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@@ -54,7 +54,7 @@
<p align="center"><i>Draft paper to be submitted to "<a href="http://panoramix.univ-paris1.fr/AHTEA/colloques.html">Austrian
Perspectives on the New Economy</a>".<br>
Please comment.</i></p>
- <h1>Abstract</h1>
+ <h1><a name="abstract"></a>Abstract</h1>
<p>Inadequate and ill-adapted property institutions in the third world prevent
the extralegal assets of the poor from serving as capital. In particular,
the absence of credible systems of title transfer makes real estate holdings
@@ -70,7 +70,7 @@
shows that the poor of the world have, in his terminology, <i>assets</i>
vastly in excess of their <i>capital</i>. In one study, de Soto's associates
surveyed neighborhoods in various poor countries, assessing the value
- of buildings which were not formally titled; the extrapolated value of
+ of buildings which were not formally titled. The extrapolated 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. In identifying a crucial mystery -- the failure of these assets
@@ -88,7 +88,7 @@
<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. (In the countries
+ your property. A mortgage on that house would be capital. (In 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
@@ -114,31 +114,30 @@
supplemented and/or supplanted with <i>smart contracts</i>? Smart contracts
will enable cooperation among mutually suspicious parties, often without
need for legal recourse. Could such a jurisdiction-free contracting mechanism,
- accessible over the net, dramatically increase capital liquidity, spawning
+ accessible over the Net, dramatically increase capital liquidity, spawning
a flood of new wealth in the poorest areas of the world? </p>
- <h3>Overview</h3>
+ <h3><a name="overview"></a>Overview</h3>
<p>The rest of the paper is organized as follows:</p>
<blockquote>
<p><b>Networks of Trust</b> synthesizes ideas from de Soto and Francis
Fukuyama to suggest the strong role played by widely trusted intermediary
- institutions, or <i>trust hubs</i>, in forming working large scale trust
+ institutions, or <i>trust hubs</i>, in forming working large-scale trust
networks, especially the institutions of title and law. We explain de
Soto's program, which we call <i>the governmental path</i>, to address
- the absence of these institutions by bringing them into governmental
+ the absence of these institutions by bringing the informals into governmental
systems of formal law and property. We make explicit the conflict faced
by this path between <i>local knowledge</i> and <i>global transferability</i>.
</p>
<p>We propose an alternate jurisdiction-free <i>digital path</i>, made
possible by new technologies, that could leverage the existing wide
recognition of first world institutions to short circuit the slow growth
- process of the other paths; and could resolve the conflict by use of
- smart contracts.</p>
+ process of the other paths.</p>
<p><b>Smart Contracts</b> are contracts as program code, where the terms
of the contract are enforced by the logic of the program's execution.
In a series of steps, from the basic metaphor of <i>contracts as board
games</i>, through the nature of contract-created <i>derivative rights</i>,
to <i>compositions of games</i> to turn assets into capital, we explain
- how smart contract can resolve the conflict -- to gain the benefits
+ how smart contracts can resolve the conflict -- gaining the benefits
of global transferability without sacrificing local knowledge.</p>
<p><b>Backing and Legitimacy</b>. Why would a change of electronic title
be locally honored as a transfer of control of the actual assets? The
@@ -422,21 +421,22 @@
accumulate its own reputation-capital. </font></p>
<h1><font color="#000000"><a name="smart-contracts"></a>Smart Contracts</font></h1>
<p>How might such hubs deal with the idiosyncrasies of each village's <i>people's
- law</i>, the idiosyncrasies that sabotage traditional governmental attempts
- to capitalize village assets, without taking on the impossible burden
+ law</i> -- the idiosyncrasies that sabotage traditional governmental attempts
+ to capitalize village assets -- without taking on the impossible burden
of learning all this local knowledge itself, and without imposing the
costs of homogenization? By the use of smart contracts.</p>
<p><font color="#000000">In smart contracts, a software program is the operational
embodiment of a 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 -- the machine hardware. This contract/host combination
- is a 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 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>
+ machine is a very primitive example of a smart contract being executed
+ on a contract host -- the vending software executing on the vending machine
+ hardware. This combination of contract and contract host is a 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 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
@@ -445,8 +445,7 @@
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>
<p><font color="#000000">(The vending machine is partially and asymmetrically
trusted, as both parties know that it is ultimately an agent only of the
drink manufacturer. Other smart contract scenarios involve more symmetric
@@ -516,7 +515,7 @@
system</i> -- a secure programming language or operating system suitable
for writing smart contracts [<a href="#Miller00">Miller00</a>]. This contract/program
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
