*4.1. Smart Contracts*

Smart contracts are a set of instructions residing on a blockchain, written in computer code, and are a key aspect of harnessing blockchains' capabilities. Szabo (1994) states that a smart contract can execute the terms of a contract and is a computerized protocol. They can be used, for example, to guarantee payment by counterparties involved in a contract. Ethereum is the first blockchain to successfully employ smart contracts. The self-enforcing nature of smart contracts results in transaction costs of monitoring and enforcing adherence to rules and laws being removed (Cong and He 2019). Sisli-Ciamarra (2012) states that firm board composition may also be affected by smart contracts. Generally, firms have bankers as directors to signal financial markets' creditworthiness, and smart contract signalling may deter this need. Mik (2017) argues that smart contracts can be implemented to solve numerous legal and enforcement issues. In our opinion, applications of smart contracts in corporate finance and governance could include option exercises and other contingent claims requiring instant collateral transfer in case of default. They can also include performance-based employee compensation packages. Moreover, smart contracts alleviate agency costs in many of these scenarios in corporate governance (Yermack 2017). Finally, a firm's willingness to implement smart contracts can signal future ethical behaviour.

## *4.2. Decentralized Autonomous Organizations (DAO)*

Organizations/firms are deemed to be a natural mechanism for conducting businesses, and this form of organization dates back to the mid-19th century (DuPont 2017). However, blockchains have the potential to transform the future organization to a digitized decentralized network of stakeholders (DuPont 2017 and Sims 2019). In our opinion, blockchains can facilitate a form of novel organization without senior management or an organizational hierarchy. Blockchains are an opportunity for new organization types to develop based on a distributed decentralized structure (Scott et al. 2017). Shermin (2017) argue that blockchains can overcome traditional principal–agent dilemmas through decentralized governance and highlight the importance of smart contracts to implement a trust regulatory system. A DAO is an amalgamation of blockchains, smart contracts and stakeholders all working together interactively. The basic rules of governance are programmed into the blockchain at setup (DuPont 2017). All stakeholders involved with the DAO will possess tokens that represent a share in the DAO's performance (similar to a share of an organisation/firm). Therefore, the fundamental profit maximisation goal of the firm can be restated as the value maximisation of the tokens for a DAO (DuPont 2017). Essentially, in our opinion, a DAO is an organisation controlled by token holders that operate on a blockchain through smart contracts. Thus, DAOs will have to be governed by laws and regulations similar to all regular firms in order to interact and conduct business in the real world. Therefore, these token holders will replace board members AND top management, where decisions would be made by token holders. Moreover, the type of token possessed by each token holder may determine the type of contract for each project within the DAO, similarly to an employee in a regular organization/firm.
