The Limits of Code Deference.

• Author: Hinkes, Andrew M.

ABSTRACT 869 I. INTRODUCTION 870 II. SMART CONTRACTS ARE INSTRUCTIONS TO COMPUTERS, NOT LEGAL AGREEMENTS 873 III. DECENTRALIZED VENTURES AND THE GOAL OF CODE DEFERENCE 878 A. Concepts Underlying Decentralized Ventures 878 B. Necessity of Code Deference 879 C. Code Deference Strategies 881 i. EDI Master Agreements 881 ii. Examining DAO Code Deference Strategies 882 iii. "Legally Compatible" Attempts to Impose Code Deference in Daos 887 1. MetaCartel "Pact" and "Qualified Code Deference" 887 2. The LAO 889 3. Comparing the Pact and the LaoOA Code Deference Strategies 890 iv. Alternative Approaches 893 IV. IS THE PURSUIT OF CODE DEFERENCE WORTHWHILE? 896 I. INTRODUCTION

Smart contracts have become a common topic of academic scholarship. (1) Legal academics have attempted to contextualize smart contracts within existing law using doctrines of interpretation and construction typically applied to legal contracts. (2) This approach occasionally views smart contracts as legal contracts, but more often as components of a broader set of representations and promises which, considered together, may constitute legal contracts. (3) Through this lens, disputes over smart contracts may be resolved by the application of legal rules using the traditional legal dispute apparatus. (4)

This article takes a different approach to disputes arising over smart contracts based upon observations of their use in decentralized ventures. Instead of asking whether disputes over smart contract outcomes may be resolved using existing law, I ask whether users of decentralized ventures can be compelled to always defer to the outcome of the code used by the venture and to not seek to resolve disputes over smart contracts using litigation and legal remedies.

Smart contracts are code that can transact or alter the state of some digital asset. (5) This state alteration may modify the power of a party to control a digital asset or alter the digital asset itself. (6) Smart contracts operate deterministically; if smart contract code receives the appropriate data, its code will execute. (7) This feature is foundational to smart contracts' appeal; they can be relied upon to perform as expected. Smart contracts have been used to build systems that facilitate collaborative action among their users. These smart contract-powered systems ("decentralized ventures") allow human participants to collaboratively undertake governance tasks, and to collectively affect rights to digital assets. (8) Various types of decentralized systems rely on different levels of human support and interaction to function. However, all decentralized ventures are premised on two assumptions: first, that smart contracts will operate as expected; and second, that their human participants will agree to be bound to the outcome of those smart contracts. (9) Given that decentralized ventures rely on sometimes complicated interaction between multiple smart contracts to function, (10) a failure of one smart contract may impact other smart contracts, the venture's participants, and others, including third parties. (11)

While the architecture of a given decentralized venture will determine how much human interaction is required for it to operate, certain decentralized ventures rely on smart contracts to allow their users to interact, to control transactions of digital assets, and to settle those transactions with finality. Certain decentralized applications enable their users to engage in transactions that do not include identifiable counterparties or without trusting typical third-party intermediaries. (12) Others coordinate large groups of users to act collectively. (13) Regardless of their architecture, decentralized ventures generally rely on code to transact assets or to coordinate their users.

Users and designers of decentralized ventures generally attempt to avoid litigation because litigation has uniquely disruptive effects on decentralized ventures. The mere act of being served with a complaint would severely impact decentralized ventures; litigation holds may require smart contracts to stop operating, could require digital assets controlled by smart contracts to be frozen, and may be impossible or extremely burdensome to implement. Injunctive relief that would stop smart contracts from operating, freeze digital assets controlled by smart contracts, or require a deployed smart contract to be interrupted or disabled may be impossible to implement. Injunctions and litigation hold obligations impact interested parties, including unnoticed third parties, who use these smart contracts or assets created by decentralized ventures, and whose rights to digital assets rely upon the continuing operation of smart contracts.

