Law and the Blockchain

Abstract

All contracts are necessarily incomplete. The inefficiencies of bargaining over every contingency, coupled with humans’ innate bounded rationality, mean that contracts cannot anticipate and address every potential eventuality. One role of law is to fill gaps in incomplete contracts with default rules. The blockchain is a distributed ledger that allows the cryptographic recording of transactions and permits “smart” contracts that self-execute automatically if their conditions are met. Because humans code the contracts of the blockchain, gaps in these contracts will arise. Yet in the world of “smart contracting” on the blockchain, there is no place for the law to step in to supply default rules — no legal intervention point. The lack of a legal intervention point means that law on the blockchain works in a fundamentally different way from law in the corporeal world. Business organizational law provides a prime example of how the law uses default rules to fill gaps in an incomplete contract and how the law works differently in the blockchain context.

Keywords: corporate law, contracts, bitcoin, blockchain, business organizations, decentralized autonomous organization, DAO, cryptocurrency, Ethereum. disputes, business associations, corporations, partnerships, smart contracts, ledger technology, law and technology, limited liability, tokenholders

JEL Classification: K12, K22, K41, L22