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All watched over machines of loving grace amsterdam

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Presented at IViR, Amsterdam, 6/9/19

Published in: Law
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All watched over machines of loving grace amsterdam

  1. 1. A L L WAT C H E D O V E R B Y M A C H I N E S O F L O V I N G G R A C E : A C R I T I C A L L O O K AT S M A R T C O N T R A C T S D R A N D R E S G U A D A M U Z , U N I V E R S I T Y O F S U S S E X
  2. 2. A P O L O G I E S …
  3. 3. “I like to think (it has to be!) of a cybernetic ecology where we are free of our labors and joined back to nature, returned to our mammal brothers and sisters, and all watched over by machines of loving grace.” Richard Brautigan
  4. 4. W H AT I S A S M A R T C O N T R A C T ? • Part of a larger topic dealing with autonomous agents and AI and the Law. • Excellent scholarship on translating legal norms to machine-readable expressions. • Traditional concept is just a self- executing contract written in code. • Latest iteration includes the use of cryptographic tools, particularly the blockchain.
  5. 5. B L O C K C H A I N
  6. 6. W H AT I S A B L O C K C H A I N ? • A blockchain is quite simply an open, permissionless, cryptographic, decentralised ledger. • The ledger is public and decentralised, and since anyone can check past, present and proposed transactions, there is increased reliability in the system.
  7. 7. I M M U TA B L E A N D TA M P E R - F R E E • A hash function: a mathematical operation that can produce a unique output depending on the input. • Take some text, turn it into numbers, and then apply a formula (the hash function) that will produce a unique number (the hash value). • Changing the original text, then the resulting number would not match the hash value. • Blockchains consist of blocks of transactions that are chained together by appending the hash of the previous transaction, making it impossible to change, and therefore makes them tamper-free.
  8. 8. P R O O F O F C O N C E P T
  9. 9. C H A R A C T E R I S T I C S • Proof of Work. Reward for running the program to verify transactions. • Proof of Stake: Chooses the allocation of the next block between those with a stake in the system without the need for large expenditure of resources. • Authentication. This is the main function of a blockchain, the implementation must be designed to validate transactions securely and unequivocally. • Decentralization. The blockchain must be decentralized, so copies of the entire ledger cannot be held centrally. This presents a few technical problems, such as the increasingly unmanageable size of the blockchain as more transactions accumulate.
  10. 10. B L O C K C H A I N P O T E N T I A L • Verify banking transactions. • Verify bets. • Verify music uses to give royalties to artists real time. • Identify a work owner. • Verify contracts. • Verify provenance.
  11. 11. B L O C K C H A I N L A W S • Several US states have amended their legislation to allow smart contracts, or have implemented sui generis laws. • Arizona, Delaware, Illinois, Nevada, Tennessee, Vermont, and Wyoming. • Usually they define blockchain and smart contracts in one way or another. • Pretty poor definitions, not technology neutral.
  12. 12. A R I Z O N A L A W 2 0 1 7 ( H B 2 4 1 7 ) • “Blockchain technology" means distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.
  13. 13. S E V E R A L O T H E R E F F O R T S • In Europe, Lichtenstein has been one of the first to regulate smart contracts and blockchain. • Switzerland will be following suit with a new legislation: “Bundesgesetz Vorentwurf zur Anpassung des Bundesrechts an Entwicklungen der Technik verteilter elektronischer Register”. • Detailed responses that seem to be regulating yesterday’s technologies and exchanges. • Are they needed?
  14. 14. S M A R T C O N T R A C T S
  15. 15. W H AT I S A S M A R T C O N T R A C T ? • There was a time before the blockchain! • Traditionally smart contracts meant any code implementation of a contract where the parties were automated. • It’s been in use in B2B contracts for decades.
  16. 16. “ S T R O N G ” S M A R T C O N T R A C T S • Implemented in code using a common language (eg Solidity). • Pegged to a cryptocurrency for automated payments and transactions. • Transaction and contract get written into the blockchain. • Immutable code, openly verifiable transactions.