+ play. (For example, a <i>board manager</i> for 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>
@@ -555,14 +554,14 @@
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 the contract host. An honest contract host
- would consider this money to be only a piece on the board, which can be
- picked up (transferred 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>
- -- the contract host, merely by running the contract, ensures that erights
- in escrow can only be released under the agreed conditions, without needing
- to understand those conditions or those erights.</p>
+ transaction that brings about the transfer of title, at the $-Issuer,
+ of that much 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 (transferred 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> -- the contract host, merely by running the contract, ensures
+ that erights in escrow can only be released under the agreed conditions,
+ without needing to understand those conditions or those erights.</p>
<p>A dishonest contract host could abscond with the money instead, which
is why contract hosts need to be widely trusted. A widely trusted contract
host presumably has a valuable reputation at stake, which helps secure
@@ -581,11 +580,11 @@
location [<a href="#Vinge84">Vinge84</a>], under these conditions, they
can transact with each other <i>as if</i> they fully trust each other.
The hubs -- the issuers and the contract host -- thereby succeed at providing
- virtual trust connectivity between their spokes -- Alice and Bob.</p>
- <h3>Assets + Contracts x Time + ?? = Capital</h3>
+ virtual trust connectivity between their spokes: Alice and Bob.</p>
+ <h3><a name="equation"></a>Assets + Contracts x Time + ?? = Capital</h3>
<p><font color="#000000"><img src="images/6-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
+ 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 simple clear example is the <i>covered
call option</i>. (Such instruments are kindergarten finance for many,
@@ -645,8 +644,8 @@
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 eright 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 would with Alice's money.</p>
+ then revoke Alice's access to the chair and issue fresh access to the
+ other player, much as the $-Issuer would with Alice's money.</p>
<p>With this ability to compose networks of games, 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
@@ -670,9 +669,9 @@
game, in which this right, issued by contract host #1, would appear as
a movable piece. Alice appears in the same role in both these games --
as a player. Contract host #1 also appears in both these games -- it appears
- as the contract host in game #1 (the horizontal rectangle), and it appears
- as an issuer in, game #2, of the right to sit in the left chair of game
- #1. Hence the tilted overlap of the rectangles.</p>
+ as the contract host in game #1, and it appears as an issuer in, game
+ #2, of the right to sit in the left chair of game #1. Hence the tilted
+ overlap of the rectangles.</p>
<p>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
@@ -692,7 +691,7 @@
cost and move on. More commonly, if the contract is understandable to
some number of others, including some Fred trusts, Fred may turn to them
for advice on the contract's meaning -- the analog of legal advice. With
- this step, derived right become erights about which other contracts can
+ this step, derived rights become erights about which other contracts can
be written, deriving further erights.</p>
<h3><a name="resolution"></a>Resolving the Conflict</h3>
<p>The above steps, applied to informally owned assets, could resolve the
@@ -736,7 +735,7 @@
by custom contracts, well after starting on the digital path. This is
to be contrasted with the governmental path, in which pervasive rule homogenization
is the necessary first step, and therefore also a major barrier to starting
- on the governmental path.</p>
+ on that path.</p>
<h1><a name="legitimacy"></a>Backing and Legitimacy</h1>
<p>For purely electronic assets, like fiat money and stock, at this point
we have, perhaps, an adequate picture. The title listing for these assets
@@ -775,7 +774,7 @@
This should be an area ripe for entrepreneurial invention. </p>
<h3><a name="ratings"></a>Ratings</h3>
<p>The issue of credibility does not require <i>all</i> title listings to
- have high credibility. Rather, it is adequate for distant traders, that
+ have high credibility. Rather, it is adequate for distant traders, who
have no knowledge of a particular governing village, to nevertheless have
some reliable basis for judging the credibility of <i>particular</i> title
listings. An obvious answer is to introduce another trusted intermediary
@@ -840,10 +839,33 @@
with Sam about the meaning of the contract. For most communities, seeing
Sam explain clearly what rights he's trading away will be enough to establish
legitimacy. After all, that's Sam talking, not some outsider making dry
- claims about Sam's past intentions. Such records should also help overcome
+ claims about Sam's past intentions. Such recordings should also help overcome
barriers of language and literacy.</p>
+ <h1><a name="limits"></a>Limitations and Hazards</h1>
+ <h3><a name="human"></a>Incorporating Human Language, Perception, and Judgement</h3>
+ <p>Many preexisting and desired arrangements will not be expressible purely
+ as smart contracts. Conventional contracts make use of the rich expressiveness
+ of human language, perception, and judgement, all of which are vastly
+ more subtle and sophisticated than any currently automated alternative.
