Creating markets in no-trust environments: The law and economics of smart contracts

Abstract

Smart contracts, self-executing agreements based on blockchain technology, have the capacity to create trust in what we term no-trust contracting environments. We argue that using them in such environments is the path to unleash the full potential of smart contracts. Compared to the contract enforcement mechanisms characterized by traditional contract law or relational contracts, smart contracts can offer a superior solution for facilitating trade. Several lawyers and economists have debated whether smart contracts might offer the prospect of cheaper, faster and better transactions. As we discuss below, contract law scholars caution that they neither replicate the relational context essential for the day-to-day practice of contracting nor offer a superior solution to problems addressed by traditional contract law, such as contract validity and legality. We clarify and systematize the current thinking on the legal nature and reliability of smart contracts, and address the concerns of contract law scholars. While doing that, we suggest a step forward in characterizing contracting environments, contract enforcement mechanisms and the trust relationship underlying contracts.