On the intellectual origin of blockchain (III). More on the recent forerunners

I ended the previous post on the subject of David Chaum and how his DigiCash did not lead to a proper break with traditional cash. The disruptive leap in this respect, even if still only in a theoretical or speculative realm, is attributable to the following two characters in this story.

The first of these characters actually worked with David Chaum at the unsuccessful DigiCash company. I am talking about a U.S. citizen with a Hungarian surname: Nick Szabo. A multi-talented man: computer science graduate (1989) from the University of Washington, cryptographer and jurist. Besides working at DigiCash, he was the designer of bit gold, a digital currency project, forerunner of Bitcoin and blockchain. Many have said in fact that the real person behind the pseudonym “Satoshi Nakamoto” –the bitcoin creator – is Szabo, something he has always denied. British writer and journalist Dominic Frisby said: “I’ve concluded there is only one person in the whole world that has the sheer breadth but also the specificity of knowledge and it is this chap…”. There is even a subunit of the Ether cryptocurrency (the currency running on the Ethereum platform) that was given his name (the szabo).

Szabo’s first great contribution on this subject was a paper entitled “Smart contracts: building blocks for digital free markets”, published in a Californian futurist and transhumanist journal called Extrop in 1996. In this visonary article, Szabo, computer engineer, cryptographer, as well as jurist, asks how the Internet, combined with modern cryptographic protocols (asymmetric or double key cryptography, blind signature systems such as those devised by Chaum, multiple signature systems, mixing protocols) could revolutionize traditional contract law, by enabling such a basic part of the law, a contract, which is the basis of the whole of our market economy, to be up to meeting the requirements of online trading. It was in this paper that the term and idea of “smart contract”–now part of everyone’s vocabulary- was created: a software program through which obligations that are both agreed and programmed are enforced automatically, giving rise to a contract that executes itself, aided by computer technology. Which is ideal particularly for a contract not just between absent parties but also between strangers who have no ground for trusting each other. This was also where we first saw the term “smart property” used to refer to a smart contract incorporated into a physical object (a vehicle, the lock of a house), so the physical availability of that object is also programmable according to the terms of a specific agreement.

This first paper on smart contracts was revised and extended in a 1997 publication entitled “Formalizing and securing relationships on public networks”. Here we now find an allusion to the idea of a distributed trust, in other words, to how the participation of several agents in the monitoring and recording of a transaction is a guarantee of certainty and protection against fraud.

This idea was explored further and started to gain importance in publications such as “Secure Property Titles with Owner Authority” a paper published in 1998, in which, faced with the problems of political uncertainty and discretionality –in less developed countries especially- that are associated with centralized property record systems, it was proposed to have a titles database distributed or replicated across a public network (a record system that –it tells us- would be able to survive a nuclear war). This involves the creation of a kind of property club on the Internet that gets together and decides to keep track of the ownership of some kind of property. The title held by each is authenticated with the electronic signature of the previous owner a process that is reproduced with each successive owner, forming a chain. And the record of the chain of titles which shows the current owner of each item of property is based on a consensus of the majority of the participants, given that it is unlikely that they will all come to an agreement to commit fraud. As we shall see, here lies the core of the ownership recording system for the bitcoin.

Another important paper exploring these ideas is “Advances in distributed security” published in 2003, where Szabo proposes leaving behind the unattainable idea of absolute certainty, to settle for systems with a high probability of certainty such as that provided by cryptography. In this context, he proposes processes such as distributed time-stamping, the use of hashes as a means of identifying the time-stamped messages or files, the creation of “Byzantine-resilient” replication systems, etc.

Alongside his concern over alternative systems to ensure compliance with contracts and the chain of ownership using the Internet, software programming and cryptography, Szabo also turned his attention to the specific subject of money, going much further than the ideas explored by David Chaum. What concerned him, as we have seen, was the subject of privacy: how the fact of acting as intermediaries in our electronic payments gives the financial institutions knowledge of essential information on our lives. Szabo also confronted another issue: placing the value of the money we use at the discretion of political authorities; the problem of discretionary inflation, in other words. This is where the impact of his 1998 proposal for bit gold lay, which appeared at the same time as another very similar idea: b-money, belonging to Wei Dai.

