A Unified Theory of Code-Connected Contracts

Smart contracts and their promise of automatic performance capture legal and entrepreneurial imaginations. But the excitement around the technology led to some confusing legal responses. Several legal scholars use chronology to help reduce the confusion and place smart contracts within what is already familiar about computational contracting. According to this line of thinking, blockchain-based smart contracts simply represent the next technological advancement in a long history of computable contracting technologies. However, other scholarly work suggests that such a chronological explanation under-simplifies the nature of the linkages between smart contracts and other forms of code-connected contracts. This Article offers a unified theory of code-connected contracts as a tool for guiding risk allocation and design trade-off discussions when considering whether to use one or more forms of code-connected contracts. Specifically, this Article argues that the many variations of code-connected contracts should be viewed along an axis of state transition complexity. Doing so brings to the forefront the fact that the issues facing smart contracts used to merely automate performance of contractual obligations differ in terms of both magnitude and novelty from algorithmic decision-making tools used by parties to fill gaps in contractual terms and other computational contracting tools. In other words, the state transition complexity theory of code-connected contracts set out in this Article offers an analytical tool for anticipating legal and business risk when using computational contracts. Ultimately, the state transition complexity theory of code-connected contracts demonstrates that getting to the core legal issues presented by code-connected contracting requires an analysis of the details of each specific implementation. As with most legal questions, proper analysis depends on facts and circumstances. Nevertheless, many of the core legal issues will arise because emerging technology, like all technology, is social technology. Thus, the implications of the state transition complexity theory of code-connected contracts are that many of the legal issues are not terribly new, and we should not forget to look to existing jurisprudence and scholarly work in contract law and corollary disciplines.
I. INTRODUCTION 982 II. THE MANY VARIATIONS OF CODE-CONNECTED CONTRACTS 984 A. Earlier Forms of Code-Connected Contracts 985 B. Today's Code-Connected Contracts: Smart Contracts 987 C Newer Inquires in Light [...]