Mitigating the Legal Challenges Associated with Blockchain Smart Contracts: The Potential of Hybrid On-Chain/Off-Chain Contracts

Tantamount with the increasing application of blockchain technologies around the world, the use of blockchain-based smart contracts has rapidly risen. In a “smart contract,” computer protocols automatically facilitate, verify, and enforce arrangements made between parties on a blockchain. Such smart contracts offer a variety of commercial benefits, notably immutability and increased efficiency facilitated by removing the need for a trusted intermediary. However, as discussed in recent legal scholarship, it is difficult for smart contracts to uphold certain fundamental principles of contract law. Translating concepts of individual intention and responsibility into the decentralized space of blockchain is problematic. Aggregating such individual intention into the combined will and intention of the blockchain entity is at best challenging, and at worst unfeasible. Further, while traditional contracts accommodate change and allow for the amendment of terms in response to evolving circumstances, blockchain smart contracts do not. As the difficulties of blockchain smart contracts become apparent, attention is turning to hybrid smart contracts. “Hybrid” smart contracts are commonly described in legal discourse as arrangements that consist of both a traditional contract (natural language) and a blockchain-based smart contract (formal computer code) component. In comparison, computer science scholarship provides a more complex and nuanced articulation, framing hybrid smart contracts as arrangements that combine code running inside the blockchain (on-chain) with data and computations from outside the blockchain (off-chain). The link between these on-chain and off-chain operations is created through a decentralized oracle network. Such hybrid contracts maintain the immutability of blockchain, and the trustless contracting this facilitates, with the flexibility that comes from connecting to real-world, real-time data sources. In such a context, the objective of this Essay is to examine the nature and operation of hybrid smart contracts, integrating both legal and computer science discourse, and to critically analyze whether such arrangements have the potential to mitigate some of the legal challenges that have been identified with respect to fully on-chain smart contracts