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markm@eros.cs.jhu.edu
markm@eros.cs.jhu.edu
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<p>As Hernando de Soto explains in The Mystery of Capital [<a href="#deSoto00">deSoto00</a>],
the poor of the third world (including much of the former communist world)
do not suffer from, in his terminology, a lack of <i>assets</i>; rather,
- they suffer from a lack of <i>capital</i>. The poor around the world do,
- surprisingly enough, have assets. In a simple experiment, in which de
- Soto's associates drove around neighborhoods in various poor countries,
- assessing the value of buildings which were not formally titled, de Soto
- extrapolated that the value of just the informally owned buildings in
- the third world amounted to $9.3 trillion -- more than half the combined
+ they suffer from a lack of <i>capital</i>. Many of the poor around the
+ world do, surprisingly enough, have assets. In a simple experiment, in
+ which de Soto's associates drove around neighborhoods in various poor
+ countries, assessing the value of buildings which were not formally titled,
+ de Soto extrapolated that the value of just the informally owned buildings
+ in the third world amounted to $9.3 trillion -- more than half the combined
value of all publicly traded U.S. companies.</p>
<p>De Soto's focus is on the <i>informal</i> sector -- that sphere of economic
activity that occurs outside of the official <i>formal</i> legal system.
@@ -132,9 +132,17 @@
remove. This thought experiment led directly to seminal work responsible
for much of the modern world of interactive systems that we now take for
granted.</p>
- <p align="center"><i>It is easy to turn an aquarium into fish soup,<br>
- but not so easy to turn fish soup back into an aquarium.</i></p>
- <p align="right"><i>--Lech Walesa </i></p>
+ <div align="center">
+ <table cellpadding="12">
+ <tr>
+ <td>
+ <p align="center"><i>It is easy to turn an aquarium into fish soup,<br>
+ but not so easy to turn fish soup back into an aquarium.</i></p>
+ <p align="right">--Lech Walesa</p>
+ </td>
+ </tr>
+ </table>
+ </div>
<p>The 20th century performed a similar experiment on a grand scale, tying
large bricks to large societies with the best of intentions, but with
vastly tragic consequences. Only by learning from this experiment may
@@ -288,9 +296,9 @@
the employees and executives of the organization might be.</p>
<p>Other examples of familiar WTIIs include title companies, insurance,
escrow, exchanges and auction houses, underwriters, Consumer Reports,
- Roger Ebert, courts and police, etc... The list is endless. </p>
- <p><img src="images/4-low-trust.gif" width="350" height="218" align="right">From
- a simple graph-theoretic point of view [<a href="#Granovetter73">Granovetter73</a>],
+ Roger Ebert, notaries, arbiters, courts and cops, money, etc... The list
+ is endless. </p>
+ <p>From a simple graph-theoretic point of view [<a href="#Granovetter73">Granovetter73</a>],
we can analyze the Fukiyama low-trust world (in which the fanout from
each node is small) and the de Soto missing-WTII world (in which the hubs
are absent), and immediately recognize which brick has the greater impact
@@ -304,22 +312,30 @@
to each other. The resulting picture resembles both Fukuyama's portrayal
of familial trust societies, and de Soto's portrayal of networks of villages
of informals.</p>
- <p align="center"><i>The division of labor is limited by the extent of the
- market.</i></p>
- <p align="right"><i>--Adam Smith </i></p>
+ <div align="center">
+ <table cellpadding="12">
+ <tr>
+ <td>
+ <p align="center"><i>The division of labor is limited by the extent
+ of the market.</i></p>
+ <p align="right">--Adam Smith</p>
+ </td>
+ </tr>
+ </table>
+ </div>
<p>The virtual network of Figure 3 forms one large market with great extent,
enabling a great division of knowledge and labor. The virtual network
of Figure 4 is one of many separate markets, barely connected to each
other, and each individually of minor extent.</p>
- <p>But shouldn't this situation be an ideal growth medium for WTIIs? If
- there is great market need for them, then surely there is great demand
- and great opportunity. Indeed, this is the situation from which the WTII
- backbone grew spontaneously in the west. Absent government oppression
- we should indeed expect it to grow here as well. However, Western-style
- WTII infrastructures are the result of slow growth processes; they build
- slowly over time. These widespread trust needed by these institutions
- can be seen as a form of capital that takes a long time to accumulate.
