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@@ -41,7 +41,7 @@
</TD>
<TD ALIGN="RIGHT">
<P ALIGN="RIGHT"><FONT SIZE="7"><!-- #BeginEditable "BigTitle" --><font size="6">The
- Pencil, the Brick, and the Law</font><font size="5"><br>
+ Pencil, the Brick, and the Law:</font><font size="5"><br>
Smart Contracts and the Third World<br>
<br>
<font size="4">by Mark S. Miller and Marc Stiegler</font></font><!-- #EndEditable --></FONT>
@@ -56,18 +56,18 @@
<h3>Abstract</h3>
<p><font color="#FF0000">*** To be written</font></p>
<h3><a name="intro"></a>Introduction</h3>
- <p>As Hernando de Soto explains in The Mystery of Capital [<a href="#deSoto00">deSoto00</a>],
+ <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>. 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
+ world do, surprisingly enough, have assets. In a simple exercise, 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.
+ activity that occurs outside the official <i>formal</i> legal system.
Most of the economic activity of the third world's poor occurs in the
informal sector. Despite the non-official status of the informal systems
of laws and property in this sector, they are nevertheless quite real,
@@ -78,32 +78,32 @@
<p>As a simple example, the house you live in, from which no one would attempt
to evict you, is an asset. The recognition and sense of legitimacy in
your local community of your claim to the house makes this asset effectively
- your property. A mortgage on that house would be capital. But just because
- no one can evict you from your house, this does not mean a bank dares
- to accept it as collateral for a loan. The distinction is one of <i>credibility
- of property rights transfer at a distance</i>, i.e., the ability to engage
- in binding contracts such that the new owners could be confident they
- could indeed evict you as part of the contract, despite their distance
- from your community.</p>
+ your property. A mortgage on that house would be capital. (In the countries
+ that have become rich, mortgages in particular have been a major source
+ of highly decentralized investment, seeding many family businesses.) But
+ just because no one can evict you from your house, this does not mean
+ a bank dares accept it as collateral for a loan. The distinction is one
+ of <i>credibility of property rights transfer at a distance</i>, i.e.,
+ the ability to engage in binding contracts such that the new owners could
+ be confident they could indeed evict you as part of the contract, despite
+ their distance from your community.</p>
<p>De Soto's offer of hope for the poor is to transition into today's official
formal system of law and property, backed by national governments, in
- order to obtain the benefits of capital formation -- in the countries
- that have become rich, mortgages in particular have been a major source
- of highly decentralized investment, seeding many family businesses. Do
- Soto documents well both the high comparative costs of operating formally,
- and the difficulty of bringing about the transition, but successfully
- makes the case that the benefits outweigh the costs. Today, there are
- only these two choices -- informal <i>vs.</i> governmental. Given only
- these choices, we believe de Soto is advocating the right one, we wish
- him great luck with his program, and we do not wish to distract those
- who are able to make this transition successfully. Indeed, we can imagine
- few more effective programs for improving the overall condition of humanity.</p>
+ order to obtain the benefits of capital formation. De Soto documents well
+ both the high comparative costs of operating formally, and the difficulties
+ of bringing about the transition, but successfully makes the case that
+ the benefits outweigh the costs. Today, there are only these two choices
+ -- informal <i>vs.</i> governmental. Given only these choices, we believe
+ de Soto is advocating the right one, we wish him great luck with his program,
+ and we do not wish to distract those who are able to make this transition
+ successfully. Indeed, we can imagine few more effective programs for improving
+ the overall condition of humanity.</p>
<p>Despite our admiration, this paper takes a different approach; it explores
a third alternative, one openned up by new technologies. Because binding
contracts for ownership transfer lie at the heart of capital formation,
- if traditional contracts were supplemented and/or supplanted with smart
- contracts, which leverage the Net and cryptography for mediating disputes
- and enabling cooperation among suspicious parties, could such instruments
+ if traditional contracts were supplemented and/or supplanted with <i>smart
+ contracts</i>, which leverage the Net and cryptography for mediating disputes
+ and enabling cooperation among suspicious parties, could such instruments(**?)
dramatically increase capital liquidity, spawning a flood of new wealth
in the poorest areas of the world? (Given the exponential rate at which
the cost of electronics is falling, the cost of the tecnology itself should
@@ -120,18 +120,17 @@
</p>
<p>In Figure 1, the origin on the axis is what people were doing at the
time--writing with pencil and paper. When he found himself unable to communicate
- to people how much better things could be, he contrasted their current
- experiences with how much <i>worse </i>things could be. He tied a pencil
- to a brick, handed it to people and said, "Okay, now write."
- People found it very difficult. The unwieldy nature of the tool interfered
- with their ability to express ideas. With the pencil and brick for contrast,
- he effectively asked two questions: "What made the difference?"
