Smart Contract Cryptolaw to accelerate the Automation Economy

Smart contracts are agreements between parties posted to the blockchain, possibly for automated execution. The agreements can be and among humans and technology entities (like machine to machine communications). Smart contracts don't make anything possible that was previously impossible, but rather, allow solving common problems in a way that minimizes trust. Minimal trust often makes things more convenient by allowing human judgements to be taken out of the loop, thus allowing complete automation. Ethereum and Eris Industries are open-source software projects developing smart contract platforms. Some examples of smart contracts are betting on the high temperature tomorrow, without an intermediary, automated mortgage rate resets, inheritance payouts, and peer-to-peer insurance.

Economy Outsourced to Smart Contract DAOs/DACs?
Smart contracts bring up the distinction between technically-binding and legally-binding frameworks, where code contracts run inexorably even if conditions have changed whereas human contracts are more flexibly binding. The quintessential example of a smart code contract is a vending machine. If the vending machine is not broken, every time you put in money, you get your selected item. The machine is not thinking of when or how to comply with your request, there is no discretion, the machine always complies. The key shift is that we want to be aware of is that we are starting to have a world not just where we have vending machines, but where smart contracts might be running big sectors of our economy, for example the whole mortgage industry.

Cryptolaw: intersection of Technological and Legal Frameworks
Cryptolaw then is the intersection of technological and legal frameworks. One key question is whether we want a separate legal system for smart contracts since they may be unenforceable in our current legal system. For example, a decentralized program already launched and running is difficult to control, regulate, or sue for damages. Further, smart contracts impact not just contract law, but the notion of the social contract within society more generally. What kinds of social contracts do we humans want with technological entities?

Compliant and A-compliant Smart Contracts
As with blockchain applications being in two modes, enterprise and individual, the thinking is that there may be two modes of smart contracts: compliant and a-compliant. Compliant smart contracts would have the four parameters of mutual assent, consideration, capacity and legality, and features such as a kill switch, automated consumer protection, assurity funds escrowed, and identity transparency. The other mode, a-compliant smart contracts, would be operating outside but not necessarily in opposition to, the current legal structure. Another way of looking at this is by the counterparty, are these human-human, human-entity, or entity-entity contracts? We may have a future world where there are new forms of legal entity status like personhood granted to smart contract entities like with corporations. http://www.slideshare.net/lablogga/blockchain-consensus-protocols

Material inspired by: Primavera de Filippi and Gavin Woods.
More Details: Cryptocitizen: Smart Contracts, Pluralistic Morality, and Blockchain Society

Rethinking Risk with Automated Blockchain Macroeconomic Indicators

Progress is underway to investigate and migrate many different parts of the banking, securities, and insurance industries to public and private blockchains. These operations include settlement and clearing, smart property digital asset registration and transfer of stocks, bonds, derivatives, private equity, and other instruments, and the structuring of more predictable insurance payouts. One next step is articulating how blockchains might be used more broadly across industries and economies for automated risk management and macroeconomic indicator generation. This could help meet the need for real-time knowledge about the health of financial systems, especially given their interdependence and global nature.

Automatic Macroeconomic Indicators
The pseudonymous property of blockchains could be a valuable parameter of transaction data structures that automatically relay meta-data as a semi-private input to large-scale open risk models [1] at the entity and macroeconomic level. Risk measurement and macroeconomic indicators could thus be produced automatically in real-time with tremendous aggregate transparency. The functionality could be built into fintech blockchains as a standard, with other organizations (like smart contract DAOs) to blend the data into macroeconomic statistics. Fintech standards bodies analogous to IEEE working groups could recommend protocols. Transaction meta-data aggregation could also engender a new class of economic indicators granularly measuring sophisticated parameters such as interlinkage, complexity, value-at-risk, and country-level inflows/outflows, and prediction markets and derivatives could run over these.

Hayekian Market Signaling
For automatically generated macroeconomic indicators, there would need to be a willingness to disclose exposure, whether pseudonymous or not, and whether on public or private blockchains. This could be compelled by regulatory entities, or better, volunteered as a market-signaling technique, just as the smart contract industry may fork into legally-compliant and a-compliant contracts. Prediction markets could be a further layer to elicit anonymously-voted opinions regarding data quality. This could facilitate the concept of markets as discovery in the Hayekian competitive currencies model and address systemic collusive tendencies and the predictive avoidance of collapses.

