April 16, 2018 Reading Time: 2 minutes

Many people who are bullish on blockchain make grandiose claims that the technology will completely overhaul industries and institutions. But these claims often ignore the complexity of the real world and misunderstand what revolutionary technologies actually do.

Take blockchain-enabled smart contracts and the legal profession. Smart contracts are pieces of computer code that allow assets to be automatically transferred on a blockchain when certain conditions are met. They show a great deal of promise, especially for relatively simple and repeated transactions, where parties can pre-commit to payment when goods are delivered. They can streamline payment processes and establish trust between parties that don’t know each other.

Smart contracts are a big deal. But just how big? Chris Herd at the Foundation for Economic Education writes that “when lawyers are no longer necessary to be the arbiters of contracts, a huge purpose of theirs will be destroyed overnight.” Selva Ozelli at Coin Telegraph writes that “lawyers realize that smart contract technology will be an unstoppable disruptive force for the profession.”

Smart contracts are indeed poised to become a staple of our economy, but for better or worse, most lawyers’ jobs are safe. This is because smart contracts face the same fundamental challenge as the old-fashioned paper ones: it’s impossible when writing a contract to anticipate every possible future state of the world.

Mr. Herd gives the example of payment for wheat being triggered when a delivery truck reaches the right location. The efficiency gains are clear. But what happens if the buyer later finds that the wheat isn’t of the agreed-upon quality or type? Or suppose the buyer needs to change the location of delivery. Is it possible to alter the smart contract on the fly? Even in a seemingly simple transaction, there’s no substitute for human judgment.

The system employed by OpenBazaar, a Bitcoin-enabled peer-to-peer retail platform, is an interesting combination of features of a smart contract and human judgment. When a sale is agreed upon, the buyer’s funds are placed in an escrow wallet. If the goods are delivered and the buyer and seller are both happy with everything, the buyer and seller sign off and the funds go to the seller’s Bitcoin wallet. If there’s a problem, it’s referred to a third-party mediator, who can find in favor of the buyer or seller and release the funds accordingly.

Once again, even for simple transactions, the trust engendered by automated features of smart contracts is only as good as the human mediation process. It’s easy to see, then, how smart contracts couldn’t even begin to address the issues that come up in complex commercial litigation.

The impacts of even the most revolutionary technologies are rarely so simple as to cleanly replace entire industries or institutions. The flipside of disruption is adoption by existing players. My guess is we’ll see lawyers make frequent use of smart contracts embedded in more complex agreements that are still written and enforced by human beings. The writers I cite above are right to see the vast potential of blockchain technology, but we should be skeptical of sweeping claims that entire industries, governments, or existing technologies will be entirely replaced.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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