cRYPTO Glossary

The agency problem, also known as the principle-agent problem or agency dilemma, refers to the inherent challenge of aligning the interests of one party (the agent) with the interests of another party (the principal) when the agent is entrusted to act on behalf of the principal.

Explanation:

• Principal and agent: The principal delegates authority to the agent to make decisions or take actions on their behalf.
• Misalignment of interests: The agent may prioritize their own interests or diverge from the principal's goals, leading to potential conflicts.
• Examples: In corporate governance, shareholders (principals) elect executives (agents) to manage the company's affairs, but executives may prioritize personal gain over shareholder value.
• Mitigation: Strategies such as incentive alignment, monitoring, and transparency aim to mitigate the agency problem.

Key Points for Beginners:

• Significance: Understanding the agency problem is crucial in governance structures and relationships where one party delegates decision-making authority to another.
• Blockchain Perspective: Blockchain technology can mitigate agency problems through transparent, decentralized governance mechanisms and smart contracts that automate and enforce agreements.