Blockchain Industry Needs To Understand That Code Is Not Law

Much has been made in the press and in corporate circles about the potential of blockchain technology to fundamentally reshape business and daily life, and rightly so. Blockchain can reshape numerous aspects of our world for the better, from payments to insurance to sensitive identity information. Projects currently in development promise to solve problems — for example, the provenance and authenticity of products moving through supply chains — that have bedeviled governments, businesses, and individuals seemingly forever.

We must be careful, though, not to mistake this promise for a silver bullet. In order for blockchain to reach its full potential, strong processes will need to be put in place around it in many areas. One of the most important of these is law.

Some engineers tout the maxim that “code is law.” Catchy though the phrase is, it is, unfortunately, not true. Law is law; code and English (or any other language) is merely a medium of communicating intent.

Any sphere in which human beings interact is, by definition, ambiguous and unpredictable. The blockchain space, which largely runs on a system of “smart contracts,” is no different. No matter how well-designed and thoroughly vetted a smart contract is, situations will arise that the originators will not have foreseen. When something like this happens, there has to be a system that allows the parties to reach an agreement with some flexibility beyond the strict parameters encoded in the smart contract.

For example, imagine a contract by which a supplier in Asia agrees to provide a shipment of product to a wholesaler in the United States. Using a smart contract, the funds for the purchase of this shipment are put into escrow pending the outcome of the transaction. The Asian manufacturer produces the product and ships it across the ocean, where it lands at the Port of Los Angeles. Based on the structure of the smart contract, the funds are released from escrow into the shipper’s account as soon as this happens.

However, the product gets stuck in customs for three weeks. When it is finally released, the goods are spoiled; the wholesaler never receives its purchase in a condition in which it can be sold on to consumers. Because a smart contract is binary — effectively, an if-then statement — there is no mechanism for the purchaser to recoup funds to which it feels entitled based on the unsatisfactory outcome of the transaction. From the point of view of the smart contract, the transaction is finished and sealed. There is no way to re-route the funds or renegotiate the agreement after the fact.

So, the very incorruptibility of smart contracts, which makes them so attractive for so many use cases, may prove to be their Achilles heel if a framework for arbitration and dispute resolution is not implemented for them. Code can render outcomes irreversible if it is written to do so, but that does not make it law. The sooner we can find an accommodation between the utility of smart contracts and the very human sphere of legal agreements, the sooner we can unleash the full potential of smart contracts to change commerce for the better.

Amy Wan is the Founder and CEO of Sagewise, a technology company that provides arbitration tools for smart contracts.