Cryptocontracts: Automating Payment for Digital Consumption

The proliferation of digital currencies, following the lead of Bitcoin, has been outpaced only by the companies forming to bet their futures on widespread acceptance of the new technology. A few companies are focusing on self-enforcing contracts, dubbed Smart Contracts or Cryptocontracts. Digital currencies are an enabling technology here in that they allow the contract to actually hold wealth directly in a way which is not actually accessible to anyone, and pays only when contract criteria are met.

Digital currencies are an enabling technology here in that they allow the contract to actually hold wealth directly in a way which is not actually accessible to anyone, and pays only when contract criteria are met.

While similar to submitting funds into escrow, the key distinction with a cryptocontract is that it is the digital instrument itself that holds the funds, only to be automatically disbursed when the performance criteria of the contract are met. By removing the necessity of trust, automated contracts may also facilitate the acceptance of anonymous, cash-like digital currencies.

The low transaction cost associated with the transfer of digital currencies will allow the transfer of very small amounts of money, without being eaten up by credit processing merchant fees. This opens up the ability to charge per unit of consumption of digital goods. Hotel room movie viewers are familiar with renting access for a limited time. In fact, these transferability restrictions on time and availability are already tied to iTunes, Kindle, and many other digital content providers. Songs are sold for ninety-nine cents for a lifetime because merchant fees area already eating a third of that price. A cryptocontracts for the same song could charge fractional cents for every time the song is played, movie watched, or app played.

A new model of very limited licensing gives consumers more options as to how they would like to purchase digital goods. Widespread adoption of this practice would also help limit the policy implications of applying the first sale doctrine to digital goods. Charging users per unit of digital content consumed would leave no doubt as to ownership, and eliminate concern for a secondary market.

Some authors have implied that this form of automatic contract could be used to determine if someone was satisfied by an experience in the future. Only pay for a movie if it actually increases your heart rate, or if gait and facial recognition software determine that you became happy through the course of the movie. A danger of such close tailoring a service or payment to individual customers is that consumers who are willing to pay more will be charged more for the same service. Online airfare booking services already charge more for customers that they sense are about to buy tickets based on past behavior. If a single cryptocontract service were to manage all of a person’s micropayments, this wealth of purchasing information would certainly allow for price discrimination.

Projects like Etherium, are seeking to turn computer programmers into lawyers. They will have to take care not to engage in unauthorized practice of the law, which a few automated legal service companies have been recently charged. Invictus, another company exploring the market for cryptocontracts, is offering a kind of equity sharing agreement platform. The nascent industry of cryptocontracts may offer lawyers with backgrounds in computer science some interesting opportunities.