As most readers of this blog are likely aware, the theory behind initial coin offerings and “smart” contracts is that the code itself is entirely transparent and self-executing; the terms of the contract are set in the programming, thus eliminating the need for enforcement mechanisms or for messy legal disputes over interpretation.  The code dictates the agreement, and the code enforces it; investors curious about terms of an investment can simply read the code and have utter certainty as to the nature of the agreement. 

As Matt Levine described it, “If you invest your Ether in a smart contract, you’d better be sure that the contract says (and does) what you think it says (and does).  The contract is the thing itself, and the only thing that counts; explanations and expectations might be helpful but carry no weight.”  Primavera De Felippi and Aaron Wright dubbed this system “lex cryptographica.”

But problems arise when the code diverges from the white paper summary typically distributed to potential purchasers.  Famously, for example, in the case of one project known as the DAO, a “flaw” in the code allowed a “hacker” to steal Ether currency from investors.  Or did it?  Matt Levine explained, “The descriptions didn't matter; only the code did. The descriptions didn't allow for today's hack, but the code did. (By definition! If the code could be hacked, the code allowed for the hack.) Any vulnerabilities in the DAO's code were not flaws in the code; they were flaws in the descriptions — which were purely for entertainment purposes.”

Which brings us to Coin-Operated Capitalism, a new paper by Shaanan Cohney, David Hoffman, Jeremy Sklaroff & David Wishnick.  They compare the white paper descriptions to the actual code underlying the fifty top grossing ICOs in 2017, and conclude that the two regularly diverge on three critical aspects: whether there are any supply restrictions on the assets, whether there are transfer restrictions on assets distributed to insiders, and whether the code can be modified.  Signifcantly, the authors also found no evidence that these misdescriptions in any way harmed the initial capital raise or affected trading prices thereafter, suggesting that – as the authors conclude – “no one reads smart contracts.”

These results present a challenge to crypto evangelists who hope smart contracts will eventually replace legal institutions, and lend further support for the notion that the demand for ICOs is based on a speculative frenzy rather than any true demand for the products or companies underlying the sales.