  17. 17. A R I Z O N A L A W 2 0 1 7 ( H B 2 4 1 7 ) • "Smart contract" means an event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.
  18. 18. T Y P E S O F S M A R T C O N T R A C T S • Machine-to-machine transactions • Cryptocurrencies • Crowdfunding (ICO) • Governance (DAO) • Decentralised apps (ÐApps) • Rights management • Registries • Dispute resolution
  19. 19. U S E F U L C O N C E P T S • Contract Source Code • Wallet: Where your coins are stored. • Token: represents any fungible tradable good: coins, loyalty points, gold certificates, IOUs, in-game items, etc. • Keys: Used to digitally sign the contract, usually pegged to your token, need the key to access your coins.
  20. 20. https://www.mme.ch/de/magazin/ bcp_framework_for_assessment_of_crypto_tokens/
  21. 21. I T ’ S A L L C O D E
  22. 22. C A N B E R U N L O C A L LY, O R O N A D I S T R I B U T E D P L AT F O R M
  23. 23. S T E P S T O D E P L O Y A C O N T R A C T I N E T H E R E U M • Write it in code (Solidity). • Run it locally to test it. • Test it in a small external net (ethereumjs-testrpc) • Compile using a Solidity compiler. • Upload the contract using command line node that interacts with the Ethereal blockchain (geth).
  24. 24. S O M E R E L E VA N T C H A R A C T E R I S T I C S • As the most popular smart contract platform is Ethereum, the smart contract relies on that platform, development team, software tools, and governance structure. • Once deployed in the blockchain, the contracts cease to exist independently, they are distributed and their performance depends on miners. • The miners will run calculations to obtain cryptocurrency as a reward for operating the network.
  25. 25. E T H E R E U M N O D E S
  26. 26. E T H E R E U M M I N I N G N O D E S
  27. 27. C A N A B L O C K C H A I N B E U S E D T O C O N D U C T A C O N T R A C T ? • Yes, if the parties can express properly offer and acceptance (and consideration), and other formalities according to national law. • Art 9 E-commerce Directive 2000/31/EC: “Member States shall ensure that their legal system allows contracts to be concluded by electronic means.” • US blockchain legislation allows contract formation using smart contracts.
  28. 28. R I C H L I T E R AT U R E O N L E G A L A S P E C T S • Durovic M and Janssen A, ‘The Formation of Blockchain-Based Smart Contracts in the Light of Contract Law’ (2018) 26 European Review of Private Law 753. • Cannarsa M, ‘Interpretation of Contracts and Smart Contracts: Smart Interpretation or Interpretation of Smart Contracts?’ (2018) 26 European Review of Private Law 773. • Giancaspro M, ‘Is a “Smart Contract” Really a Smart Idea? Insights from a Legal Perspective’ (2017) 33 Computer Law & Security Review 825. • Geiregat S, ‘Cryptocurrencies Are (Smart) Contracts’ (2018) 34 Computer Law & Security Review 1144.
  29. 29. S O M E I N T E N D E D A N D U N I N T E N D E D C O N S E Q U E N C E S • The parties in the smart contract are not necessarily in control. • Coded contracts that are placed in a public ledger may rely on an army of intermediaries, from platform developers to miners. • Various points for legal accountability?
  30. 30. A F E W T H I N G S T O K E E P I N M I N D • Not all “smart contracts” are contracts. • Smart contracts can be anonymous, so legitimacy and capacity could be an issue. • Electronic Identification and Trust Services Regulation: advanced electronic signatures need to identify the person.
  31. 31. P R O B L E M S W I T H S M A R T C O N T R A C T S
  32. 32. A F E W I S S U E S
  33. 33. W H E R E T O S TA R T ? • Clunky, heavy, expensive, environmentally unfriendly. • Do not scale well, particularly PoW blockchains. • Lots of projects that start out as blockchain have been abandoned, or became non-blockchain. • Immutable nature presents several problems. • Whoever writes the blockchain writes history forever.
