Abstract: Blockchain integrates multiple information technology such as linked list structure, peer-to-peer propagation, consensus mechanism, encryption algorithm, etc. Although blockchain provides a new sustainable mechanism for the scale expansion of modern enterprises with smart contracts, it also brings challenges to the existing market supervision. With the Wu-li Shi-li Ren-li (WSR) approach, we set up a theoretical model of sustainable consensus mechanism (Wu-li) and study the operation mechanism of DAOs. First, we analyze how blockchain changes the border of organizations based on the transaction cost theory. The result shows that DAOs have more advantages in scale expansion than traditional enterprises. Then, we examine the case of imperfect consensus and obtain the scale expansion effect with constraints on consensus quality (Shi-li). Finally, we discuss market failure in the real world with DAOs and propose supervision suggestions on DAOs' operating (Ren-li). In general, market regulators should be more involved in smart contracts while DAOs can suppress the transmission of information asymmetry through reputation incentives. There should be more supervision on both “chain terminals” and “the chain”. Decentralized collaboration of multiple regulators can be carried out to improve the effect of supervision. In this study, the Wu-li Shi-li Ren-li (WSR) approach provides a theoretical guidance on the establishment of DAOs and help to promote the innovation and supervision of organizational form in the era of digital economy.

Key words: distributed autonomous organizations, smart contracts, the WSR approach, consensus mechanism, market supervision