Condo Management Meets Decentralized Governance

12 July 2021

On June 24, 2021, the Champlain Towers South condo in Florida collapsed, exposing a catastrophic fault line in the way condos are managed. Once the dust had settled and engineering reports determined the material cause of the fatal disaster, news agencies like the New York Times began investigating how the building fell into such disrepair. It discovered a history of mismanagement, including condo board infighting, inexperienced management, deferred maintenance, lax and ineffective safety audits as well as inadequate savings for repairs. Since then, many other condos have been identified as being at risk.

Quinn DuPont is an assistant professor in the UCD Lochlann Quinn School of Business at University College Dublin.

These condos face a classic collective action problem. Many condo boards are unable to find consensus, lack financial and managerial transparency and make poor decisions. While these are hard problems to solve, blockchain governance technologies might offer solutions. Could blockchain prevent future condo collapses?

There are at least three opportunities for blockchain technologies to support the rapidly growing, multi-billion dollar property management software industry: polycentric governance, enhanced voting and secure asset management.

Blockchain for condo governance

Long before the collapse of Champlain Towers South, residents faced a $15 million bill for repairs, but the condo board only had $800,000 in savings. Across the U.S., up to one-third of condos have inadequate savings for essential repairs, in many cases due to inexperienced condo board management (often run by volunteer homeowners) who are unable to come to agreement. Condo boards often struggle to achieve consensus because trust has been compromised and there are few incentives to collaborate. The situation is similar to other collective action problems, like the allocation of fishing, forestry and water rights.

In her Nobel prize winning research, American economist Elinor Ostrom studied “polycentric governance” and discovered there are powerful strategies for governance that avoid the pitfalls of both simple markets and centralized government policies. She found:

  • a) Decisions made by small, independent organizations are more effective than large, centralized ones 
  • b) Competitive and exclusive property rights are traditional but by no means the only form of ownership (collective, non-rivalrous “toll” use of goods is possible) 
  • c) An evolving set of “rules in use” can support common understanding and agreement and
  • d) Complex systems can be modeled as game environments with rules for optimal behavior

To test her analysis, Ostrom worked with Roy Gardner and James Walker to develop an economic model with a quadratic payoff function that required participants to allocate tokens between markets. In one experiment, participants had to make decisions using only aggregated information, which led to substantial over-investment. But in a second experiment, where participants could directly communicate with each other, their joint returns were improved. The lesson for condo governance is that if decentralized communication and trust were woven into the fabric of a condo board, consensus may emerge naturally.

You would be forgiven if all this discussion of tokens, markets, games, rules and decentralized decision making sounds suspiciously like the crypto platforms with which readers of CoinDesk are familiar. Indeed, these are precisely the tools being used for next-gen blockchain governance, including decentralized finance (DeFi), decentralized autonomous organizations (DAOs) and the ongoing re-imagination of property with non-fungible tokens (NFTs).

Achieving optimal consensus and engendering – not eliminating – trust will help condo boards agree on decisions, but blockchain can also help make better decisions. Condo boards are usually democratic but when faced with thorny collective action problems simple voting schemes like one person-one vote tend to collapse into mob rule. 

Enhanced voting schemes like auctions and delegated or quadratic voting are being actively tested on decentralized blockchains. Auctions are highly efficient for incentivizing predictable behaviors; delegated voting schemes like “liquid democracy” combine the benefits of direct democracy with expert-led decision making; and quadratic voting balances majority-minority interests by making strongly held opinions “expensive.” 

Due to the complexities of tabulating results from these decentralized decision making systems, trusted computation platforms (like blockchain) are needed. So it seems reasonable to think that condo boards at loggerheads could use blockchain platforms to make intelligent, timely decisions. Therefore, right-sized solutions to decision making should focus on supporting condo boards, not government-mandated policies.

Finally, since procurement and bid selection for condo repairs requires huge sums of money to be collectively held and managed, secure and transparent crypto assets are an obvious solution. Savings accounts for condo boards are managed across long time horizons by changing (and untrusted) treasurers that require sustained, collective investment. 

While future property management software designed like a decentralized autonomous organization may lack the excitement of boom and bust crypto, it may offer sustainable financial management and a measure of safety.

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