Blockchain and the Law: The Rule of Code
I picked this book up just because I was curious what all the fuss is about blockchain and bitcoins. They came up in the news and internet so often. They sounded nebulous. I kind of understand it, but not quite. This book doesn’t disappoint.
A paper that changes the world
Satoshi Nakamoto’s system, outlined in a short nine-page article entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, relied on a network of computers to validate and maintain a record of all Bitcoin transactions. Under this model, transactions were recorded in a common data store, and the underlying Bitcoin software controlled the supply of the digital currency and coordinated transaction validation, thereby eliminating the need for centralised control.
What is bitcoin?
It’s one of many crypto currencies or digital money. Instead of paper printed by central bank, backed up by government that this piece of paper has certain value and can be used to buy stuff, digital money resides in digital wallet (e.g. phone, computer, USB stick etc) and can change hand (i.e. buying stuff) in the same way as paper money.
What is blockchain?
It’s an underlying technology upon which bitcoins are based. It facilitates the creation of resilient, tamper-resistant, and automated code-based systems that operate globally, providing people with new financial and contractual tools that could replace key societal functions. Blockchains reduce the need for intermediaries and create systems governed by protocols and other code-based rules, which are automatically enforced by the underlying blockchain-based network. Blockchain technology key characteristics are a peer-to-peer network, public-private key cryptography, and consensus mechanisms.
They are resilient and resistant to change, and enable people to store nonrepudiable data, pseudonymously, in a transparent manner. Most—if not all—blockchain-based networks feature market-based or game-theoretical mechanisms for reaching consensus, which can be used to coordinate people or machines. These characteristics give blockchains the potential to support increasingly disintermediated and global services, allowing parties to engage more directly with one another for a variety of reasons. New services can rely on a blockchain to store information, transfer value, or coordinate social or economic activity, with less of a need to pass through centralized choke points.
Essentially, blockchain can be used for things other than digital money. It can be used as a tamper-resistant and resilient repository for public records and other types of authenticated and certified information. These applications such as smart contract, blockchain-based land title etc. may have much bigger impact on society than digital money.
Why’s blockchain important?
It allows transactions among untrusting parties increasing trade deals, lowering the cost of business transactions by cutting off the middlemen (e.g. banks-the issuer of letter of credit etc.)
It serves as an auditable trail of activity occurring on a peer-to-peer network (i.e. no centralised control, no intermediary). Although information stored on a blockchain may be encrypted, contextual information about what accounts are engaging in transactions or interacting with smart contracts is, in most cases, publicly available for anyone to view. All transaction data stored on a blockchain is not just auditable but also authenticated and nonrepudiable. Because blockchains rely on public-private key encryption and digital signatures, once a transaction occurs on a blockchain-based network, parties subject to that transaction will have a hard time denying involvement.
While Bitcoin offered the ability to replace the role of central banks and eliminate the need for financial institutions, blockchain technology could be applied more generally to reduce the need for middlemen in many sectors of the economy. Whenever a trusted authority is necessary to coordinate social or economic activity, blockchain technology could provide the necessary infrastructure to replace this activity. The roles of banks, financial institutions, stock exchanges, clearinghouses, content providers, online operators, and even governmental systems could all be modeled by a set of protocols and code-based rules deployed on top of a blockchain-based network.
Parallel of currencies and content
Currencies are becoming untethered from both their physical manifestation and centralized control. Just as the Internet separated creative content from physical newspapers, compact discs, and VHS tapes, rendering the flow of information less controllable, we are beginning to witness a similar pattern emerging in the context of currency and financial payments.
What is a smart contract?
To understand a smart contract we may need to recap what the conventional/standard contracts are like. They’re written in prose full of legal jargon to specifically describe interactions between, responsibilities of and consequences of non-compliance among parties. Enforcement happens after the fact (of non-compliance) and third-parties (i.e. court/government) are required to enforce the contract which naturally means complex and long court proceedings. Smart contracts, on the other hand, is written in computer program or code. It describes interactions, responsibilities and consequences of non-compliance in the same way as conventional contract, but the enforcement is done by the program before the act of non-compliance. For example, money (in the form of bitcoins, perhaps) will automatically (done by a program as previously written in a smart contract) change hand once product delivery is confirmed.
Smart contracts could structure a decentralized application, set a market price for rides, match drivers and riders, handle payments, facilitate ratings, and define transparent rules for the organization’s management. This new organization could be designed to be self-sufficient, borderless, and open to drivers around the world. The organization’s underlying smart contracts could collect a small portion of each fare and store it in a collectively managed digital currency account. That means Uber could potentially be replaced with rider cooperatives based on smart contract.
Samsung recently released a washing machine that relies on the A.D.E.P.T. framework to automatically order (and pay for) new detergent from an online service whenever the inventory of detergent runs low. In essence, smart contracts allow business transactions between machines.
German company Slock.It is building smart contracts that would enable people to rent or share anything connected to a smart lock, including bikes, storage lockers, or homes. The smart lock is tied to a smart contract on the network, and anyone who wants to lease a product relying on Slock.It’s technology would simply need to send the rental price to the lock’s digital currency address. Seconds later, the lock would open, and remain under control of that person until the lease expired. This is the intersection of the physical and the digital. Devices can be independent actors on the blockchain — they can consent to contracts, spend money, talk to each other, all independent of human control. Most importantly, you don’t have to pay 15-30% commission to Airbnb.
Smart contract and legal profession
The widespread adoption of smart contracts also may accelerate changes in the delivery of legal services, resulting in a structural shift in the legal profession. As smart contracts become more and more sophisticated, individuals could rely less on the advice of lawyers, opting to use standardized agreements, some of which incorporate smart contract code.
The opposite side of the coin
Whether we would rather live in a world where most of our economic transactions and social interactions are constrained by the rules of law—which are universal but also more flexible and ambiguous, and therefore not perfectly enforceable—or whether we would rather surrender ourselves to the rules of code. Decentralized blockchain-based applications may well liberate us from the tyranny of centralized intermediaries and trusted authorities, but this liberation could come at the price of a much larger threat—that of falling under the yoke of the tyranny of code.