- </p>
+ <p><img src="images/4-low-trust.gif" width="350" height="218" align="right">But
+ shouldn't this situation be an ideal growth medium for WTIIs? If there
+ is great market need for them, then surely there is great demand and great
+ opportunity. Indeed, this is the situation from which the WTII backbone
+ grew spontaneously in the west. Absent government oppression we should
+ indeed expect it to grow here as well. However, Western-style WTII infrastructures
+ are the result of slow growth processes; they build slowly over time.
+ These widespread trust needed by these institutions can be seen as a form
+ of capital that takes a long time to accumulate. </p>
<p>One of the depressing features of the pictures painted by both Fukiyama
and de Soto is that the only hope they see for these societies is home-grown,
with each individual third world nation bootstrapping itself through all
@@ -388,133 +404,324 @@
the government must discover and respect the local laws, and work out,
at considerable cost in time and effort, a way to integrate those local
laws with the national systems.</p>
- <p> The difficulty comes from an inherent tension between local knowledge
- and global credibility -- local knowledge of the idiosyncratic people's
- law, conventions, and negotiated arrangements in force in each village,
- <i>vs.</i> the need to move the governance of title transfer to WTIIs,
- whose wide scope requires them to operate from a more homogenized set
- of rules. This tension is acute on the governmental path, because the
- homogenized set of rules is not even per title company, but rather the
- official legal system itself. Governmental legal systems are not the wonders
- of adaptability de Soto's program would seem to require. However, he offers
- no alternative. Though difficult, he shows that this path can work, and
- he documents that it did work when the U.S. absorbed the wild west.</p>
- <p>As if this work were not difficult enough, this whole process faces enormous
+ <p> The difficulty comes from an inherent tension between <i>local knowledge</i>
+ and <i>global credibility</i> -- local knowledge of the idiosyncratic
+ people's law, conventions, and negotiated arrangements in force in each
+ village, <i>vs.</i> the need to move the governance of title transfer
+ to WTIIs, whose wide scope requires them to operate from a more homogenized
+ set of rules. This tension is acute on the governmental path, as the homogenized
+ set of rules is not even per title company, but rather the official legal
+ system itself. Governmental legal systems are hardly the wonders of adaptability
+ de Soto's program would seem to require. Even with the best of intentions,
+ an accommodation between the two must rapidly turn into a Procrustean
+ bed. However, de Soto offers no alternative. Though difficult, he is successfully
+ making this path work, and he documents how it did work when formal U.S.
+ law, slowly and painfully, absorbed the wild informal west.</p>
+ <p>As if this path were not difficult enough, this whole process faces enormous
obstacles from many different factions, notably bureaucracies and lawyers
- within the national sphere that see this as an assault on their prerogatives.
- The process never becomes easy: each village is another major upheaval
- in the perceptions and preferences of entrenched groups dedicated to protecting
- the status quo. </p>
+ within the national sphere that see this as an assault on their prerogatives,
+ as de Soto also documents. The process never becomes easy: each step of
+ progress is another major upheaval in the perceptions and preferences
+ of entrenched groups dedicated to protecting the status quo.</p>
<h3><a name="bootstrapping"></a>The Digital Path</h3>
- <p align="center"><i>National borders aren't even speed bumps on the information
- superhighway.</i></p>
- <p align="right"><i>--Tim May </i></p>
+ <div align="center">
+ <table cellpadding="12">
+ <tr>
+ <td>
+ <p align="center"><i>National borders aren't even speed bumps on
+ the information superhighway.</i></p>
+ <p align="right"><i>--Tim May</i></p>
+ </td>
+ </tr>
+ </table>
+ </div>
<p>Can we sidestep this brutally painful process? Perhaps eventually with
the Net. </p>
- <p><font color="#000000"><img src="images/5-bootstrap.gif" width="366" height="214" align="right">For
- e-goods and e-services that can be provided purely electronically, due
- to the Net, these can now be purchased from across the world as easily
- as from next door. The providers and consumers of these e-goods and e-services
- have escaped the old limits of geography and jurisdiction. If the functions
- provided by various WTIIs, including title and contract enforcement, can
- be supplied as purely electronic services, then existing first world trust
- hubs could bootstrap the third world on a global scale through the new
- medium. (Figure 5)</font></p>
- <p><font color="#000000">Many first world trust hubs are already trusted
+ <p><font color="#000000"><img src="images/5-bootstrap.gif" width="366" height="214" align="right">Due
+ to the Net, purely electronic goods and services can now be purchased
+ from across the world as easily as from next door. Consumers of these
+ goods and services have already escaped old limits of geography and jurisdiction.
