Imagine day‐to‐day agree­ments that can’t be legal­ly enforced, for exam­ple agree­ments between your part­ner and your­self, medium‐size agree­ments between busi­ness part­ners, or agree­ments between gov­ern­ments. Presently, they can’t be enforced for two rea­sons. First, it may be quite cost­ly to enforce these agree­ments, because you need the pres­ence of a legal sys­tem. Or it may be that because these agree­ments are about future effort, which may be ambigu­ous and you can’t con­tract over this type of future effort.

At present, the only way we have of deal­ing with these types of agree­ments is devel­op­ing long‐term, cost­ly rela­tion­ships. For exam­ple, get­ting mar­ried, or maybe tak­ing over a busi­ness part­ner, or even invad­ing a dif­fer­ent coun­try just to enforce agree­ments. Now, the ques­tion that we have is can we have a mech­a­nism for enforc­ing these types of agree­ments where­by we can get rid of the idea of trust­ed, cost­ly third par­ties like a legal sys­tem. Where we can enforce agree­ments between anony­mous indi­vid­u­als. Can we have agree­ments or the mech­a­nisms for enforc­ing agree­ments between gov­ern­ments with­out hav­ing to appeal to the ambi­gu­i­ty of inter­na­tion­al law?

Eric Maskin, an econ­o­mist, won a Nobel Prize in the mid‐2000s for the­o­ret­i­cal work on self‐enforcing agree­ments. However this type of the­o­ret­i­cal work that he’s think­ing about, these thought exper­i­ments, were not very use­ful in prac­tice for rea­sons that we don’t ful­ly under­stand, how­ev­er, except for very extreme con­tracts like mutually‐assured destruc­tion.

At the same time as Eric Maskin was devel­op­ing his the­o­ret­i­cal foun­da­tions for his self‐enforcing agree­ments, we had peo­ple devel­op­ing Bitcoin. At the heart of Bitcoin, there’s a cryp­to­graph­ic sys­tem which, if you look at it very care­ful­ly from a the­o­ret­i­cal and math­e­mat­i­cal point of view, imple­ments many of Eric Maskin’s ideas for self‐enforcing agree­ments. The great­est exam­ple of this is the idea of rip­ping apart a one hundred‐dollar bill. Two sig­na­tures with­in the Bitcoin sys­tem imple­ment that type of idea where­by a sell­er can say, Look, here’s half of a hundred‐dollar bill. When you deliv­er your good, then I’ll give you the oth­er half.”

If you look at the cryp­to­graph­ic sys­tem under­ly­ing Bitcoin, you find that many of the com­po­nents of Eric Maskin’s the­o­ret­i­cal ideas of self‐enforcing con­tracts are avail­able. So the ques­tion, the­o­ret­i­cal­ly, is can we use the cryp­to­graph­ic sys­tem with­in Bitcoin to design self‐enforcing agree­ments?

The idea of design­ing these self‐enforcing agree­ments is to design agree­ments where it’s in the self‐interest of both indi­vid­u­als to enforce the con­tracts, where they’re imple­ment­ed by a com­put­er and the cryp­tog­ra­phy assures us the out­come. The main task of cryp­to­graph­ic game the­o­rists, like Simon Grant, is to devel­op these types of agree­ments but from a per­son­al­ized point of view. So they look at a prob­lem, and they devel­op a game the­o­ret­ic frame­work for the agree­ment, and then they imple­ment cryp­tog­ra­phy to allow for these types of agree­ments.

One thing that we do pre­dict is that cryp­tog­ra­phers and game the­o­rists will become rich. However we also pre­dict small­er firm size, because firms are big sim­ply because we can’t enforce agree­ments. And we pre­dict few­er wars. However there are cer­tain prob­lems that we have to think about. These types of ideas, cryp­to­graph­ic, game the­o­ret­ic ideas, and self‐enforceable con­tracts allow for con­tracts between anony­mous indi­vid­u­als such as on drug mar­kets. They allow for, for exam­ple, set­ting up con­tracts off­shore, tax haven con­tracts, that can’t be bro­ken down like the Panama expe­ri­ence we recent­ly had. And so there are a lot of costs in terms of how do we see the world, and we don’t real­ly know how we see the world emerg­ing should these types of things be adopt­ed.

The big ques­tion for us is that this is an excit­ing area of study. This is some­thing that seems to have the poten­tial to gen­er­ate great effi­cien­cies for busi­ness, for gov­ern­ment, and for day‐to‐day inter­ac­tion with indi­vid­u­als should you actu­al­ly want these low cost, minus­cule agree­ments to be enforced. And this is the type of work we do at the Australian National University in Economics.

Further Reference

Rabee Tourky profile at University of Queensland, Australia

2016 Annual Meeting of the New Champions at the World Economic Forum site

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