Potentials and Limitations of Smart Contracts: A Primer from an Economic Point of View

Abstract

Smart contracts are an innovative contract type best described as digital and decentralized agreements which are stored on a blockchain. The automatisms included in blockchain-based smart contracts as well as their transparency and irreversibility contribute to their increasing popularity and made proponents of smart contracts suggest that they will replace traditional written contracts and become the (only) contract type in the long run. However, seminal problems prevail, including technical, legal, and also economic questions. This paper addresses the latter: Using theoretical approaches of New Institutional Economics, such as the theory of transaction cost or the theory of agency, it shows that smart contracts are no cure-all, but another (process) innovation of considerable, but not unlimited potential. Smart Contract, Blockchain, Distributed Ledger Technology, New Institutional Economics, Principal Agent Theory, Transaction Cost, Property Rights, Positive Economics, Synchronous Interaction, Datatrusted Exchange