+ If the functions provided by various WTIIs were offered by prominent first
+ world trust hubs as purely electronic services, those in need of such
+ widely trusted intermediary services could escape as well -- escape from
+ the crushing assumption that such services can only be provided by institutions
+ beholden to their own governments. Instead, they could reach across the
+ Net to use these services, and begin to bootstrap themselves out of their
+ poverty by participating in the global networks of commerce. (Figure 5)
+ </font></p>
+ <p>Many first world trust hubs are already widely known and plausibly trusted
in the third world because of the frenetic distribution efforts of the
- traditional broadcasting media such as television: shows ranging from
- CNN to Dallas and Baywatch have granted an aura of respectability to first
+ western broadcasting media such as television: shows ranging from CNN
+ to Dallas and Baywatch have granted an aura of respectability to first
world organizations that most governments can only envy. (However one
- may feel about this process, it is occurring, so it may as well be put
- to good use.) Using first world WTIIs, villages on a global scale can
- in principle become part of a global trust network. For example, if a
- person in village A wants to sell a tractor to a person in village D,
- a couple of villages away, they could easily reach across the Net to a
- title registry run by Citibank in New York to execute the transfer. In
- a similar fashion, the tractor may be securitized, transforming it into
- capital. And in a state such as Russia, a title listing with Citibank
- would, ironically, have more legitimacy than a title listed by their own
- government.</font> </p>
- <p><font color="#000000">As an additional bonus, once the villages of the
- world join this global village, it is much easier to grow local high-trust
- hubs as well: an entity becomes widely trusted by consistently and visibly
- performing in accordance with the contracts being managed by hubs that
- are already widely trusted. A working trust backbone gives highly trustworthy
- behavior the visibility it needs to more rapidly accumulate its own reputation-capital.
- </font></p>
+ may feel about this process, it is occurring, so we may as well put it
+ to good use.) Using first world WTIIs, villages on a global scale could
+ become part of a global trust network. For example, if a person in village
+ A wants to sell a tractor to a person in village D, a couple of villages
+ away, they could easily use a title registry run by Citibank in New York
+ to execute the transfer. In a similar fashion, the tractor may be securitized,
+ transforming it into capital. And in a state such as Russia, a title listing
+ with Citibank would, ironically, have more legitimacy than a title listed
+ by their own government.</p>
+ <p>Although these first-world WTIIs enable their customers to escape the
+ limitations of jurisdiction, early on they not be so lucky themselves.
+ However, during bootstrap, this may be a blessing in disguise.Widespread
+ trust implies widespread vulnerability of others to the WTII, which is
+ why such trust is hard to accumulate. The possibility of recourse against
+ the WTIIs is an integral part of the widespread sense that they can be
+ trusted, as they evolved to become trusted in the context of that environment.
+ </p>
+ <p><font color="#000000">But once the villages of the world join this global
+ village, it will be much easier to grow jurisdiction-free high-trust hubs
+ as well: an entity becomes widely trusted by consistently and visibly
+ performing in accordance with various contracts -- contracts being managed
+ by hubs that are already widely trusted. With a working trust backbone,
+ highly trustworthy behavior gets the visibility it needs to more rapidly
+ accumulate its own reputation-capital. </font></p>
<h3><font color="#000000"><a name="smart-contracts"></a>Smart Contracts</font></h3>
- <p>How might such WTIIs deal with the idiosyncracies of local village tradition,
- the idiosyncracies that sabotage traditional governmental attempts to
- capitalize village assets? By the use of smart contracts.</p>
+ <p>How might such WTIIs deal with the idiosyncracies of each village's <i>people's
+ law</i>, the idiosyncracies that sabotage traditional governmental attempts
+ to capitalize village assets, without taking on the impossible burden
+ of learning all this local knowledge itself, without imposing the costs
+ of homogenization? By the use of smart contracts.</p>
<p><font color="#000000">In smart contracts, the program code is an operational
- embodiment of the contract. A drink vending machine is a very primitive
- example of a smart contract, being executed on a contract host: it is
- the trusted intermediary between the drink manufacturer and the purchaser.