Immanence Philosophy of Risk
One effect of having granular, precise, real-time automated economic indicators and risk measurement systems is that it could enable more fundamentally our definition of risk to shift. As traditionally conceived, we have what is conceptually and emotionally a scarcity relationship with risk. Risk is something to measure, avoid, manage, and control, as exemplified by traditional finance and insurance models. There is the begrudging position of ‘no risk, no reward’ and ‘nothing ventured nothing gained,’ but this view is conceived in the scarcity of trade-offs, not in the abundance of making new bigger spaces for opportunity. Instead, risk could be reconceptualized as ‘taking a step,’ taking a step into an unknown of immanence, from an unknown yet supported downside and into a completely open upside. Immanence risk models could be realized through societal shared trust and the willingness to share information in comfortable ways to create the underlying layer supporting the open upside. A concrete example of this could be deploying open source FICO scores and decentralized credit bureaus with blockchain-based reputation structures where the global shared information trust model facilitates the local open upside possibility.

[1] Open Source Risk Model resources:
Hwang, J.H. Proposal for an Open-Source Financial Risk Model
Papadopoulos, P. OpenRisk.eu, Open Risk API (White Paper, Github)

Blockchain Thinkers and Smart Contracts to take over the World?

Automatically-executing smart contracts and their impact on society has been contemplated in many different contemporary science fiction works like Daemon (Suarez), and Accelerando and Glasshouse (Stross). The interesting point is that artificial autonomous agents are becoming increasingly full-fledged participants in the real-life contemporary world. There are many forms of artificial intelligence in development, and also the advent of new kinds of information technology like blockchains.

Blockchains could be an explosive operational venue for new kinds of autonomous agents like distributed autonomous corporations (DACs), a long-envisioned concept in computing and science fiction. Blockchains are a universal permanent public transaction ledger where smart contracts can be encoded to conduct certain activities in the future. For example, a smart contract could be used to specify a bet between two parties about the maximum temperature tomorrow. The smart contract, itself being online, will automatically check the temperature tomorrow per a pre-specified information oracle (like an Internet-based weather site) and pay out the proceeds to the winning party. Similarly, more complicated arrangements like mortgages (with interest rate resets) and wills (payout per a person’s death) could be encoded in smart contracts.

Far more complicated smart contracts could also be specified, for example for DACs where all corporate documents are encoded to blockchains. This would include the operating charter, governance rules, financial statements, client contracts, licenses, and other documents for orchestrating all manner of corporate conduct. A DAC would engage in the full suite of activities conducted by any physical-world corporation, except that all operations would be triggered to execute automatically per blockchain-based smart contracts. Since all of the DAC’s activities are blockchain-registered transactions, its operations are transparent and publically-inspectable on demand at any moment. Other advanced entities could include Blockchain Thinkers and fully-autonomous Blockchain AIs.

Smart-contract entities are a new concept that is not presently part of everyday human life, but is contemplated in science fiction works such as Daemon (Suarez), Accelerando and Glasshouse (Stross), and the Golden Age trilogy and Hermetic Millennia (John C. Wright). These narratives provide various portrayals of what life might be like with humans and autonomous corporations living in coexistence. On one hand, there are many potential efficiency and transparency benefits that facilitate societal interaction as agent motives and activities can be observed more closely and constitute a truer measure of reputation. On the other hand, DACs are a monolithic code entity that may execute unstoppably despite changing world conditions. Code has always been law (inexorably-executing), but the context for human interaction with such code has been more limited. In the current connected world, humans may be increasingly living side-by-side with different gradations of code-based sentient entities such as personalized robots, artificial companions, Internet-of-Things smarthome networks, self-driving connected cars, and Blockchain Thinkers.

New Legal Regime for Blockchain-based Smart Property and Smart Contracts?

Beyond the already wide-ranging digital currency and financial transaction applications for blockchain technology, there is another class of applications that could allow a complete reconfiguration of law and government. Blockchains are a new form of decentralized information technology, the trustless cryptographic public ledger system that underlies digital currencies like Bitcoin. Some of these potential application in law and government are that in the future, all property (hard and soft assets, and intellectual property) could be registered and transacted via blockchains as smart property. Likewise, all forms of legal agreements, contractual relationships, and governance could be enacted through code-based smart contracts.

An important consideration raised by the possibility of smart contracts and systems of cryptographically-activated assets is whether a new body of law and regulation is required to distinguish between technically-binding code contracts, and more flexible legally-binding human contracts. Contract compliance or breach is at the discretion of human agents in a way that it is not with blockchain-based or any kind of code-based contracts. Since it could be nearly impossible to enforce smart contracts with law as currently enacted (for example, a decentralized program already launched and running is difficult to control, regulate, or sue for damages), the legal framework is essentially pushed down to the level of the contract. It is not that lawlessness and anarchy would ensue with smart contracts, but the implication is that legal frameworks would become more granular and customized to the situation. Parties agreeing to a contract could choose a legal framework just as jurisdiction is selected as a parameter now. Thus smart contracts impact not just property law and contract law, but more broadly the notion of the social contract within society.

