Principal Agent Model

Definition ∞ The principal-agent model describes a relationship where one party, the agent, acts on behalf of another, the principal. In traditional finance, this model examines potential conflicts of interest when an agent’s incentives do not align perfectly with the principal’s objectives. In the digital asset space, this framework can apply to various relationships, such as users (principals) delegating funds to a staking pool operator (agent), or token holders (principals) entrusting governance decisions to a core development team (agent). Blockchain technology attempts to mitigate these conflicts through transparent smart contracts and decentralized governance.
Context ∞ The discussion surrounding the principal-agent model is highly relevant in decentralized autonomous organizations (DAOs) and delegated proof-of-stake systems, where agency risks can impact decision-making and resource allocation. Key debates focus on designing effective incentive mechanisms, transparency requirements, and accountability structures to align agent behavior with principal interests. A critical future development involves sophisticated on-chain governance tools and reputation systems that reduce information asymmetry and enhance oversight in these delegated relationships.