Long before blockchain was cool, Nobel Prize-winning economist Oliver Hart was into contracts. As far back as 1976, the doctor of economics from Princeton University had been exploring how corporations use contracts to interact, and what happens when things go wrong.
Over the years, Hart became fascinated by what he describes as the “fuzzy” areas of these agreements, where the anticipated potential outcomes break down, and arbitrators, or even judges are required to make sense of the chaos. The concept is called “contract incompleteness,” and in the age of blockchain, it is on the verge of exploding into more mainstream circles.
By June 2016, Hart and fellow economist Bengt Holmström of the Massachusetts Institute of Technology were just months away from winning the Nobel Prize for their work in “residual rights control,” a term they coined to describe who has control over an agreement when all anticipated eventualities break down. Then, modern technology finally caught up with him.
A distributed autonomous organization called The DAO, powered by little more than self-executing code called a smart contract, had dramatically imploded. A contract with a bit too much fuzziness was made to execute an order its authors never intended, sending $60 million worth of the ethereum cryptocurrency to a hacker’s wallet.
While a simple tweak to the underlying agreement could have prevented the loss, the ethereum blockchain was designed to be immutable, no one had residual rights of control, and there was no single authority to charge back such illicit gains. The resulting wave of financial destruction culminated in the contentious separation of ethereum into two competing blockchains.
The original blockchain with the hacked funds still in the hacker’s wallet, now called ethereum classic, is currently valued at $1.6 billion. The other blockchain, where the users agreed to return the illicit gains to their original owners, simply called ethereum, is now valued at $42.7 billion.
From the ashes of The DAO collapse, a boutique industry of smart contract consulting firms emerged to help ensure smart contracts are as airtight as possible before they go live. And as of today, Hart officially joined one of those consulting startups, blockchain economics, governance and design firm Prysm Group, as its first senior adviser.
“Instead of just looking at the contract itself, what’s written there, it’s also useful to think about what procedures are put in place for dealing with what isn’t there,” said Hart, who will be paid for his work with Prysm Group on a case-by-case basis. “How you communicate with the other party, how you might resolve disputes.”
At his new position Hart will review incentive structures designed by the Prysm Group team to help ensure the client’s desired outcome is achieved. While this is the first time the Harvard professor has worked directly with a blockchain startup, his expertise in the field of contract incompleteness has previously resulted in his serving as an expert witness in cases involving the Department of Justice and Uber.
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