Because the digital assets controlled by smart contracts and their human users are governed by law, any effort to create code deference must be grounded in law. (14) Decentralized ventures sometimes attempt to avoid litigation by imposing prior restraints to prevent their participants from filing lawsuits. This is true even if the relief available from courts may be limited by the intractability of smart contract code, underlying system architecture, or efforts to obfuscate the identity of parties responsible for the decentralized venture and of other participants. (15) Thus, the success of decentralized ventures will rely in part on the enforceability of legal agreements that seek to prevent litigation over smart contract outcomes. Restraint from recourse through the legal system, if available at all, must come in the form of a legal agreement.

It is unclear how effective these legal restraints can be. Can parties bind themselves to the outcome of executory smart contract code, no matter what? Are agreements to defer to the outcomes of smart contract execution and not to sue, even if a smart contract outcome varies from what was expected, fails to execute, or is modified by others, legally enforceable? If so, how effective are such agreements if challenged ex post? Even if those agreements are enforceable, are they effective? What are the limits of legal agreements to defer to smart contract code?

This article analyzes various strategies employed by decentralized autonomous organizations, a type of decentralized venture, to prevent their human participants from litigating smart contract outcomes. The Dao, a web of smart contracts that was designed to behave like an investor-led venture capital fund, avoided incorporation, attempted to disclaim legal relationships among its participants and itself, and obscured the identity of its interested parties, insulating the venture with confusion, opacity, and complexity. (16)

Other decentralized ventures have formed legal entities that use smart contracts to automate or execute governance tasks and that attempt to use legal contracts to bind their human users to code deference. The MetaCartel Ventures DAO, incorporated as a Delaware limited liability company, uses covenants in its operating agreement that treat "exceptional" smart contract outcomes as errors to be handled by internal dispute resolution procedures, and otherwise requires its members to covenant not to sue over smart contract outcomes to the extent legally permissible. The LAO, another decentralized venture incorporated as a Delaware limited liability company, deems actions undertaken by its native DApp and smart contract code to be equivalent to a written action approved by a majority vote of its members, narrowing, but not entirely foreclosing, the ability of members to sue over smart contract outcomes. (17) Both the MetaCartel Ventures DAO and The LAO allow disputes to be resolved using on-system tools and procedures.

Untested structures or agreements could be used to attempt to create code deference. Users of decentralized ventures could exclude smart contract outcomes from the benefit of the parties' bargain by agreeing that the outcome of smart contract code execution is not a material term of their agreement. Decentralized ventures could be designed to wind-up and return their human participants to some agreed-upon state when a dispute is litigated, rather than decided by on-system dispute resolution. This article examines strategies to create code deference across three sections. First, this article will briefly explain smart contracts and emphasize that smart contracts are code, not legal contracts. Second, this article will analyze efforts to bind users to the result of agreements made through electronic systems, examining electronic data interchange contracts as a historical model, analyzing approaches taken by existing decentralized ventures, and proposed strategies not observed in practice. Finally, this article will examine the limits of these efforts, and conclude with observations about the future of decentralized ventures.

2. SMART CONTRACTS ARE INSTRUCTIONS TO COMPUTERS, NOT LEGAL

   AGREEMENTS

   Smart contracts are the technology that allow decentralized ventures to operate. As explained by Nick Szabo, smart contracts allow "contractual clauses [to] be embedded in hardware and software . . . in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher." (18) Smart contracts deployed on blockchains allow code to directly affect digital assets by using "if-then" logic to trigger transactions. The smart contract code deployed at a wallet address controls when and how a digital asset may be transacted to another wallet address. (19) To use a smart contract, a user transacts some digital asset (i.e., a technically compatible form of information) to the smart contract wallet address. That smart contract code thereafter exercises on-system control over that digital asset subject to its execution. (20) Upon the receipt of some external information by the smart contract code, (21) the code will "execute," and affect the digital asset under the code's control. (22) Both the smart contract code and the...