No-Party Trust in Smart Contracts
Smart contracts are often hyped as the technology that will change every single business model in our economy, ranging from finance and the settling of international payments, copyright management and royalties, to securing the authenticity of rare and valuable goods. According to techno-optimists, smart contracts bear the promise of dramatically reducing the cost of contracting, thereby fuelling new forms of trade at higher speed and with more reliable outcomes.
Smart contracts can be defined as self-executing agreements that are encoded in computer language. They can be (but do not necessarily need to be) placed on a distributed virtual infrastructure (e.g. blockchain or other distributed ledger technologies, Ethereum being currently the best-known platform for smart contracts). Computer protocols verify and execute the clauses of the contract, thus making some traditional contracting activities, such as monitoring, redundant. The most important feature of smart contracts is that their pre-programmed enforcement takes place according to the encoded clauses, and independently of external influence or control. The idea is that it is much more difficult to breach a smart contract unless the designers expressly included such feature in the contract code.
It is only natural that such a technology would be used for automating economic exchange, including delegating contracting away to artificial agents that would perform and enforce contracts for us. What an enormous amount of time and money we could free up for other activities with automation. But how can we be so sure that smart contracts would bring such magnificent efficiency gains? And how do smart contracts compare to the means of traditional (‘legal’) and relational contracting that currently support most economic exchanges in our economies? We set out to shed light on these questions in our article “Creating markets in no-trust environments: The law and economics of smart contracts” (2019).
In the article, we discuss the foundations of the economic mechanism inherent in smart contracts and the potential to create new markets with such contracts. We survey various technological options and application examples of smart contracts, and clarify and systematize the current thinking on the legal nature and reliability of smart contracts. Furthermore, we address the concerns of contract law scholars raised against smart contracts, namely that smart contracts cannot replicate the relational context essential for the day-to-day practice of contracting and they do not offer a superior solution to problems addressed by traditional contract law, such as contract validity and legality.
We argue that there are, in fact, good reasons to believe that smart contracts offer a superior solution for facilitating trade, especially in contexts where legal institutions or social circles are lacking to support economic exchange that would be beneficial for the parties and society. While arguing that, we suggest a step forward in characterizing three different contracting environments, respective contract enforcement mechanisms and the matching trust relationship underlying contracts. These are (i) relational contract environments, where parties rely on peer-to-peer trust and where personal reputation or the community ensures contract enforcement, (ii) legal contract environments, where parties trust in centralized authorities with coercive powers to enforce their contracts, and (iii) anonymous contract environments, where there is no central authority or community to enforce contracts, but technology ensures enforcement. This latter environment we identify as novelty compared to the other two.
Our recent paper “Smart Contracts: Reducing Risks in Economic Exchange with No-Party Trust?” (2019) builds on the first paper, but considers smart contracts from a different angle. It focuses on explaining the impact that the automation of contract enforcement could have on contracting autonomy and the democratisation of trade by way of a special trust mechanism we called ‘no-party trust’. Considering that trust reduces risks in economic exchange, we explain how the particular trust mechanism underlying smart contracts’ enforcement could provide opportunities for creating new markets.
We continue to be interested in exploring whether using smart contracts could be a path to increasing the autonomy of consumers and offering a solution for democratising trade. While we built our argument by way of analysing those smart contracts that are self-executing agreements based on blockchain technology, it can certainly also be extended to other types of algorithmic and automated contracts that can operate independently from human interference. Advances in computer science provide new opportunities for the automation of (especially commercial) contracts at increasing speed and at all stages of contracting: search, negotiation, formation, performance, interpretation, and enforcement. Just as this changes the legal nature of contracts, so do we see ambiguity in the consequences of taking out ‘the human’ from the process of contracting. These topics are the object of our ongoing research.
Helen Eenmaa-Dimitrieva - Estonian Research Information System
Maria José Schmidt-Kessen - Copenhagen Business School