Blockchain as a method of resolving hold-up problem

Abstract

The hold-up problem is a form of opportunistic behavior of contractual partners. It occurs when the optimal volume and structure of transactions cannot be defined with ex ante certainty. The consequence of the hold-up problem is that, once a contractual relationship has been established, one of the parties seeks to modify the distribution of benefits in such a way that it has a higher level of profit from the contract than is justified by the contractual investments it has made. The paper examines the potential of the Blockchain concept to, applied as a framework of "smart" contracts, contribute to the elimination or reduce opportunities for the emergence of a hold-up situation. The Blockchain concept with its characteristics (transparency, protection of data integrity, shareability) deploys the foregoing potential in three ways: by witnessing the transaction via the Blockchain; ensuring the execution of a (by Blockchain certified) transaction; by verifying transactions through a decentralized system that replaces verification by third parties (courts or arbitration). Consequently, the Blockchain concept for storing and managing information substitutes the role played by the institute of trust in the classical ("analog") legal relationship.