology, by providing cryptographically secured and universally verifiable trust, eliminates the necessity for these high-cost hierarchical intermediaries. The immutable ledger solves Adverse Selection by providing trustless verification of credentials, and self-executing Smart Contracts solve Moral Hazard by automating enforcement and eliminating agency discretion.
In this context, where the economic rationale for administrative control has been largely automated, the firm boundary shrinks, and the organizational model naturally gravitates toward the fluid, decentralized structure of the DAO. The role of Human Resources undergoes a profound, non-linear transformation:
- From Gatekeeper to Cultivator: HR transitions from a function primarily dedicated to risk mitigation (filtering resumes and manually monitoring performance) to one of strategic enablement.
- Focus on the Unautomated: The future HR core must focus on the unique human elements that technology cannot govern. This includes Culture and Cohesion to ensure network alignment in the absence of command structures, and Talent Development by designing sophisticated, merit-based reputation systems (e.g., non-transferable tokens) that replace rewards based on traditional tenure.
- The Technical Shift: Ultimately, the HR professional must evolve into a System Architect. Their core competency will shift to designing and facilitating the governance mechanisms, the tokenomics, voting systems, and dispute resolution protocols that allow the decentralized organization to function democratically and efficiently.
Conclusion.
Blockchain technology provides the economic catalyst to dissolve the high-cost hierarchical solution to the agency problem. By enabling the rise of the DAO, it not only shrinks the firm’s boundary but forces HR to evolve from a function of control to one of strategic and technical enablement, becoming the essential human layer for alignment within an automated, trustless economic environment.
About the Author:
Leonardo Albuquerque de Abreu holds a Bachelor’s degree in Economics and has six years of professional experience in data engineering, with a focus on cloud migration and data architecture. He is interested in decentralized technologies, blockchain, and Bitcoin, and in exploring how these systems can reduce unnecessary friction and overhead in organizations. His work examines the evolution of traditional hierarchical structures toward DAO-based models as a means of enabling smoother, more efficient coordination.
You can contact Leonardo at: https://www.linkedin.com/in/leonardo-albuquerque-data-engineer