- It escrows drinks and money, and performs an exchange of those goods when
- both have been presented. There is even a rollback process, in which it
- returns the money if the drink manufacturer is unable to delivery the
- drink.</font></p>
- <p><font color="#000000">To the extent possible, the smart contract code
- directly enforces the terms of the contract; as in the vending machine
- example, it provides an inescapable arrangement rather than a set of penalty
- clauses which require separate enforcement after contract breach, as is
- typical in traditional contracts [<a href="#Szabo97">Szabo97</a>, <a href="#Miller00">Miller00</a>].</font></p>
- <p><font color="#000000"><img src="images/6-exchange.gif" width="390" height="247" align="right">The
- basic metaphor for the composition of smart contracts is the board game.
- When two people negotiate a contract, they are jointly designing the rules
- of a game they would both be willing to play. To start the actual play,
- they turn the board management over to a contract host and start moving
- assets onto the board, where the contract host escrows the assets for
- completion. These assets, represented as <i>erights</i> in the electronic
- context, are the pieces on the board; the players make the moves, but
- the only moves deemed legal by the code, in the context of the current
- state of the board, are allowed.</font></p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p><font color="#000000"><img src="images/7-duties.gif" width="297" height="299" align="right">In
- the simple example illustrated in Figure X, we have a 5-party game (contract).
- Alice wishes to buy stock from Bob. The contract host escrows money from
- Alice (managed by the currency issuer) and stock from Bob (managed by
- the stock issuer). Once the money and the stock have both been placed
- on the board, the contract host transfers title on both assets to the
- recipients, and the game is over. </font></p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p> </p>
- <p><font color="#000000"><img src="images/8-option.gif" width="379" height="235" align="right">Games
- such as this can be arbitrarily sophisticated, requiring only more sophisticated
- software to embody them. A slightly more sophisticated example is the
- covered call option. (see figure).</font></p>
- <p> </p>
- <p> </p>
- <p> </p>
+ embodiment of the contract [<a href="#Szabo97">Szabo97</a>]. A drink vending
+ machine is a very primitive example of a smart contract, being executed
+ on a contract host: it is the partially trusted intermediary between the
+ drink manufacturer and the purchaser. It escrows drinks and money, and
+ performs an exchange of those goods when both have been presented. There
+ is even a rollback process, in which it returns the money if the drink
+ manufacturer is unable to delivery the drink. Traditional contracts are
+ understood to be backed by a coercive enforcement system made of courts
+ and cops. However, the vending machine does not have the option of such
+ coercive recourse following a breach. In what sense is it a contract?</font></p>
+ <p>The vending-machine-as-contract would indeed require separate enforcement
+ if it dispensed the drink first and then demanded payment. However, by
+ escrowing both drinks and payment before dispensing either, it also dispenses
+ with the need for separate enfocement. Instead of enforcement, the contract
+ creates an <i>inescapable arrangement</i>. It cannot prevent the customer
+ from walking away before the game is over, but a customer who walks away
+ from a contract in progress leaves behind any assets escrowed by the contract
+ at that point [<font color="#000000"><a href="#Miller00">Miller00</a>]</font>.
+ The terms of the contract are enforced by the contract itself -- by the
+ behavior of the contract when executed as a program.</p>
+ <p>Although conventional coercive recourse is still often possible on the
+ Net, for more and more Net commerce these costs are too great, and the
+ jurisdictional issues potentially too messy. Instead, Net businesses have
+ been engaging in rich and rapid experimentation with cooperative arrangements
+ that require no coercive recourse [<a href="#WhatsHerName"><font color="#FF0000">WhatsHerName</font></a>].
+ The most common arrangements involve not actual escrow, but reputation
+ feedback and credit [<a href="#Steckbeck01">Steckbeck01</a>]. This has
+ a similar logic, in that a partcipant effectively secures their good performance
+ with the value of their reputation capital. Such arragements are messier
+ and less amenable to automation than escrow, but they do substantially
+ reduce capital costs. Both kinds of arrangements have their place and
+ will compete in the market. Here, I will explore escrow-based smart contracts,
+ not because I expect this form to dominate, but because their logic is
+ vastly easier to explain; because they're easier to build, and so will
+ occur sooner; and because they apply to participants with no prior reputation,
+ which helps for bootstrapping the transition. Likewise, for the electronic
+ systems of title (or <i>issuers</i> below), in this paper I assume systems
+ that provide for instant settlement [<a href="#e-gold">e-gold</a>]. Although
+ delayed settlement may substantially reduce capital costs [<a href="#Selgin01" target="_top">Selgin01</a>],
+ they turn smart contracts into explosions of complexity.</p>
+ <h3><font color="#000000"><img src="images/6-exchange.gif" width="390" height="247" align="right"></font>Contracts
+ as Games</h3>
+ <p><font color="#000000">The basic metaphor for the composition of smart
+ contracts is the board game. When two people negotiate a contract, they
+ are jointly designing the rules of a game they would both be willing to
+ play. Once they commit to playing this game, the players may them make
+ moves, but only moves judged legal by the rules given the current board
+ state. Each move potentially changes the board state, changing which moves
+ are legal during the next turn.</font></p>
+ <p><font color="#000000">For example, Figure 6 shows the six possible board
+ states of a simple negotiation and exchange game. Let's say Alice is playing
+ the left side of the board and Bob the right. The initial board state
+ is the one shown on the far left, in which neither of the pieces is on
+ the board. The gold bar, representing money, is off the board on the left,
+ which portrays its possession by Alice at this time. For concreteness,
+ let's say the knight represents stock. Bob might offer a certain amount
+ of stock to Alice by placing it on the left square of the board. This
+ takes us to the board state that's up and right from the initial state.