This Wei Dai is a cryptographer, and a fellow computer science graduate from the University of Washington. In 1998 he published a very short paper with the title “B-money: an anonymous, distributed electronic cash system” in the Cypherpunks mailing-list which was later quoted as a reference work in the whitepaper by Satoshi Nakamoto (no work by Szabo was ever quoted as such). The driving force behind Dai’s work, like any good cryptoanarchist, was basically the opacity of cash transactions, and the terminology was perhaps a little too eloquent: “b-money”. An interesting fact is that the smallest unit of the Ether cryptocurrency is called “wei”, named after that forerunner.

The idea put forward in these proposals (which tie in with the most radical visions of cryptoanarchism of Tim May whom Dai explicitly quotes at the beginning of his paper) is not to represent the existing money that is legal tender in a new electronic format to enable or achieve the anonymity of electronic payments, instead to replace that money originating from the government with a new type of money created by the users themselves, assisted by the web and cryptography. This intention –having, as we can see, much more radical political significance because it questions one of the key attributes of state sovereignty, the printing of money- poses a problem going beyond a simple accounting record issue to control the circulation of money, in other words, avoiding the dual availability of a digital asset: that of how to control the creation of this money, to avoid discretionality and ensure its scarcity, and which is somehow a reflection of an economic activity or value.

Wei Dai proposed a type of regular online auction among the system participants to determine the amount placed into circulation in new digital coins.

Szabo’s approach was different. He had for some time been mulling over the idea of how to make a simple bit string (a given number of zeros and ones) into something of value in itself. He was looking for a digital object that could work like gold. The instrument he devised for this –an application of the hashcash algorithm created by Adam Back to prevent email spam, mentioned also by Nakamoto- was a computational proof-of-work, a solution that could be given an economic meaning similar to gold, through the effort and use of resources required for its extraction; the use of computation cycles, in this case. This electronic money devised by Szabo is therefore managed through a program on the web which puts a given mathematical challenge or problem to the system participants. This mathematical problem or puzzle is related to the cryptographic function known as hashing, and may only be solved using “computational brute force”, in other words, by trial and error using different figures until a string is found that fits. When this result is obtained, in the form of a given bit string, it becomes the system’s first unit of currency. The program rewards the first participant to find that string by giving them the unit of currency, which can then be used by this participant to make payments to other users, and so the unit of currency and its fractions begin circulating. This first bit string, obtained by solving the problem, is the starting point for the next challenge, which the program then poses. This is how new currency units are added to the system regularly and in a programmed way.

This proposal was perhaps a little primitive –owing its existence to a metal-based and therefore materialistic idea of money, as a thing that must be given an intrinsic value rather than simply as a symbol of value-, and misguided too, because the intrinsic value we give to gold does not arise only from its scarcity and the difficulty to obtain it, instead from its intrinsic properties as a substance, which can never be said of a sequence of zeros and ones no matter how difficult they are to obtain.

This idea of Dai’s in relation to having bit gold as b-money would never be put into practice, but is the most direct forerunner of the bitcoin.

On the intellectual origin of blockchain (II). Recent forerunners

In the first post in this series on the intellectual origin of blockchain technology, I talked about two figures I consider to be early forerunners: Alan Turing and John von Neumann. In this second installment, I will look at two more recent figures: Tim May and David Chaum (and in a third post, I will touch on Nick Szabo and Wei Dai).

After the gloomy years of World War II and the Cold War, we now turn to the 1980s and 1990s, with its very different political, socio-economic and technological context. After the fall of the Berlin Wall and the break-up of the Eastern Block, the buzzwords became the “end of history” (in the sense that Marxist utopias had been left behind) and globalization. In the technology field, we were seeing increasingly powerful microprocessors, the internet and mobile phones.

As readers may remember, when internet first came on the scene, many heralded that it would bring about massive cultural, social and political changes. The lofty ideals of the Age of Enlightenment seemed closer than ever before: thanks to this new technology, a world compartmentalized into aggressive nation-states and under the thumb of large multinationals could give way to a true universal human community, united through communication, the free and direct flow of information and easy access to knowledge. Of course, this cyberspace-based community would have its economic facet as well: universal trade, which would spread prosperity throughout the planet.

However, while internet and mobile communications have indeed drastically reshaped our social customs, it didn’t take long to see that new technologies were not engendering the political changes some people hoped for. Nation-states are not a thing of the past; rather, they have found digital technologies useful as weapons for controlling their citizens, citing dangers from radicalism and globalized terrorism, which, in turn, have also co-opted technology for their own purposes, the polar opposite of the enlightened ideals internet was supposed to bring with it. On the economic side, we have seen that globalization does not in fact mean global prosperity. Different multinationals have come and gone, but, far from the expected distribution of wealth, economic power is even more tightly concentrated in the hands of a few. Today, a handful of companies born from new technologies, namely Apple, Microsoft, Google, Facebook and Amazon, have attained unprecedented popularity, wielding more power to control and influence users than ever seen before.

