Smart contracts (i.e., agreements enforced by a blockchain) are supposed to work at lower transaction costs than traditional (and incomplete) contracts that instead exploit a costly legal enforcement. This paper challenges that claim. I argue that because of the need for adaptation to mutable and unpredictable occurrences (a chief challenge of transaction cost economics à la Oliver Williamson), smart contracts may incur higher transaction costs than traditional contracts. This paper focuses on two problems related to the adaptation: first, smart contracts are constructed to limit and potentially avoid any ex-post legal intervention, including efficiency-enhancing adaptation by courts. Second, the consensus mechanism on which every smart contract depends may lead to additional transaction costs due to a majority-driven adaptation of the blockchain that follows Mancur Olson’s Logic of groups. The paper further proposes several institutional expedients that may reduce these transaction costs of smart contracts.

Keywords: Adaptation, Blockchain, Enforcement, Incomplete contracts, Smart contracts, Transaction costs.