+ Alice might not respond soon enough, in which case Bob may withdraw his
+ offer by taking back the knight, bringing us back to the initial state.
+ That's why the first transition arrow is shown as bidirectional.</font></p>
+ <p><font color="#000000">Or Alice may respond to Bob's offer with a certain
+ amount of money, by placing it on the right square of the board. This
+ takes us to the upper right board state. At this point, either party may
+ still decide they're unsatisfied, withdraw their piece, and reenter the
+ loop of bidirectional arrows. Or, in the upper right board state, Bob
+ may pick up the money offered by Alice. Bob has accepted Alice's offer.
+ This is the irreversible commitment step shown by the bold unidirectional
+ arrow, and takes us to the board state down one. From here, the only possible
+ move is for Alice to pick up Bob's knight.</font></p>
+ <p>How is this contract self enforcing? What prevents cheating? Who needs
+ to trust whom with what? To answer these questions, we must start by explaining
+ what is happening on whose computer. We assume that each player trusts
+ their own computer (a dangerous assumption, but we cannot proceed without
+ it). We also assume that player A cannot not trust player B's computer
+ any more or less than they trust player B. Under these assumptions, we
+ can treat a computer and its proprietor as a single unit for purposes
+ of analysis.</p>
+ <p><font color="#000000"><img src="images/7-duties.gif" width="297" height="299" align="right">The
+ execution of this game actually involves five parties. The two players
+ of course, Alice and Bob. The contract host serves the same role as our
+ vending machine -- it is the third party mutually trusted to execute the
+ contract/program faithfully. The contract can be any program Alice and
+ Bob mutually agree on, written in a safe language suitable for writing
+ smart contracts, that functions as the <i>board manager</i> for the game
+ they have agreed to play. (A <i>board manager</i> for, for example, chess,
+ is a program that enables two people to play with each other, maintains
+ the board state, and only allows legal moves. A board manager does not
+ itself play the game.)</font></p>
+ <p><font color="#000000">Unlike the vending machine, the contract host need
+ not have any prior knowledge of the contract.</font> Once Alice and Bob
+ agree on the text of a board manager and on a mutually trusted contract
+ host, they upload the board manager to the contract host, which then verifies
+ for them that they've agreed on the same contract, and dispenses to each
+ the right to play their respective sides of the game, shown as the arrows
+ pointing at the respective chairs. The contract can embody the knowledge
+ of acceptable arrangements local to Alice and Bob, local custom, prior
+ handshakes, etc... If the contract host can be trusted at all, it can
+ be trusted to run this contract faithfully, despite its ignorance of the
+ local knowledge that gives it meaning. The tension between local knowledge
+ and widespread trust is partially resolved.</p>
+ <p>(In the vast majority of cases, one would expect Alice and Bob to select
+ a "boilerplate" contract/program off the shelf and fill in the
+ blanks, rather than write a contract/program from scratch. However, the
+ story of the custom contract better shows the logic by which the system
+ operates, and may explain how these shelves will come to be stocked.)</p>
+ <p>The "$-Issuer" and the "Stock-Issuer" turns the movement
+ of the pieces into a transfer of erights. A $-Issuer, or more conventionally
+ a bank, is effectively a title company for money. For money on record
+ at the bank, the rights to the money changes hands by the transfer of
+ quantity between accounts -- shown above as <i>purses</i> within the issuers.