This situation, which first started to take shape in the 1990s, has pushed the somewhat visionary and utopian mindset of the internet’s early days into a type of resistance movement characterized by activism and an anti-establishment and anti-system ideology. The difference is that, this time, the insurgents are striking from within, using digital tools for their own purposes. This includes groups such as hackers (who, like all pirates and rebels, are rather romanticized), cyberpunks and the topic of this article, the cypherpunks and cryptoanarchists leading an ideological movement to put cryptography and information encryption techniques in the hands of individuals and to thwart national security agencies’ attempts to monopolize the use of this technology.

 

The cryptography I am referring to in this post is modern cryptography, heavily based on mathematical theory, computer science and the application of electronics to computing, i.e., something that only began to be developed in the 1950s. Before then, encryption techniques were much more rudimentary: from the simplest codes like the substitution cipher Julius Caesar used for military messages to the electro-mechanical encryption of telegraph and radio messages by German military intelligence services during World War II, using a series of Enigma machines creating polyalphabetic substitution through variable-position rotors. By placing the rotors of the deciphering machine in the same positions as in the cyphering machines, the recipient could decode messages. This was a symmetric-key mechanics-based encryption system, where letter substitutions changed every so often, but the problem was that the system only worked if the sender had previously given the recipient the key (i.e., the specific placement of the rotors) to be used at a certain time. Yet this information could be intercepted by the enemy and potentially used to decode messages if it also had the same model Enigma machine. In contrast, mathematical cryptography is based on arithmetic operations or mathematic calculations applied to digitalized messages, that is, messages that have been previously converted into numbers. Thanks to computers – machines that operate at electronic speed, close to the speed of light – practical use can be made of encryption and decryption techniques that require making highly complex numeric calculations very quickly (generally involving very large prime numbers, the product of which is difficult to factorize).

 

Initially, governments, in particular the United States through its National Security Agency (NSA), attempted to keep the knowledge and use of this technology – so critical during wartime – to themselves, standing in the way of commercial use and use by the general public. However, in the mid-1970s, following an embittered battle with the NSA, IBM registered its Data Encryption Standard (DES) algorithm with the National Bureau of Standards. This algorithm was later made available to financial sector companies, who needed it to develop their automatic teller machine networks. Knowledge and public release of this algorithm sparked a growing interest in modern mathematical cryptography beyond the closed field of national security. In that same decade, the public also learned about revolutionary asymmetric (or public-key) cryptography: the Diffie-Hellman algorithm, followed by the RSA (Rivest, Shamir and Adleman) algorithm, first developed in 1977. Asymmetric cryptography resolved the formidable vulnerability issue I mentioned above, namely that, in traditional symmetric cryptography systems, private keys must be shared between sender and receiver. This development was absolutely vital for enabling secure communications between parties that do not know one another, which in turn is essential for carrying out financial transactions via internet.

 

By the 1990s, the crypto-libertarian movement was beginning to take real shape thanks to Timothy C. May, better known as Tim May. In the early digital days of 1992, this California hippie-techie, a well-respected electronic engineer and scientist at Intel, wrote The Crypto Anarchist Manifesto, a short text heralding that computer technology was “on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other. Interactions over networks will be untraceable, via extensive re- routing of encrypted packets and tamper-proof boxes which implement cryptographic protocols with nearly perfect assurance against any tampering. Reputations will be of central importance, far more important in dealings than even the credit ratings of today. These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation (…) The methods are based upon public-key encryption, zero-knowledge interactive proof systems, and various software protocols for interaction, authentication, and verification. The focus has until now been on academic conferences in Europe and the U.S., conferences monitored closely by the National Security Agency. But only recently have computer networks and personal computers attained sufficient speed to make the ideas practically realizable…

 

In the ensuing years, Tim May was the force behind, and the main contributor to, the cryptography and cryptoanarchy internet forum known as the Cypherpunks electronic mailing list and its document The Cyphernomicon. He is one of the leading intellectual references among the designers of the first cryptocurrencies, such as Nick Szabo and Wei Dai.

