Governance of Smart Contracts in Blockchain Institutions

11 Pages Posted: 22 Jul 2019

See all articles by Bronwyn E. Howell

Bronwyn E. Howell

Victoria University of Wellington - School of Management

Petrus H. Potgieter

University of South Africa

Date Written: June 11, 2019

Abstract

We consider some of the techno-economic characteristics of smart contracts relating to real-world transactions, and the effectiveness of the governance regimes in which they will operate. We find that the requirement to code the precise executable steps ex ante in smart contracts necessitates a degree of precision and foresight about potential future eventualities that is unprecedented in all but the simplest of real-world interactions. The rules-based approach necessitated by pre-programming all transactions anticipates a state where complete contracting is feasible, so is not well-suited to transactions in real-world environments where unexpected outcomes can arise. This stands in direct contrast to the well-developed principles-based governance frameworks offered under contract law and the courts, which have developed ways to specifically address issues of contractual incompleteness. Thus despite objectives for blockchain-governed institutional (or even constitutional) frameworks to operate as fully self-contained environments within which all commercial interactions can be mediated via smart contracts, the inherent incompleteness of contracts due to limits to information availability, human cognition and communication renders such objectives illusory. A role will continue to exist for the real-world contract governance institutions as a complement to blockchain governance arrangements. Smart contracts may be suitable for routine, low-value highly-standardised and easily-coded spot transactions with predetermined outcomes and executed within a short time horizon of agreement taking place. However, the more complex and unique is the transaction, the higher is the value at risk, the harder it is to anticipate and precisely specify contingencies and measure and observe outcomes, and the longer is the time frame between agreement and execution, the less likely it is that smart contracting will be more efficient than real-world contracting. Indeed, in many cases a smart contract may prove more costly to administer.

Keywords: blockchain, distributed ledger, smart contracts, polycentric governance, club governance, distributed consensus

JEL Classification: D71, K24, L39, M15, O32

Suggested Citation

Howell, Bronwyn E. and Potgieter, Petrus H., Governance of Smart Contracts in Blockchain Institutions (June 11, 2019). Available at SSRN: https://ssrn.com/abstract=3423190 or http://dx.doi.org/10.2139/ssrn.3423190

Bronwyn E. Howell (Contact Author)

Victoria University of Wellington - School of Management ( email )

Wellington 6001
New Zealand
+64 4 463 5563 (Phone)
+64 4 463 5566 (Fax)

Petrus H. Potgieter

University of South Africa ( email )

P.O. Box 392
UNISA
Pretoria, Gauteng 0003
South Africa
+27 12 433 4622 (Phone)

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