+ When Alice places the gold bar on the board, her computer, the $-Issuer,
+ and the contract host engage in a three-way cryptographic transaction
+ that bring about the transfer of title, at the $-Issuer, of that much
+ money from Alice to, as far as the $-Issuer is concerned, the contract
+ host. An honest contract host would consider this money to be only piece
+ on the board, which can be picked up (transfered to the possession of
+ a player) only according to whatever may be the rules of the game. We
+ refer to this as <i>oblivious escrow</i>.</p>
+ <p>A dishonest contract host could abscond with the money instead, which
+ is why contract hosts needs to be widely trusted. A widely trusted contract
+ host presumably has a valuable reputation at stake, and this value helps
+ secure honest behavior. (More sophisticated cryptographic protocols are
+ possible which further limit the player's vulnerability to a dishonest
+ contract host or issuer, but these are beyond the scope of this paper.)
+ </p>
+ <p>In the arrangement shown here, the $-Issuer, the Stock-Issuer, and the
+ contract host need not have any prior knowledge or trust of any of the
+ other four players. For the game to be meaningful, Alice and Bob must
+ have prior knowledge and trust in both issuers and the contract host,
+ but not in each other. Even if Alice and Bob are both use-once pseudonymous
+ identities with no apparent physical location [<a href="#Vinge84">Vinge84</a>],
+ under these conditions, they can transact with each other <i>as if</i>
+ they fully trust each other.</p>
+ <h3>Assets + Contracts x Time = Capital</h3>
+ <p><font color="#000000"><img src="images/8-option.gif" width="379" height="235" align="right">The
+ Smart Contracts explained so far, the vending machine and the exchange
+ game, cannot turn assets into capital. To do so requires contracts that
+ unfold over time, like a mortgage. To explain how such unfolding creates
+ ever more abstract forms of property, a good clear example is the <i>covered
+ call option</i>. (Such instruments are kindergarden finance for many,
+ so excuse us while we belabor the obvious. Re-explaining the familiar
+ is often necessary when translating into a different medium.)</font></p>
+ <p><font color="#000000">Alice has an <i>option</i> when she has the right,
+ but not the obligation, to engage in some action at some agreed price
+ before some deadline. Alice has a <i>call</i> option when she has the
+ right to buy some agreed asset, let's say stock, at some agreed price
+ before the deadline. The option is a <i>covered</i> call option when Alice's
+ counterparty, Bob, escrows up front the stock Alice may decide to purchase.</font></p>
+ <p>We may visualize this as the game shown in Figure 8. In the initial board
+ state, shown in the top left, the stock is already on the board. While
+ in this state, neither Alice nor Bob may pick up the stock. Another "player"
+ in the game, so to speak, is the game clock. Should the deadline expire
+ while in this initial state, the clock causes a transition to a state
+ from which Bob can now pick up his stock and go home.</p>
+ <p>Or, before the deadline expires, Alice may decide to <i>exercise</i>
+ the option. She may place a gold piece on the left square. Unlike in the
+ previous game, in this game the acceptable amounts are predetermined by
+ the rules. The left square only accepts a certain amount of money. If
+ Alice places this amount of money on the board, this is the irrevocable
+ commitment step shown as the bold unidirectional arrow. After this move,
+ the only remaining legal moves are for Alice to pick up the stock, and
+ for Bob to pick up the money.</p>
+ <p>What is so different about this contract? During the time between when
+ the game starts (when Alice gets access to her chair) and the time when
+ the game transitions to a new board state (either by expiration of the
+ deadline or by exercise of the option), Alice a something valuable. During
+ this interval, Alice has the option to buy this stock. This is a very
+ different kind of value to have than the stock or money themselves. The
+ value of this new right <i>derives</i> from the value of the stock and
+ the money, but whereas they are very simple literal kinds of rights, this
+ new right is somehow more abstract. In Wall Street terminology, the new
+ right is a <i>derivative</i> of the more literal <i>underlying</i> rights.
