Over the years, as my role has evolved from coordination of computers into coordination of people, I’ve been thinking a lot about the principal agent problem.
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity the agent takes actions on behalf of another person or entity (the principal)
Common examples of this relationship include corporate management (agent) and shareholders (principal), elected officials (agent) and citizens (principal), or brokers (agent) and markets (buyers and sellers, principals).
In all these cases, the principal has to be concerned with whether the agent is acting in the best interest of the principal.
In the professional world, managing the principal agent problem is well-trodden territory. From the perspective of the principal (often mostly capital), there are decades of best practices developed around preventing & managing the principal agent problem. From the prospective of the agents (often mostly labour, though in the web3/startup ecosystems it can widely vary), there are many tools for collective movement that have been developed.
Of these best practices, I think prevention is worth a lb of cure.
So how do you prevent the principal agent problem?
The principal–agent problem typically arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in their (the principal’s) best interest, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe.
I think that managing the principal agent problem is core to how we evolve smart contract ecosystems and the DAOs that build them.
Any pioneering coordination maximalist worth their salt should know how to keep agency costs (the cost of the deviation from the principal’s interest by the agent) principal/agent problems in their network!
Some ways i think we’ll see the Principal Agent problem managed in the DAO world.
- Hyperstructures like Uniswap will be built upon smart contracts, which because they are built on trustware and not socialware, will have very low agency costs.
- Where trustware is too complicated, expensive to use, or we just don’t have the data (oracle problem), so socialware must be relied upon, DAOs will learn to keep agency costs low.
- Since we know from above that “The principal–agent problem typically arises where the two parties have different interests and asymmetric information”, DAOs will learn to
- create information symmetries by building in public
- keep aligned interests
- Since we know from above that “The principal–agent problem typically arises where the two parties have different interests and asymmetric information”, DAOs will learn to