Exploring Liability for Cryptoeconomic Consensus - A Law and Economics Approach

Abstract

Cryptoeconomic systems, such as cryptocurrencies and decentralized autonomous organizations, rely on consensus at several levels. Their protocols and the open source code implementing them are often the results of consensus among several participants. The systems are updated according to consensus mechanisms set in their protocols. This consensus is sometimes reliant on consensus among another set of participants in other cryptoeconomic systems, such as oracles feeding a cryptoeconomic system with external information. The outcomes of consensus may be illegitimate or harmful, which raises the question of liability. There is a heated debate around such liability – both as a matter of law and policy. Some call for stricter regulation in terms of harsher liabilities, while others argue for more of a light-touch approach, shielding participants from liability in the name of promoting “responsible innovation.” Some even argue for cryptoeconomic systems to be left to themselves and their own architecture-based self-regulation not subject to national laws. However, when cryptoeconomic consensus results in undesirable outcomes, remedies are often searched for in the law, both in public enforcement and private litigation. This paper utilizes law and economics to explore the merits of legalist approaches to liability for cryptoeconomic consensus, normative policy guidance for such liability, and institutional implications for such liability.

Keywords: Blockchain, DAO, DeFi, Cryptoeconomics, Cryptocurrencies, Liability, Risk

JEL Classification: G28, K24, K42