  34. 34. P R O B L E M S W I T H I M M U TA B I L I T Y
  35. 35. I M M U TA B L E E R R O R S • Immutability could be a problem. • Once written, the contract tends to stay that way forever. • Bugs can lead to huge losses. See the Parity Wallet, an Ethereum smart contract that locked out between $100 and $300 million USD due to a bug. • Other bugs have allowed fraudsters to take advantage.
  36. 36. D E C E N T R A L I Z E D A U T O N O M O U S O R G A N I Z AT I O N ( D A O )
  37. 37. D A O “ T H E F T ” • DAO operates a pool of millions of USD worth in Ether (ETH). • Only those participating in contract verification can withdraw funds according to terms of participation. • On June 17 2016, a bug in the code allowed malicious party to syphon funds from common pool (estimated 3.6m ETH, about $50 million USD at the time). • Hard fork from developers “turned back time”.
  38. 38. L O R D H O D G E • “Smart contracts” are contracts which can be partially or fully executed or enforced without human intervention […] Courts will not be able to cancel the performance of the contract. But a remedy may lie in the law of unjust enrichment... to compel the parties to re- transfer the property or money".
  39. 39. P R O B L E M S W I T H “ D E C E N T R A L I S AT I O N ”
  40. 40. AT TA C K O F T H E B L O C K C H A I N • The problem is that blockchains have specific features that may make enforcement difficult. • Anonymity • Reliance on a network • 51% attack • Forking
  41. 41. “ D E - C E N T R A L I S E D ” C O N T R A C T S • Contracts not run locally, dependent on a variety of actors. • Jurisdictional nightmare. • Anonymous parties, foundations based in Switzerland, with funds in all over the place. • Miners based in China.
  42. 42. 5 1 % AT TA C K • Blockchains are immutable. As long as no miner gains majority control of the network, then they can perform what is known as a 51% attack. • This allows a malicious agent to broadcast wrong information and validate it as true. • Several attacks to smaller coins have taken place, biggest victim was Ethereum Classic in January 2019.
  43. 43. I D E A L O F M I N I N G
  44. 44. S I C H U A N F L O O D I N G R E A L I T I E S
  45. 45. R E M E D I E S
  46. 46. S C E N A R I O S • Error in code cannot be changed, funds are frozen, who is liable? Who can you sue? • Contract contains purposeful error by fraudster. • Coin used for payment that loses all value. • Developers fork code, making two copies of contract, perhaps diluting value. • Miners decide to attack a contract, changing history in the ledger. • “Garbage in, garbage out”.
  47. 47. R E M E D I E S • Here’s where the few articles dealing with smart contracts talk about remedies. • No reason to forego existing principles of contract law. Error, contracting under mistake, frustration, unjustified enrichment, etc. • Assumption is that under normal circumstances, smart contracts should be treated as any other contract. • But these are not normal circumstances. Contract cannot be changed or re-written!
  48. 48. S U E T H E M I N E R S ? G O O D L U C K W I T H T H AT …
  49. 49. S U E T H E D E V E L O P E R S ? • A tempting idea is to think of suing the developers. • As Ethereum has demonstrated with the DAO hack, developers can fork the code and “turn back time". • Could you sue a developer to mandate a fork? • A couple of early attempts in the US have been abandoned, but this could be interesting avenue. • However, developers exist around the world, they could simply not comply.
  50. 50. O T H E R P R O B L E M S
  51. 51. M I S TA K E N O W N E R S H I P • Registry systems would still need a central authority. • Person got “ownership” of the Mona Lisa in a blockchain registration system. • “Garbage in, garbage out”.
  52. 52. D R M O N S T E R O I D S • A common criticism of digital rights management systems is that they often bypass exceptions and limitations. • Users have a set of permissions under copyright which an automated and self-executing smart contract would ignore. • It would be difficult to code the complex intricacies of fair use and fair dealing.
  53. 53. L O S I N G Y O U R K E Y…
  54. 54. T H E L L A M A S O C K P R O B L E M
  55. 55. @ T E C H N O L L A M A Thanks

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