Regulation through code as a safeguard for implementing smart contracts in no-trust environments

Abstract

Smart contracts, self-executing agreements based on blockchain technology, are a hotly debated topic in the tech community, among policy makers, industry stakeholders and in academia. They offer the prospect of cheaper, faster and better transactions. The hype around smart contracts is also viewed with caution. We contribute to the existing academic literature by addressing some of the concerns about the legal nature, anonymity and reliability of smart contracts. Several contract law scholars argue that smart contracts cannot offer a superior solution to many problems addressed by traditional contract law, such as contract validity and legality. Furthermore, they argue that smart contracts cannot replicate the relational context which is essential for the day-to-day practice of contracting. In this contribution, we firstly draw a distinction between smart contracts based on public blockchains and those based on private or permissioned blockchains. While all existing contributions develop their arguments implicitly assuming that smart contracts are based on public blockchains, much commercial experimentation with smart contracts is occurring on permissioned blockchains. Importantly, many of the mentioned problems do not arise on permissioned blockchains. Secondly, we argue that there is a good reason to prefer public blockchains over permissioned blockchains for contracting, namely their capacity to create trust in otherwise no-trust contracting environments. This is the path to unleash the full potential of smart contracts. In contrast to critics, we argue that compared to traditional contract law, smart contracts potentially offer a superior solution for facilitating trade.