- and, "How can we move further in the other direction?" This
- experiment showed people how important their tools and their media were
- to their effectiveness, and helped them start to see the next brick to
- 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>
+ how much better things could be, he contrasted their current experiences
+ with how much <i>worse </i>things could be. He tied a pencil to a brick,
+ handed it to people and said, "Okay, now write." People found
+ it very difficult. The unwieldy nature of the tool interfered with their
+ ability to express ideas. With the pencil and brick for contrast, he effectively
+ asked two questions: "What made the difference?" and, "How
+ can we move further in the other direction?" This experiment showed
+ people how important their tools and their media were to their effectiveness,
+ and helped them start to see the next brick to 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>
<div align="center">
<table cellpadding="12">
<tr>
@@ -146,16 +145,15 @@
<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
- our good intentions have better results, and this vast human tragedy will
- at least not have been in vain. Once we see the bricks that were tied
- to these societies, and understand how they precipitated these tragic
+ our good intentions yield better results, and this vast human tragedy
+ will at least not have been in vain. Once we can see the bricks that were
+ tied to these societies, and understand how they precipitated these tragic
outcomes, we may see clearly the bricks that remain, and start to imagine
their removal as well. Not just to bring the rest of the world up to the
- standard enjoyed at the origin of the axis, but to move past that point
- as well.
+ standard enjoyed by the first world, but to move past this point as well.
<h3><a name="openness"></a>The Brick of Constrained Speech</h3>
<p><img src="images/2-soviet.gif" width="381" height="145" align="right">The
- most apparent contrast between these two societies is summed up by their
+ most obvious contrast between these two societies is summed up by their
common labels: <i>closed societies</i> and <i>open societies</i>. Knowledge
evolves well only through a process of open discourse and criticism, in
which no <i>official truth</i> is held beyond skeptical re-examination
@@ -170,13 +168,12 @@
<p>The brick of constrained speech is in the process of being removed yet
again as we speak. The right of free speech, which underpins so much of
the strength of western civilization, is being transformed by the Net.
- In today's Web-enhanced society, freedom of speech is no longer a right
+ In today's Net-enhanced society, freedom of speech is no longer a right
which needs to be negotiated between citizen and state; rather, it is
a technological fact that accepts no compromise. This new Net-empowered
right to free speech is effectively a law, but is a completely <i>jurisdiction
free law</i>--even if all the nations of the world agreed that speech
- should be constrained, no constraint would prevail, as none would be enforceable
- [<a href="#Kelsey99">Kelsey99</a>].</p>
+ should be constrained, no constraint would prevail, as none would be enforceable.</p>
<h3><a name="tech-law"></a>Technological, Jurisdiction-Free Law</h3>
<p>The advent of technologically-based, jurisdiction-free law has many ramifications
[<a href="#Lessig99">Lessig99</a>]. Even in the US, where free speech
@@ -187,7 +184,7 @@
balance between copyright and free speech. But a technological fact has
no ability to compromise: there is no one to negotiate a compromise with.
So copyright becomes unenforceable even though it has the universal support
- of all the world's major jurisdictions.</p>
+ of all the world's major jurisdictions [<a href="#Kelsey99">Kelsey99</a>].</p>
<p>Technological facts would seem to be morally neutral. Should we expect
technological laws in general to be either good or bad? Taken by itself,
the loss of copyright is probably an example of a bad consequence. Copyright
@@ -204,7 +201,7 @@
your monitor screen. You could <i>send</i> someone a virus, and under
today's law that would be considered a use of force. After all, the virus
does cause harm to the recipient. But sending viruses is also a form of
- free speech, and under the technological law of the Net, ultimately cannot
+ speech, and under the technological law of the Net, ultimately cannot
be constrained. The logic of John Stuart Mill's defense of free speech
[<a href="#Mill69">Mill69</a>] applies perfectly to this situation.</p>
<p>John Stuart Mill never claimed that "bad" speech could not
@@ -214,22 +211,22 @@
differently to a certain pattern of speech, that pattern is rendered harmless.
After all, it's only information; it cannot by itself cause damage. The
only effective answer to bad speech is more speech, as only this enables
- the listener to grow from gullibility and cynicism into skepticism.</p>
+ the listener to grow from gullibility or cynicism into skepticism.</p>
<p>Likewise, the Net only transmits information -- including viruses. A
virus can only do harm based on the reaction -- the means of processing
- and operation -- of the computer receiving the virus [<a href="#Hardy99">Hardy99</a>],
- and of its user [<a href="#Stiegler98">Stiegler98</a>, <a href="#Walker">Walker</a>].
+ and operation -- of the computer receiving the virus [<a href="#Hardy99">Hardy99</a>].
The good news is that the damage done by computer viruses (or any malicious
- bit pattern) is not a technological law, since computer security is possible.