The next figure we look at, also from California, had a less political, and more technical and business, focus: David Lee Chaum, a brilliant mathematician and computer scientist who from the 1980s on created novel cryptographic protocols applicable in online commerce, payments and even voting. He is credited with the cryptographic protocol known as the blind signature, which is the digital equivalent of the physical act of a voter enclosing a completed anonymous ballot in a special envelope that has the voter’s credentials pre-printed on the outside.

Chaum’s motivation for creating this type of protocol was his concern for privacy of financial transactions, which was being eroded as electronic payment means were becoming more widely used. One of the essential properties of traditional cash bills and coins is their anonymous nature, as money simply held by the bearer. In contrast, all the new ways of sending money represented in bank accounts (bank transfers, credit cards, web-based payment gateways, etc.) allowed for tracking of who paid what amount to whom, and why. This meant that an increasing amount of data revealing a lot about a consumer’s preferences and spending habits and, in short, they type of person they are, was being recorded and stored in digital databases completely beyond the consumer’s control.

In this blog post, I will not go into a detailed technical explanation of the blind signature protocol invented by Chaum, which he presented at a 1982 conference under the title “Blind signatures for untraceable payments.” In a nutshell, however, it involves a person or authority verifying, with their electronic signature, a specific digital item generated by another person. The authority knows the identity of the sender and what type of item is involved, but it does not know the content of the signed item. This technology has many uses. It is crucial when a third party verifier is needed, such as an election authority certifying that the person casting an online vote is allowed to vote and only submits one ballot, but where, to safeguard the secrecy of ballots, this authority must not know the content of the validated vote. In the case of electronic money, the third party verifier is the bank that holds the account of the person wishing to generate a digital monetary item, or token, because it is the bank that must verify that the sender has sufficient funds and then debit the corresponding amount from the account to avoid double-spending. The blind signature protocol is very useful in this case. Once the bank has verified that the sender (the payer) is indeed authorized to make the payment, it can sign the digital token without knowing the specific serial number individually identifying the payer, while still monitoring the transaction. Accordingly, when the recipient (the payee) presents a given digital token with the specific serial number to that same bank to exchange it for cash money, the bank does not know which of its clients sent the token and, consequently, who made the payment in question.

 

How can a bank sign a digital monetary token without knowing its individual serial number? This is where Chaum’s mathematical ingenuity came into play: the payer (i.e., the bank client wishing to make a payment with electronic cash) generates a random serial number x and, prior to sending it to the bank with its payment order, disguises it by multiplying it by a factor C known only to the payer. Put differently, the payer gives the bank a serial number encrypted using a commutative algorithm or function C(x), which can be reversed by performing the inverse arithmetic operation, in this case, dividing C’ by the same factor. After verifying the payer’s standing to make the payment, the verifying bank electronically signs that same encrypted serial number with its private key S’ and returns the result, S’(C(x)), to the payer. The payer then applies inverse division to the prior multiplication through which the serial number was encrypted, C’(S’(C(x))), and obtains S’(x), that is, the original serial number now electronically signed by the bank. The payment can now be made without the bank knowing who generated that specific note. This is clearly analogous to issuing bank notes against cash deposits, but in a digital environment.

 

In 1989, David Chaum attempted to put this idea into practice with the creation of the Amsterdam-based electronic money corporation DigiCash, but the business did not flourish. In fact, only two banks supported DigiCash systems, the Missouri-based Mark Twain Bank and Deutsche Bank. The business only had 5,000 clients and total payment volume never passed $250,000. Chaum later explained that it was hard to get enough merchants to accept the payment method so enough consumers would use it, or vice versa. Although David Chaum became a hero for cryptoanarchists, the problem was that the average consumer was not that concerned about the privacy of his transactions. In the end, in 1998 DigiCash filed for bankruptcy and sold off all its assets.

What I find most interesting about this attempt is that the electronic cash David Chaum invented still depended on ordinary legal tender (because the process always started and ended at a bank account in dollars, euros or another national currency), and the accounting control that avoided double-spending was still in the hands of the traditional banking system, given that it was a bank that verified the sender’s ability to pay and then debited the amount of electronic money sent from the traditional account.

Bitcoin, to appear later along, was a radical departure from this model.

(The pioneering works about mathematical cryptography are Claude Shannon’s article “Communication Theory of Secrecy Systems” published in the Bell System Technical Journal in 1949 and the book by Shannon and Warren Weaver titled “Mathematical Theory of Communication.”

