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Monday, April 26, 2021

Incomplete Contracts

Followup on previous piece: 

Incomplete Contracts  by Jesse Walden  in Andreessen Horowitz

cryptocurrencies & blockchains

One way to think about various kinds of crypto projects is through the lens of contract theory. An axiom of this area of legal scholarship states: “all but the simplest contracts are incomplete”. That is, contractual arrangements cannot anticipate every possible outcome or set of actions, given complex and dynamic changes in the world the contract lives in.

When contracts are incomplete, they rely on renegotiation when unexpected contingencies like bankruptcy, regulation or even simple changes in details emerge. Such contingencies often require third parties like the legal system to help interpret and mediate between the two parties, and can lead to unpredictable outcomes. In this way, contracts are always about the unknown eventualities of decision making, incentives, and governance authority.

But if we accept that contracts are simply decision logic — akin to computer programs, then contract theory gives us a framework for thinking about different types of smart contracts and crypto-enabled projects — and how they can scale (including governance of them) .... ' 

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