PowerLedger Chair Shares Blockchain & Smart Contracts Governance Issues

A Closer Look At The Governance Issues Caused By Blockchain And Smart Contracts

By now, to people paying attention, it must have become clear that blockchain and smart contracts will seep into almost all aspects of technologies around us. However, there are a few burning questions which still needs to be figured out, and this time the answer might not be in the technology.

How smart our smart contracts in the future are going to be? More specifically, how will the governance issue look like in the blockchain future?

To get a clearer image of the scenarios these questions want us to view, let us look at 2 types of scenarios. First one, of semi-automated systems of the future, followed by the changed world where smart contracts control our micro-transactions.

The governance issues with dumb tools

Let's take an example of a factory worker in the 60s. He would have a paper contract that determined how and when he got paid. A punch card recorded the time when he came into work and whether he was late or not. Manual work was required to calculate the final payslip and the salary was given in cash.

The governance issues were simple here. If you thought they’d made a mistake, you’d go to admin and point out the mistake. If for some reason, they couldn’t sort the mistake out, you could appeal to the court system, or the accountancy regulatory body, that lay beyond and around this system.

Even with the arrival of the computer in the 80s, even though some of the above processes got automated, the governance issues still remained the same.

The governance issues with smart tools

Since there will be no factory workers in the future, let’s take an example of a girl working in a coffees shop. She clocks in with her RFID tag and starts to serve coffee. The system knows how many coffees she has made and sold and when the bank holidays are and releases exactly the right amount of cryptocurrency according to the smart contract. For bonuses, the system will know if she has got good social media feedback from customers and keeps track of likes, shares, and recommendations.

It’s all smooth frictionless and integrated. However, here governance issues start to get tricky. What if there are complications like a rude customer, a faulty machine or a natural disaster that deteriorated her performance for no fault of her.

In the idealized world of the blockchain future, the smart contract knows about this and has a contractual clause for this, and depending on what’s been set, you get paid appropriately. But according to Professor Oliver Hart of Harvard, who won a Nobel prize for his work on contract theory, the above is never possible.

The Incomplete theory

According to Hart, however much you push intelligence into the tools themselves, with smart money, smart contracts, smart timesheets all rolled into one integrated unit you still need a governance layer to decide upon matters, when the smart layer suddenly looks stupid.

His theory, called the incomplete theory of contracts explains why there will always be some wriggle room in every contract. Hart goes on to explain why it often serves both parties to maintain more wiggle room in many contracts than you might imagine. In any case, incompleteness is an ever-present condition.

What this essentially means is that there is always a judicial legal structure outside any contract and that will come into play if there’s a dispute about what’s going on in the layers below.

Is the Answer Parallel System?

Bernard Salt, a demographer, and social commentator agree. He says that where we’re headed should be a parallel system. There will be a whole code world of structures which determine the payment policy, for everyone from baristas to doctors. But there will also be a parallel human world to adjudicate when things go awry.

In Salt’s own words, “Humans must sit in the governance system at some point and create judgment over algorithms. Otherwise, we might as well submit to machine supremacy right now.”

But Parallel Systems has a major flaw. As machine learning algorithms improve and AIs become smarter, humans might not be smart enough to decipher the reasoning behind our future machines. Here again, the governance would essentially be humans supervising the machines. Which brings us back to the central issue with governance.


We are still in a nascent phase of this transition, and the scientific community is still trying to wrap their head around these problems. All we can say right now is that blockchain is here to stay. And as we find a way to integrate humans, AI, the blockchain, and crypto, we’ll be creating fallible, but infinitely superior solutions to things seen earlier.

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