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Conceptualizing Smart Contracts

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This presentation given at the Stanford Law School Workshop on Computable Contracts provides an overview smart contracts, that run on a blockchain, and also provides an analytical framework for understanding the use cases for their development.

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Conceptualizing Smart Contracts

  1. 1. Conceptualizing Smart Contracts Stanford Law Workshop Computable Contracts Aaron Wright Cardozo Law School January 21, 2016
  2. 2. What’s a blockchain?
  3. 3. Database maintained by a network of computers.
  4. 4. It’s not owned by any one entity or person. It’s collectively managed by a peer-to- peer network through software.
  5. 5. Data about transactions are stored in a series of “blocks” which are organized in a sequential “chain.”
  6. 6. Enables transactions involving that data to be processed and validated in a way that does not require parties on the network to trust one another
  7. 7. Why do blockchains matter?
  8. 8. Secure
  9. 9. Traceable
  10. 10. More Resilient Data
  11. 11. Self-executing
  12. 12. New part of the Internet stack
  13. 13. “Decentralised systems, such as the blockchain protocol, threaten to disintermediate almost every process in financial services”
  14. 14. What can I do with a blockchain?
  15. 15. Virtual Currencies
  16. 16. Manage access to records with greater certainty and security
  17. 17. Build Self-Executing “Smart” Contracts
  18. 18. What is a “Smart Contract”?
  19. 19. Use of code and a blockchain to execute logic if certain conditions are met.
  20. 20. Universe of Smart Contracts
  21. 21. Legal Code Universe of Smart Contracts
  22. 22. Legal Code Group Rules Universe of Smart Contracts
  23. 23. Universe of Smart Contracts Legal Code Group Rules Device Interactions
  24. 24. Universe of Smart Contracts Device Interactions Legal Code Group Rules
  25. 25. Legal Code
  26. 26. Code → less ambiguous than words Self-executing → harder to breach
  27. 27. Group Rules
  28. 28. Digital Identities & Signatures
  29. 29. E-Voting* *where public voting is not a concern
  30. 30. Uncertificated Digital Securities
  31. 31. With identity, voting records, securities, you can begin to use smart contracts to digitize corporate/LLC formations, equity allocation, and distributions
  32. 32. Device Interactions
  33. 33. Easier for machines to process code, as opposed to human readable language
  34. 34. Easier to enter into commercial arrangements using a virtual currency, as opposed to traditional hand-to-hand currency
  35. 35. Machines arguably need greater degree of precision
  36. 36. What smart contracts are being built?
  37. 37. LEGAL CODE
  38. 38. Securities
  39. 39. Derivatives
  40. 40. Capital Markets
  41. 41. Exchanges & Markets
  42. 42. Music Licensing and Royalty Payments
  43. 43. GROUP RULES
  44. 44. DEVICE INTERACTIONS
  45. 45. GROUP RULES
  46. 46. AUTONOMOUS “LAWLESS” CONTRACTS
  47. 47. What are limitations/problems with smart contracts?
  48. 48. #1 Self-Enforcement
  49. 49. • Unless provided for in the code, smart contracts lack the ability to be breached and can be hard to amend • Code immutably binds parties/devices without leaving them the possibility of unwinding the agreement, by virtue of nature of smart contract • Challenging questions for machine-to- machine commerce and legal code and unintended consequences
  50. 50. #2 Enforceability
  51. 51. • Courts have not yet affirmed the enforceability of legal code • Without absolute certainty, risk averse parties may be justifiably reluctant to enter into such agreements • Questions of agency with machines and devices—i.e., manufacturer or owners
  52. 52. Will need to back-up any legal code with a human-readable version or wrapper (known in financial cryptography circles as a “Ricardian Contract”)
  53. 53. #3 Privacy
  54. 54. • Blockchains/smart contracts are semi- private • Raises challenges for use cases, where privacy can be a valuable • Be careful when storing sensitive information on a blockchain
  55. 55. #4 Autonomy
  56. 56. • Smart contracts, on systems like Ethereum, can run autonomously without human intervention, becoming hard to stop • They are viral in nature, which raises questions as to what intermediaries will be able to be leveraged to halt their execution (miners, information intermediaries, and/or programmers).
  57. 57. Thanks! aaron.wright@yu.edu @awrigh01

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