+ In de Soto's terminology, if the literal instruments are physical <i>assets</i>,
+ then abstract rights derived by contracts about these instruments are
+ <i>capital</i>. </p>
+ <p>But there's something missing from this picture. Through the system so
+ far depicted, Alice can trade those rights managed by issuers -- money
+ and stock. The contract host, despite its complete ignorance that it has
+ done so, has created a new valuable right, owned by Alice. But in the
+ picture so far, Alice has no ability to trade this new right. This needs
+ to be repaired, in order for these new rights to truly be capital, and
+ in order for yet more abstract forms of capital to be derived from them.</p>
+ <h3><img src="images/9-layering.gif" width="324" height="304" align="right">Networks
+ of Games</h3>
+ <p>What we need, quite simply, is an issuer of this new right Alice holds
+ -- the right to sit in the left chair, in order to be able to play the
+ left side of this on-going game. Since the contract host is already managing
+ access to this chair, it seems natural to have it double as the issuer
+ for the right to sit in this chair. Just as Alice could tell the $-Issuer
+ to transfer some of her money from her purse to some else's, we can enable
+ Alice to tell the contract host to transfer her right to sit in this chair
+ to someone else. The contract host would then revoke Alice's access to
+ the chair, and issue fresh access to the new player, much as the $-Issuer
+ does with Alice's money.</p>
+ <p>With this last step, it seems we have the ability to express the full
+ range of contract layering used in modern finance. Not that modern finance
+ is directly relevant to the needs of the poor, but it is a good test of
+ the generality of our framework. </p>
+ <p>But wait. This structure decouples knowledge in a way quite different
+ than anything in the financial world. We have the contract host issuing
+ rights it does not understand, since these rights are produced by games
+ it runs, but does not understand. The contract host is not in a position
+ to vouch for any meaningful property of the rights it is issuing, so how
+ can widespread trust in the contract host translate into credible global
+ transferability of derived rights? Let's walk through the example depicted
+ in Figure 9.</p>
+ <p>Alice starts out simply as a player of the original options game, hosted
+ by contract host #1. While Alice finds herself in the resulting valuable
+ situation, she manages to find Fred, who would also find this position
+ valuable. Fred, were he convinced that Alice's chair sitting rights mean
+ what Alice says they mean, would be willing to play a game on contract
+ host #3 in which this right, issued by contract host #1, appears as a
+ movable piece. Unfortunately, having just met, Fred and Alice don't trust
+ each any more than Alice and Bob do. Fortunately, Fred does have prior
+ knowledge and trust of contract host #1. Unfortunately, contract host
+ #1 has no idea if the right to sit in this chair of this game means what
+ Alice claims it means, or anything else. </p>
+ <p>Fortunately, with Alice's consent, Fred can ask contract host #1 for
+ the text of the contract/program and the current state of the board. In
+ theory, this should be sufficient for Fred to figure out what these derived
+ rights are. Alice, who presumably understands the game she's playing,
+ can help Fred figure this out, and Fred can accept this help, with any
+ trust required between Fred and Alice. Should the contract truly be idiosyncratic
+ to local knowledge shared by Alice and Bob, knowledge to which Fred has
+ no access, he may not find the derived rights comprehensible at reasonable
+ cost and move on. More commonly, if the contract is understandable to
+ some number of others, including some Fred trusts, Fred to turn to them
+ for advice on the contracts meaning. (Unfortunately, it seems this new
+ medium will bring about a new form of lawyer, but so it goes.) </p>
+ <p>If this tale seems implausibly complex, please keep in mind that each
+ of the player is presumed to be participating through a software system
+ well engineered to hide complexity where it can, and make the issues intuitive
+ when it can't. Vastly more complex internal architectures have been made
+ to seem simple to use.</p>
<p> </p>
<p> </p>
- <p>One feature of contract hosts that is particularly important in the context
- of idiosyncratic local village property laws is this: embodying the contract
- in a smart contract is that the trust is "outsourced" from the
- specialized contract knowledge needed in traditional WTIIs: The owners
- of the computer that is acting as a smart contract host do not know, and
- do not need to know, anything about the nature of the contract. </p>
- <p><img src="images/9-layering.gif" width="324" height="304" align="right">As
- a consequence, the local village's unique definition of property rights
- can in principle be embodied in a smart contract, which can be executed
- with perfect integrity on a WTII contract server on a different continent,
- where no one has ever even heard of the village that created this set
- of property rights. Even the most eccentric of contracts will be executed
- correctly.</p>
- <p>This combination, which embodies local knowledge on an outsourced trust
- platform, could enable the villagers of the third world to leapfrog the
- enormous homogenization costs of integrating with a national body of law.