An explanation of how the Enigma machine worked and stories of the adventures and exploits on the cryptographic front of WWII can be found in a book cited in a previous post: “Alan Turing. Pioneer of the Information Age,” by B. Jack Copeland, published in Spain by Turner Noema (Madrid), 2012, pages 51 and thereafter.

For more on the battles between the first cryptoanarchists and the NSA, see “Crypto: How the Code Rebels Beat the Government Saving Privacy in the Digital Age,” by Steven Levy, published in Spain by Alianza Editorial, 2001.)

On the intellectual origin of blockchain technology (I). Early forerunners

In my previous contribution to this blog I talked about certain intellectual obstacles that can trip up jurists when dealing with the definition of smart contract and blockchain technology. The first of these is a deficit in technology training. One of the particular features of this technology, now a worldwide talking point due to its multiple applications and disruptive potential, is precisely that a high intellectual threshold is required to gain access to it, because it is hard to explain and understand.

In this and the following post I am going to try and bring a little perspective on the subject, which perhaps may help make out the signal –the significant points- among all the media noise that is currently causing so much interference.

Specifically, in the two posts I have planned, I am going to mention a few figures who have made important intellectual contributions on the path that has led to both cryptocoins and blockchain technology. On this subject, I will draw your attention to the early forerunners and more recent forerunners.

An early forerunner I could mention the German philosopher Leibniz, who at the end of the eighteenth century, besides making a mechanical universal calculator, conceived the idea of a machine that stored and handled codified information in binary digital code. But I am going to focus on two figures closer in time, who are regarded the founding fathers of computing: British Alan Turing and John von Neumann a Hungarian who later became a US citizen. And why these? Not just because in the nineteen thirties and forties they laid the intellectual foundations, in math and logic, that gave rise to the development of computing and with it the digital universe we now inhabit, but also because their ideas and visions foresaw a large part of the transformation that we are experiencing right now.

Alan Turing recently came into the public eye in a recent film (The Imitation Game, released in 2014) about his activity in the second world war in the British Royal Navy’s intelligence service, where he contributed to deciphering the codes of the famous encrypting machine Enigma used by the German navy and army in their communications. Our interest in him does not arise from his connection with the topic of cryptography, however. I especially want to talk about the work that made him famous, published in 1936 in the prestigious Proceedings of the London Mathematical Society: “On Computable Numbers, with an Application to the Entscheidungsproblem.

 

The Entscheidungsproblem or decidability problem is an arduous logical and mathematical question that kept a number of logicians and philosophers occupied at the beginning of the twentieth century from when it was posed by German mathematician David Hilbert in his writings at the beginning of the 1900s as one of the remaining challenges for the century that was then beginning: can mathematics provide an answer of a demonstrative type to every problem it poses? Or in other words, is the full axiomatization of mathematics possible to reconstruct it as a complete and self-sufficient system? Hilbert, the leading figure in what is known as formalism, considered it was, and Russell and Whitehead believed they had achieved it with their work Principia Mathematica. However, an introverted logic professor called Kurt Gödel proved it was not possible in a difficult and revolutionary article published in 1931, in which he formulated what is known as Gödel’s incompleteness theorem.

Following Gödel, in the work mentioned above, Turing (in a simple discourse strategy on the limits of computability) created the first stored-program machine (later becoming known as the universal Turing machine which at that time was only a theoretical construction) in other words, a machine having a memory that besides storing data, had the program itself for handling or computing those data, a machine that could be reprogramed and able to compute anything computable (in other words, what we now consider a computer). I must also mention his early interest in artificial intelligence to the point where the so-called “Turing test” is used to assess the greater or lesser intelligence of a device.

And so, when in 2014 Russian Canadian child prodigy Vitalik Buterin, at the tender age of 19, brought that second generation blockchain called Ethereum into operation, he would tell us that it was a blockchain using a Turing-complete programming language, and aspiring to become the universal programming machine, the World Computer. This brought Turing’s original idea into a new dimension: it was not a question of creating an individual reprogrammable machine for universal computation objects, but instead the existence of a network of computers which besides simultaneously recording those simple messages that are bitcoin transactions, also allow any programmable transaction within their capability to be carried out on them at the same time, and every step in the process and its result may be stored on a distributed, transparent, and incorruptible record with universal access. Or put another way, its universal nature does not relate only to the programmable object –like Turing’s virtual machine and our current computers -, but it is also universal in relation to the agents or devices they operate, in that the program is executed and the result is recorded simultaneously by an infinite number of computers throughout the world.

