Private Law Theory

ABSTRACT
Smart contracts are associated with disintermediation and certainty. Deterministic, infallible, and unbiased code replaces unpredictable, corrupt, and biased humans. By eliminating humans from the process of performing contractual obligations, smart contracts eliminate the need to trust the other contracting party as well the need to rely on traditional intermediaries – including insurance companies. Once deployed, the code of the smart contract cannot be modified, and its execution cannot be interfered with. It is, however, necessary to distinguish facts from fiction and to acknowledge that the fulfillment of the promise of smart contracts, is premised on the ability to address multiple technical challenges. To this end, this paper disentangles the interdependencies between blockchains, smart contracts and oracles. In principle, smart contracts operate on-chain and ‘codify the conditions’ of releasing the payout. Oracles operate outside of the blockchain, or off-chain, and provide information regarding the fulfilment of such conditions. Smart contracts are supposed to guarantee that if X occurs, the funds will be released. The challenge lies in describing X (ie, the triggering event, which is synonymous with the release conditions) in a programming language and in determining whether they have been met, that is, whether X has occurred. To this end, the discussion focuses on the technical challenges of creating secure, and robust smart contracts and oracles that could be entrusted with automating insurance payouts. For the sake of simplicity, it is assumed that the policyholder and the insured are the same person. It is also useful to limit the discussion to parametric insurance, as the participation of a claims investigator contradicts the idea of eliminating human involvement. Traditional insurance would, by definition, require the interposition of a claims investigator, who would introduce human discretion and thus uncertainty into the compensation process.

Mik, Eliza, Smart Contracts and the ‘Oracle Problem’ in the Context of InsurTech (Feb 13, 2023) in Cristina Poncibò and Piotr Tereszkiewicz (eds), European Insurance Contract Law: The Promises and Perils of Digitalization (Springer, Forthcoming).