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