Can Blockchain Solve the Hold-up Problem in Contracts?

Smart contracts are computer scripts that execute transactions, including transactions that constitute mutual promises between contracting parties, now and in the future. When created on blockchain, the future transactions envisioned in the smart contract are automatically executed and, because of the inalterability of blockchain, cannot practically be stopped.
Our central claim is that, by virtue of these features, smart contracts on blockchain are able to impose liquidated damages that cannot be renegotiated, or enjoined or reversed by courts. As such, they allow parties to more credibly and robustly commit to contracts, including renegotiation design mechanisms that protect investments against hold-up or revelation mechanisms that help courts verify changed circumstances.
Smart contracts on blockchain are not guaranteed to work, but we think they are a significant improvement over the status quo contracting technologies. The biggest obstacle to blockchain solutions is the government. It is possible courts or Congress would ban smart contracts and/or blockchain. But we believe blockchain has enough value, especially to the financial services sector, that collateral costs will deter the government from banning our solution. The government could ban specific uses of smart contracts and blockchain, for example, stopping automation of future promises or certain contract penalty provisions. But this is unlikely as both parties to a contract want these terms ex ante. It is only ex post that one party does not prefer them. As with liquidated
damages, we think the risk of court intervention is mainly limited to cases of bargaining-power imbalance.