- They would leapfrog into the world of nonjurisdictional coercionless legal
- systems made possible by the Web. And they can make this jump at Web speeds.</p>
<h3><a name="blockbuster"></a>Smart Contracting for the First World</h3>
<p>Smart Contracting is not just a good idea for the third world. In technological
western civilization as well, smart contracts can wring new efficiencies
@@ -563,12 +770,18 @@
Chris Peterson, Terry Stanley, Nick Szabo, E-Dean Tribble, Bill Tulloh,
Ka-Ping Yee, and the members of the e-lang mailing list.</p>
<h3><a name="refs"></a>References</h3>
+ <p><a name="WhatsHerName"></a>[<font color="#FF0000">WhatsHerName</font>]
+ "<font color="#FF0000">some title about law on the internet</font>"
+ Proceedings of <i><a href="http://panoramix.univ-paris1.fr/AHTEA/colloques.html">Austrian
+ Perspective on the New Economy</a></i>, 2001.</p>
<p><a name="Bartley62"></a>[Bartley62] William W. Bartley, III, <i><b>The
Retreat to Commitment</b> </i>Open Court Publishing, 1962.</p>
+ <p><a name="Birch"></a>[Birch] Greg Birch, personal communication.</p>
<p><a name="deSoto89"></a>[deSoto89] Hernando de Soto, "<b>The Other
Path</b>", Harper & Row, 1989.</p>
<p><a name="deSoto00"></a>[deSoto00] Hernando de Soto, "<b>The Mystery
of Capital</b>", Basic Books, 2000. Chapter 1 online at <a href="http://www.ild.org.pe/tmoc/language.htm">http://www.ild.org.pe/tmoc/language.htm</a>.</p>
+ <p><a name="e-gold"></a>[e-gold] See <a href="http://www.e-gold.com/e-gold.asp?cid=101791">http://www.e-gold.com/e-gold.asp?cid=101791</a>.</p>
<p><a name="Engelbart62"></a>[Engelbart62] Doug Engelbart "<b>Augmenting
Human Intellect: A Conceptual Framework</b>", SRI Project no. 3578,
October 1962.</p>
@@ -607,12 +820,14 @@
of Financial Cryptography 2000, Springer Verlag. Online at <a href="http://www.erights.org/elib/capability/ode/index.html">http://www.erights.org/elib/capability/ode/index.html</a>.</p>
<p><a name="Rees96"></a>[Rees96] Jonathan Rees, "<b>A Security Kernel
Based on the Lambda-Calculus</b>", (MIT, Cambridge, MA, 1996) MIT
- AI Memo No. 1564. http://mumble.net/jar/pubs/ secureos/</p>
+ AI Memo No. 1564. <a href="http://mumble.net/jar/pubs/%20secureos/">http://mumble.net/jar/pubs/
+ secureos/</a>.</p>
+ <p><a name="Selgin01"></a>[Selgin01] George Selgin, personal communication.</p>
<p><a name="Shapiro99"></a>[Shapiro99] Jonathan S. Shapiro, "<b>EROS:
A Capability System</b>", Ph.D. thesis, University of Pennsylvania,
1999. Online at <a href="http://www.cis.upenn.edu/%7Eshap/EROS/thesis.ps">http://www.cis.upenn.edu/~shap/EROS/thesis.ps</a></p>
<p><a name="Steckbeck01"></a>[Steckbeck01] Mark Steckbeck, Peter Boettke,
- "<b>Akerlof Problems, Hayek Solutions: Local Knowledge and self-enforcement
+ "<b>Akerlof Problems, Hayek Solutions: Local knowledge and self-enforcement
in E-Commerce</b>", Proceedings of <i><a href="http://panoramix.univ-paris1.fr/AHTEA/colloques.html">Austrian
Perspective on the New Economy</a>, </i>2001.</p>
<p><a name="Stiegler98"></a>[Stiegler98] Marc Stiegler, "<b>Introduction
@@ -623,6 +838,8 @@
<p><a name="Tribble95"></a>[Tribble95] Eric Dean Tribble, Mark S. Miller,
Norm Hardy, Dave Krieger, "<b>Joule: Distributed Application Foundations</b>",
http://www.agorics.com/joule.html, 1995.</p>
+ <p><a name="Vinge84"></a>[Vinge84] Vernor Vinge, "True Names",
+ Bluejay Books, 1984, Online at <a href="http://progoth.resnet.gatech.edu/truename/truename.htm">http://progoth.resnet.gatech.edu/truename/truename.htm</a></p>
<p><a name="Walker"></a>[Walker] Miriam Walker, Ka-Ping Yee, "<b>Interaction
Design for End-User Security</b>", in preparation.</p>
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