Smart Contracts and the Cost of Inflexibility

Abstract

Smart contracts" are decentralized agreements built in computer code and stored on a blockchain.Proponents imagine a future where commerce takes place exclusively using smart contracts, avoiding the high costs of contract drafting, judicial intervention, opportunistic behavior, and the inherent ambiguities of written language.These decentralized code-only contracts are part of a decades-long quest to eliminate supposed inefficiencies in traditional written agreements.Electronic data interchange (EDI), a contracting technology from the 1970s, was designed with the same goal and garnered similar fanfare.Commentators at the time imagined a revolution in the way firms transacted and a full shift away from anything resembling a paper contract.Ultimately EDI failed to achieve these goals-it empowered, rather than circumvented, human decisionmakers along with their "inefficient" way of forming agreements.In doing so, EDI successfully reduced some transaction costs while preserving efficient forms of contractual flexibility.Smart contracts are indeed more technologically sophisticated than EDI.Smart contract scripting languages offer a broader range of operations and greater scalability.Smart contracts are capable of seamlessly integrating with the operational and financial systems at the core of modern firms, whereas EDI transactions occurred in very early digital environments that required human intermediaries.