Smart Contracts, IoT Sensors and Efficiency : Automated Execution vs. Better Information

The increased attention to blockchain-related technologies has brought into focus ``smart" contacts, whose key feature is the automated algorithmic execution based on mapping states of the world to corresponding contractual actions. Smart contracts require digital inputs that determine when such algorithmic execution should take place, often provided by connected ``Internet of Things" (IoT) sensors, and as a result these two technologies are frequently confounded. In this paper we develop a model of smart contracts that distinguishes their impact from that of sensors. We analyze four possible regimes: (a) conventional contracting; (b) contracting with increased information from IoT sensors; (c) smart contracts that automate certain actions; and (d) the combination of smart contracts and IoT sensors.We show that IoT sensors and smart contracts can have different impacts on contracting outcomes and efficiency, and thus should not be confounded. Smart contracts restrict the strategy space by allowing the contracting parties to commit not to hold-up each other; this typically increases the contracting region where trade occurs and thus increases efficiency, but for certain parameter values it surprisingly can decrease social welfare. IoT sensors expand the state space over which the contract can be specified by creating finer partitions of the verifiable states of nature. This typically leads to more efficient trades, but it is still not fully efficient. Finally, when applied together, smart contracts and IoT sensors enable all efficient trades, including certain trades that neither technology can enable individually; in that sense the two technologies can be complementary