Counterparty/Ethereum: Why Bitcoin topped $450 today (was under $350 last week)

In the heated development space for Bitcoin 2.0 protocol projects (Figure 1), on November 12, 2014, Counterparty announced that they ported the open-source Ethereum programming language onto their own platform. Ethereum is regarded as one of the most advanced Bitcoin 2.0 projects, a general-purpose Turing-complete cryptocurrency platform. Turing-complete in this sense means able to run any cryptocurrency protocol and any cryptocoin, essentially a universal crypto-platform (the platform wins, not any specific cryptocurrency). Now Counterparty can do this too, serve as a Turing-complete platform, and possibly in a better way than Ethereum since Counterparty is already running on the existing architecture, the Bitcoin blockchain (with 90% cryptocurrency market cap), the de facto standard, already-launched, worldwide, secure platform.

Figure 1: Sample List of Bitcoin 2.0 Protocol Projects. 

(Extended from work by Piotr Piaseki)

This is Good News for All Parties (not just Counterparty): Bitcoin 2.0 is Just Beginning 

This does not mean 'game-over' for Ethereum, or 'game-won' to Counterparty. It is a sign of the dynamism in the space and the rapid innovation that open-source software communities enable (both Ethereum and Counterparty's software is all open-source). Every different project is able to examine and work with the code of the other projects and bring in any and all implementations. It means that good ideas can take seed more rapidly, be improved through iteration, and allow space for the next good ideas. Ethereum and Counterparty both have deep visions for the whole future architecture of the blockchain, and establishing early 'plumbing' foundations can help everyone progress to the next levels. In the seething hive of Bitcoin innovation, these kinds of announcements would be expected to continue, both since the blockchain industry is in early stages of development, and especially due to the open-source code liquidity of the industry.

Smart Contracts

The great benefit is that now Counterparty may be able to quickly launch the ability to do smart contracts on their platform, since Ethereum is known for its intricate focus on smart contract functionality. Smart contracts is the capacity to do more elaborate transactions on the blockchain, moving beyond simple buy-sell currency arrangements to more sophisticated contracts such as a loan with ongoing payments and interest rate resets. However, even before the Ethereum port, Counterparty did have some degree of smart contract capability (certainly for the basic smart contracts that are not even yet widely-used), as does the Bitcoin blockchain itself, and other solutions like Colored Coins and Coinprism. Other Bitcoin 2.0 protocol projects such has Ripple have their own smart contract facility, Codius.

The key point is that the blockchain industry is currently building out the infrastructure, the enabling layers in a protocol stack, the plumbing of the new layers of the Internet. There is tremendous functionality fungibility across blockchain protocols and platforms. In the blockchain plumbing layer, it might be possible to do some degree of smart contracts and tokenized altcoin issuance and multi-sig wallets on all cryptoplatforms. The questions are therefore 1) which Bitcoin protocol 2.0 platforms will emerge as standard after the intense innovation and development phase, and 2) which platforms will prove to be the most secure and raid/theft-free, and 3) at the higher level, which will be the new value-added services (the Netscape, Amazon, and Uber of the future) built atop the Bitcoin protocol plumbing protocol layers.

Take-Away Message 

The important take-away message is that the Bitcoin 2.0 protocols space may only heat up with more announcements to be expected, and more projects forming, merging, dying, and cross-implementing. Also that there could continue to be substantial volatility in the price of Bitcoin. The Counterparty announcement should be seen as support for the overall blockchain industry and underlines the clear demand to move beyond Bitcoin 1.0 currency (even as this segment is still developing) to Bitcoin 2.0 contracts. This has always been part of the initial vision set forth by Satoshi Nakamoto:

"The [Bitcoin] design supports a tremendous variety of possible transaction types that I designed years ago. Escrow transactions, bonded contracts, third party arbitration, multi-party signature, etc. If Bitcoin catches on in a big way, these are things we’ll want to explore in the future, but they all had to be designed at the beginning to make sure they would be possible later." (Nakamoto). 

Reference: Nakamoto, S. (2010). Re: Transactions and Scripts: DUP HASH160 ... EQUALVERIFY CHECKSIG. Bitcointalk.