The Contractual Cryptoeconomy: An Arrow of Time for Economics

Abstract

We consider the potential blockchains have for building a framework for all manner of contracts that can characterize an economy using the unifying idea of control over their duration. Such a contractual cryptoeconomy (**CCE**) would accommodate a broader variety of contracts than smart contracts, which are suitable for a relatively small portion of the set of all feasible contracts. We proceed by examining the idea of a contract’s natural life as a common feature shared across all contracts, be they incomplete or complete. This simplifying idea suggests why providing flexibility over a contract’s duration on a blockchain – through innovations such as HTLCs — is necessary to increasing the variety of contracts that can be feasibly represented. We also assess participation in a CCE that features blockchains with differing degrees of security. We do so by focusing on how the value of a contract is related directly to its natural life for both its immediate participants and, through externalities across the CCE, to a wider set of users. A key idea provides the overall impetus: When contracts rely on third-party intermediation, at least some contractual surplus is dissipated in arbiter rent, making the quality of third-party arbitration as important as its scale. By contrast, blockchains create contractual mechanisms that act as Coasian exchanges that can internalize this arbiter rent. However, crucially, the degree to which their use requires forgoing contractual complexity and absorbing the cost of externalities can determine the relative benefits provided by a CCE.