Crypto Law
Opportunities for cryptographic protocols in
shaping the legal systems of the 21st
century
Purpose of Law
● Prevent involuntary interactions
● eg. theft, murder, etc
Purpose of Law
● Mediate ongoing interactions
● eg. I offer to sell you shirt for $10, you send
me $10, I do not send shirt
Types of fraud
● Total
● not sending a product
● Partial
● sending a product with very bad quality
● Visible
● defect is i...
Idea: incentives
● No legal system
● Profit from acting honestly: $3
● Profit from cheating: $10
● Legal system
● Profit f...
Cryptoeconomies
● Involuntary interaction
● Violent attack impractical
● Hacking, perhaps practical
● Ongoing interaction
...
Case studies
TorWallet (2013)
Pirateat40 (2012) Bitcoinica (2012)
MtGox (2014)
Solutions
● Know whom you are trusting
● Add disincentive to cheat
● Require collusion to cheat
● Make cheating more visib...
Know whom you are trusting
● Idea: if A trusts B, and B trusts C, then C is
more likely to be trustworthy
● Secondary bene...
Add disincentive to cheat
● Deposits
● A submits N coins as deposit, if A cheats
then deposit goes to B
● Sacrifices
● A s...
Require collusion to cheat
● Multisig
● Oracles (for data)
● Wallets (for personal security)
● Multisig 2.0
● Withdrawal l...
Make cheating more visible
Provably fair gambling
Provable solvency
Make cheating impossible
● Factum law
● Idea: the definition of how much money
you have is based on the results of past
co...
Blockchain-based contracts
Financial derivative, 21 lines of code:
if !contract.storage[1000]:
contract.storage[1000] = ms...
Applications
● Self-executing financial contracts
● Computational applications
● Proof of resource
● Proof of bandwidth
● ...
Benefits
● Cost of enforcement tends to zero
● Scalable (works for both $1
microtransactions and very large trades)
● No b...
Problems
● How to determine precedents?
● What level of bad quality is actually
fraudulent?
● What are the defaults?
● Net...
End
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Crypto Law

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Crypto Law

  1. 1. Crypto Law Opportunities for cryptographic protocols in shaping the legal systems of the 21st century
  2. 2. Purpose of Law ● Prevent involuntary interactions ● eg. theft, murder, etc
  3. 3. Purpose of Law ● Mediate ongoing interactions ● eg. I offer to sell you shirt for $10, you send me $10, I do not send shirt
  4. 4. Types of fraud ● Total ● not sending a product ● Partial ● sending a product with very bad quality ● Visible ● defect is immediately obvious ● Invisible ● defects take months to manifest ● defects have only a small chance of manifesting ● Types of underlying commerce ● Product, one-time service, ongoing service ● Financial service
  5. 5. Idea: incentives ● No legal system ● Profit from acting honestly: $3 ● Profit from cheating: $10 ● Legal system ● Profit from acting honestly: $3 ● Profit from cheating: -$40 ● Problems ● How to prove fraud (information asymmetry) ● Cost of filing a claim ● Cost of enforcement
  6. 6. Cryptoeconomies ● Involuntary interaction ● Violent attack impractical ● Hacking, perhaps practical ● Ongoing interaction ● Fraud more difficult (information is more public) ● Fraud easier (people are anonymous) ● General problems ● Commerce international (enforcement harder) ● Rapidly changing society (harder to set standards)
  7. 7. Case studies TorWallet (2013) Pirateat40 (2012) Bitcoinica (2012) MtGox (2014)
  8. 8. Solutions ● Know whom you are trusting ● Add disincentive to cheat ● Require collusion to cheat ● Make cheating more visible ● Make cheating impossible
  9. 9. Know whom you are trusting ● Idea: if A trusts B, and B trusts C, then C is more likely to be trustworthy ● Secondary benefit: if C cheats B, C loses reputation with A too ● Naive implementations vulnerable to sybil attack, be careful
  10. 10. Add disincentive to cheat ● Deposits ● A submits N coins as deposit, if A cheats then deposit goes to B ● Sacrifices ● A sacrifices N coins to be able to participate in a system ● Idea: allow reputation to go negative ● Hostages ● A submits N coins as hostage, if A cheats then coins are destroyed or sent to charity
  11. 11. Require collusion to cheat ● Multisig ● Oracles (for data) ● Wallets (for personal security) ● Multisig 2.0 ● Withdrawal limits ● Rights of refusal
  12. 12. Make cheating more visible Provably fair gambling Provable solvency
  13. 13. Make cheating impossible ● Factum law ● Idea: the definition of how much money you have is based on the results of past contracts ● If you cheat, the system automatically deducts $X ● Problem: not everything is cryptographically verifiable ● Computational resources: yes ● Math problem solutions: yes ● Subjective effort: no ● Offline effort: no
  14. 14. Blockchain-based contracts Financial derivative, 21 lines of code: if !contract.storage[1000]: contract.storage[1000] = msg.sender contract.storage[1002] = msg.value contract.storage[1003] = msg.data[0] contract.storage[1004] = msg.data[1] elif !contract.storage[1001]: ethvalue = contract.storage[1002] if msg.value >= ethvalue: contract.storage[1001] = msg.sender c = call(contract.storage[1003],[contract.storage[1004]],1) othervalue = ethvalue * c contract.storage[1005] = othervalue contract.storage[1006] = block.timestamp + 500 else: othervalue = contract.storage[1005] ethvalue = othervalue / call(contract.storage[1003],contract.storage[1004]) if ethvalue >= contract.balance: send(contract.storage[1000],contract.balance) elif block.timestamp > contract.storage[1006]: send(contract.storage[1001],contract.balance - ethvalue) send(contract.storage[1000],ethvalue)
  15. 15. Applications ● Self-executing financial contracts ● Computational applications ● Proof of resource ● Proof of bandwidth ● Decentralized organization management ● Shareholder relations, board election rules, etc ● Decentralized oracles (Truthcoin, SchellingCoin)
  16. 16. Benefits ● Cost of enforcement tends to zero ● Scalable (works for both $1 microtransactions and very large trades) ● No barriers to entry, anyone can participate
  17. 17. Problems ● How to determine precedents? ● What level of bad quality is actually fraudulent? ● What are the defaults? ● Network effects ● Only effective if many people using it ● Solution: start in a community
  18. 18. End
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