And then there is John von Neumann, one of the great scientific geniuses of the twentieth century, on a par with Einstein. In relation to our subject, von Neumann was the creator of the logical structure of one of the first high-speed electronic digital and stored-memory computers which was the first physical incarnation of the imagined universal Turing machine. That computer, known as EDVAC, was made at the end of the nineteen forties at the Princeton Institute for Advanced Study (USA), as an instrument to perform the complex and extremely laborious mathematical calculations required for the design and control of the first atomic bombs. In fact, even today the structure of every computer we use is based on what is known as “von Neumann architecture”, which consists of a memory, processor, central control unit and elements for communicating with the exterior for entering and receiving data.

Besides the fact of every computer application or development owing its existence (despite his premature death aged 53) to the visions and ideas of von Neumann (including artificial intelligence which was the subject of his latest ideas in works such as the “Theory of self-reproducing automata”), I would like to take a look here at two ideas of this great pioneer.

 

Firstly, in the years following the end of the second world war almost everything was in short supply and to build EDVAC they had to use leftover equipment and materials from the weapons manufacturing industry. Making a machine put together from these components work properly was a veritable challenge that Von Neumann confronted with the idea that a reliable machine had to be built from thousands of unreliable parts. This idea, which he developed theoretically in two articles in 1951 and 1952 (Reliable Organisms from Unreliable Components” and Probabilistic Logics and the Synthesis of Reliable Organisms from Unreliable Components), links up with the formulation, later in the eighties and in relation to the reliability of computer networks created for defense uses, of what is known as the “Byzantine Generals’ Problem” –which is usually mentioned in explanations of blockchain-. It is also related to “resilience”, one of today’s buzzwords; and is at the very core of blockchain design: how to create the most reliable and transparent recording system that has ever existed based only on particular individual agents any of which could be false.

 

In relation to blockchain design we can also trace the footprint of another great intellectual contribution from von Neumann. Because he was gifted with broad intelligence, besides taking an interest in and revolutionizing set theory, quantum physics and computer science, he also forayed into economic science, where he was no less revolutionary. He pioneered the theory of games, on which he co-authored with Oskar Morgenstern in 1944 a work entitled “Theory of games and economic behavior”.  Much of the theory of games, analyzing the rationality of strategic decisions of individual agents operating in an economy based on the likely behaviors of other agents, is also present in the smart design explained by the enigmatic Satoshi Nakamoto in his 2008 paper. After all, the design of a public blockchain, such as that on which Bitcoin is based, comes from the idea that the pursuit of individual interest in gain by  a few agents –the “miners”- results in the general reliability of the system; and from the idea that it makes little sense to defraud a system to obtain an asset whose economic value depends directly on the general belief in the reliability of that system.

(I would recommend the following books to anyone who has a taste for more on these subjects: “Turing’s Cathedral: The Origins of the Digital Universe”, by George Dyson, Pantheon,ISBN-13: 978-037542275 ; “Turing. Pioneer of the Information Age”, by B. Jack Copeland, Oxford University Press, ISBN-13: 978-0198719182; and “The Proof and Paradox of Kurt Gödel (Great Discoveries) by Rebecca Goldstein. W.W. Norton & Company. ISBN: 978-0393327601)

Jurists and smart contracts

Jurists tend to come up against two large obstacles when it comes to dealing with smart contracts:

– The first problem is coming to grips with the technology; both the specific technology involved in the architecture and mechanics of a blockchain, and general computing technology. On the first subject, what exactly is a peer-to-peer network? How does asymmetric or double key cryptography work,? What are hashes or proof of work? How is node consensus achieved? What is a fork? And so on; and on the second, what is an algorithm? Or a bit string?, What is programming? What is a “code” in computing? What is involved in “compiling” or “editing”, or “executing” a program? Without a minimum amount of familiar with all these definitions, any effort to analyze or form a legal opinion on smart contracts is in vain, because, put simply, we have no idea what we are talking about.

So, when we define a smart contract as a “self-executing” contract, are we considering that the only thing a computer program does, in principle, is handle information, perform operations with data by following rules or instructions to produce new data? The relationship this has with the compliance, performance or practical enforcement of a contract is not immediately obvious.

