Smart Contracts on a Blockchain: Transaction Governance with the Potential of Deductive Certainty

Abstract: Blockchain technology has been hailed as facilitating a new governance mechanism because it allows encoding agreements in so-called smart contracts. Smart contracts are immutable computer programs that ensure the automatic enforcement of agreements. We argue that the automatic enforcement of agreements is not the only characteristic distinguishing this new form of algorithm-based governance from established contractual and relational governance. Smart contracts on a blockchain are also unique in how they allow transaction partners to form beliefs about a transaction’s outcome. Whereas established governance mechanisms rely on induction to form such beliefs, smart contracts only need logical deduction. They offer an unprecedented possibility: to attain deductive certainty about transactions. We theorize that transacting parties use two cognitive processes, induction-related and deduction-related belief formation, and hypothesize under what conditions one or the other prevails. Based on a sample of 536 smart contract-based applications, we show that users rely on deduction-related beliefs, but supplement these with established induction-related beliefs known from the trust formation literature. Having found evidence that deduction-related and induction-related beliefs are complements, we argue that smart contracts will not substitute existing governance mechanisms but reinforce them, and offer organizations new ways to govern transactions where traditional governance would not suffice.

Keywords: Blockchain; smart contracts, decentralized applications, transactions, governance mechanism