The Agency Method of Algorithmic Contract

Evelyn Shen

Oct 09, 2021

The best algorithmic contract liability model is to transform the algorithm into a "constructive agency" of the firm. Similar to theagency of natural person, algorithmic agency is also based on agency law, but it must be constrained by "constructive" qualification. On the other hand, it is not a natural person, so it can not be directly regarded as theagency of natural person.The principle of "constructive agency" isbased on contract law. In the United States, UETA, which is common law in 47 states, interprets the algorithm as an agency, and also promotes the creation of algorithm contracts by using electronic records and electronic signatures in contracts, so as to make its effectiveness equivalent to writtendocuments. It is illegal to deny the validity and refuse to perform the contract just because the algorithm contract is in electronic form. However, at present, the courts and legislatures have not found a feasible scheme to implement the algorithm contract.

There are two ways to establish an agency relationship, that is, agreement and authorization. The agency established through the agreement mustindicates consent.

The agency relationship formed through authorization must have evidence that the firmis aware of the behavior of the algorithm and constrains it.

The firmconstraint in three ways: First, to create a "tracking algorithm" that tracks the behavior of the algorithmic contract in real time; Second, to purchaseinsurance against the uncertainty of the algorithm; Finally, to introduce manualauthorization nodes into each transaction. It would be better to evaluate algorithmic contracts in this way than to make them vague as special agreements, allowing the law to support them tothe reasonableextent and to constrain and remedy them where unreasonable.

The use of algorithmic contracts enables agencies to act against fraud, market manipulation and other malfeasance based on current standards. This increases the accountability of the algorithm and gives the firmthe necessary intent to take responsibility. The firmusing algorithmic contracts agree to a specific intent for a given transaction, such as CFX's regulation of the futures contract market. Intent in algorithmic contracts can promote social accountability of algorithms.


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