The putting into practice of the idea of a smart contact is linked to the creation of those curious “assets” known as cryptocoins, which are simply made of digital information, meaning that the “placing into circulation” of these assets is programmable, able to be fully controlled by a computer program whose output (who is the current holder of a given bitcoin sum) is simply being recorded on a digital database. In relation to other assets made purely of digital matter (a sound or image file containing a work subject to intellectual property rights), it is easy to see how buying and executing the work may be computer-programmed (because a purely digital asset can be made available on remote media). But if our smart contract relates to other types of assets such as the ownership or use of tangible property, collection rights against a given party, or corporate rights or interests in a company, it will first be necessary to “tokenize” these assets or rights, meaning represent them through programmable digital files. This obviously poses the problem (now essentially a legal one) of how far our legal system is able to recognize the legal validity of that form of placing those tokenized assets or rights into circulation where those rights need to be made enforceable in practice in the real world outside the memory of the device or devices (or network, in some cases) executing a given program. Put another way, to what extent is the “authentication” provided by the code executed on the blockchain also legally valid outside the network (a problem that does not arise with cryptocoins, which only exist, operate and display all their effects on the network).

Insofar as the development of the internet of things has flooded the market with a whole range of articles equipped with electronic devices enabling them to be connected and communicate with the internet, and also be automatically controlled and programmed, the smart contract may achieve more effective and self-sufficient automatic self-execution of these articles, less in need of the support of the traditional legal enforcement mechanisms, and therefore less dependent (in principle, at least) on recognition of their legal authentication.

This first remark is designed to draw your attention to the fact that in matters related to smart contracts, knowledge and an understanding of technology, of what it is able or not able to do in practice, must come before any legal judgment.

– This brings me to the second major problem, concerning not so much knowledge as approach: we come to the subject armed with all our legal prejudices, and this could seriously distort our perception. Basically we are confused by the unclear meaning of the term “smart contract”, which immediately brings to mind our legal concept of a contract and everything associated with it. So we leap too soon into wondering about legal validity or invalidity, legal enforceability or unenforceability, about whether or not the requirements for obtaining legal recognition are satisfied, or even about evidence or its use in litigation; and we fail to realize that this is not really the crux of the matter. At the heart of the matter there is a deeper question, which cannot go unnoticed as a result of that legal preconception of ours. The question is not whether it is a greater or lesser defined new concept that seeks to be accommodated in our legal system, but rather something originally conceived in an attempt to make it an alternative to the whole of our legal system.

A smart contract, purely speaking, is not intended to be a legal contract, because it does not need to be one, in the same way as Bitcoin (in the mind of its creators) is not intended to be legally recognized money, or legal tender, but rather money for a society that has already left far behind, as unnecessary, the notions of national state, of laws and of national jurisdictions.

We need the support of a jurisdiction, of the courts of a given country, and as a precondition for this, recognition of the legal meaning and value of a given arrangement or understanding by the legislation of that country, to the extent that, de facto, compliance with, or practical performance of, the agreed terms depends on the intention of a human being. So, when that intention fails, or becomes inaccessible or hard to implement, we will seek help from state forces. If, however, technology provides us with the ability for that agreed arrangement to be implemented mechanically or automatically with complete independence from the intentions of an “obliged” party, then both the concept of contract, along with the whole legislative and institutional apparatus belonging to what we know as “contractual law” become irrelevant.

Clearly, this approach belongs to the intellectuals and ideologues who were the forerunners of this whole system –the crypto-anarchists-: a technological utopia according to which certain problems related to economic exchange and cooperation, which until now have been organized in a very unsatisfactory way (slow, expensive, complicated, unsafe) through the traditional legal systems, may be handled much more efficiently through the simple intervention of technological tools which are already within our reach.

From this starting point, the real issue that warrants our attention as jurists is: first, whether what is being sought is actually possible, simply in practical terms, and to what extent –in all areas of human relationships which until now were covered by contractual law or only some of those areas-, and how it may be possible; and secondly, whether this alternative way of doing things proves, from the standpoint of forming a judgment and bearing in mind all the potential interests at play (not just pure economic efficiency, the speed and safety of transactions, but also the need for protection of the weaker parties in economic relationships, particularly vulnerable property or vital interests, social solidarity interests which are supposed to form the basis of taxation, etc.), to be something acceptable and advisable, and in which areas it may be and in which areas it may not. While remaining very much aware at all times that we are confronting a phenomenon that largely goes beyond our forces, the forces of a national state, which may easily be overtaken by events in its attempt to gate the field.