- The disemmination of viruses cannot be prevented, so the only effective
- response to their bad bits are other bits -- the software of virus-invulnerable
- secure operating systems [<a href="#Hardy85">Hardy85</a>, <a href="#Shapiro99">Shapiro99</a>],
- programming languages [<a href="#Hewitt73">Hewitt73</a>, <a href="#Tribble95">Tribble95</a>,
- <a href="#Rees96">Rees96</a>, <a href="#Miller00">Miller00</a>], and user
- interfaces [<a href="#Walker">Walker</a>]. Only such software enables
- our computers to grow from fatal gullibility or safe-but-useless seclusion
- into rich cooperation-without-vulnerability with the rest of the electronic
- world. This growth in turn will enable the removal of the next brick.</p>
+ bit pattern) is not mandated by technological law, since computer security
+ is possible. The disemmination of viruses cannot be prevented, so the
+ only effective response to their bad bits are other bits -- the software
+ of virus-invulnerable secure operating systems [<a href="#Hardy85">Hardy85</a>,
+ <a href="#Shapiro99">Shapiro99</a>], programming languages [<a href="#Hewitt73">Hewitt73</a>,
+ <a href="#Tribble95">Tribble95</a>, <a href="#Rees96">Rees96</a>, <a href="#Miller00">Miller00</a>],
+ and user interfaces [<a href="#Walker">Walker</a>]. Only such software
+ enables our computers to grow from fatal gullibility or safe-but-useless
+ seclusion into rich <i>cooperation-without-vulnerability</i> with the
+ rest of the electronic world. This growth in turn will enable the removal
+ of the next brick.</p>
<p>(In contrast to a common misunderstanding, the cited works demonstrate
that secure computer systems need not be less capable or harder to use
than insecure systems. Indeed, it seems the only significant comparative
@@ -240,8 +237,8 @@
becomes widespread.)</p>
<h3><a name="nohubs"></a>The Brick of Missing Hubs</h3>
<p>So many bricks have been removed, how can third world poverty remain
- as persistently intractable as ever? Free speech is not enough. The end
- of Communism is not enough. The universal desire for capitalism has proven
+ as persistently intractable as ever? Free speech was not enough. The end
+ of socialism was not enough. The universal desire for capitalism has proven
to be not enough. The naive view held by many people, including this author
when the Berlin Wall fell, was that, once government was out of the way,
the market would bloom and take care of the people. This has proven tragically
@@ -278,14 +275,14 @@
due to the economics of the system. The Net itself has mostly the same
architecture, as does the highway system. In all cases, a sparsely connected
actual network acts for most purposes like a densely connected network.
- From any airport you can fly to any other airport, almost as if there
- were flights between every pair of airports.</p>
+ For example, from any airport you can fly to any other airport, almost
+ as if there were flights between every pair of airports.</p>
<p>Similarly, in the first world, two strangers can meet and conduct business
as if they had prior knowledge of and trust in each other, by virtue of
their reliance on a mutually recognizing backbone of WTIIs. These WTIIs
are both in the business of securing these relationships to minimize the
- risks that these strangers face from each other, sometimes requiring it
- to absorb some of these risk onto itself. The economies of scale available
+ risks their customers face from each other, sometimes requiring it to
+ absorb some of these risk onto itself. The economies of scale available
to a WTII can help tremendously with these risks. Historically, western
societies have developed specialized WTIIs that bundle trust with other
expertise: one trusts Citibank not only because Citibank has a demonstrated
@@ -393,7 +390,7 @@
worked out system of law, rights, and obligations, negotiated over time
and idiosyncratic village by village -- <i>the people's law</i>. Instead,
the formals approach to the situation was <i>We have a legal system. You
- don't. Take ours. </i>Although the title listings reflected a snapshot
+ don't. Here's ours. </i>Although the title listings reflected a snapshot
of who-owns-what, the legal system governing these title listing did nothing
to reflect the complex negotiated informal arrangements needed to understand
what rights someone actually held to a particular asset. Given this mismatch,
@@ -416,7 +413,7 @@
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>
+ law, slowly and painfully, absorbed the informal wild 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,
@@ -450,30 +447,22 @@
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
- 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 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
+ in the third world because of the frenetic distribution efforts of western
+ media: 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 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 because the titling institution is beyond the reach
+ of their own government.</p>
+ <p>O<font color="#000000">nce the villages of the world join this global
+ village, it will be much easier for them 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
@@ -491,10 +480,10 @@
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>
+ cannot be delivered. 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 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
@@ -527,13 +516,13 @@
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">A basic metaphor for 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 then 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
@@ -541,19 +530,19 @@
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
+ of stock to Alice by placing it on the right 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
+ amount of money, by placing it on the left 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
@@ -584,8 +573,8 @@
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>
+ local knowledge that gives this contract 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
@@ -599,14 +588,13 @@
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>
+ money from Alice to the contract host. An honest contract host would consider
+ this money to be only a piece on the board, which can be picked up (transfered
+ to the possession of a player) 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
+ host presumably has a valuable reputation at stake, and this risk 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.)
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