+ Between the poles of fully human contracts and fully automated contracts
+ there is a spectrum of arrangements we call <i>split contracts</i> --
+ the contract is split between automated and non-automated parts. The first
+ smart contracting system, AMIX [<a href="#Walker89">Walker89</a>, <a href="#Miller99">Miller99</a>]
+ demonstrates well some of the ways such split contracts can be designed,
+ so the two parts can play together well, enabling us to take advantages
+ of the strengths of both.</p>
+ <p>For example, a split contract could consist of an automated game, adequate
+ if a dispute does not arise; natural language text expressing what the
+ game could not, relevant only during a dispute; and an agreement on which
+ person or institution should read the text and arbitrate the outcome of
+ a dispute. From a game-centric perspective, the ability to declare the
+ outcome in dispute is only another move in the game, and the arbitrator
+ is only another player. From a paper-contract-centric perspective, the
+ text as interpreted by the arbiter is the outcome of last resort, and
+ so is the "real" contract. The game is only a lighter weight
+ approximation for typical non-disputed cases.</p>
<h3></h3>
- <h1>Why the Third World First?</h1>
+ <h1><a name="thirdfirst"></a>Why the Third World First?</h1>
<p>This new world of Net-based jurisdiction-free coercionless smart contracting
-- the digital path -- is an option for the first world as well as the
third. Both groups stand to gain tremendously by this transition. Virtually
@@ -851,7 +873,7 @@
<a href="#Krecke01">Krecke01</a>] has been in the first world. Nevertheless,
once technology costs become inconsequential, we expect the third world
to overtake and then lead the first in making this transition. Why?</p>
- <h3>Comparative Legitimacy</h3>
+ <h3><a name="legitimacy"></a>Comparative Legitimacy</h3>
<p>Primarily because, once again, of the issue of legitimacy. The character
of legitimacy in the first world is quite different than the legitimacy
we have been discussing among the third world's informals. First world
@@ -875,7 +897,7 @@
of local arrangements that need to be expressed. The people's law of each
individual village, being largely unwritten, must be extremely simple
compared to formal law. Also, the very informality of these systems allows
- it to compromise. As long as an adequate spirit of the law is uploaded,
+ them to compromise. As long as an adequate spirit of the law is uploaded,
imperfect expressions can often be judged to be <i>good enough</i>. This
lets the transition get started incrementally, village by village, and
imperfectly.</p>
@@ -887,13 +909,13 @@
this system brooks no compromise except through politically-driven change.
This is a high enough bar that a smart contract system, legitimate by
this standard, might emerge so slowly as to be a non-issue.</p>
- <h3>Homogenization Costs</h3>
+ <h3><a name="homogenization"></a>Homogenization Costs</h3>
<p>The costs of rule homogenization discussed above, to be paid on the governmental
path, is a cost that has already been paid and largely forgotten in the
first world. The first world has already lost this great source of diversity,
so the digital path's option to avoid paying these costs is not a selling
point there.</p>
- <h3>Cell Phones in Eastern Europe</h3>
+ <h3><a name="cellphones"></a>Cell Phones in Eastern Europe</h3>
<p>Cell phones first became society-wide hits in poor countries with terrible
telecommunication, not in rich high-tech societies. (My own observations
of Prague <i>vs.</i> Silicon Valley in 1998 corroborate this -- cell phones
@@ -907,7 +929,7 @@
trust and commerce. The digital path offers them tremendous new opportunities.
In the West, it provides a smaller improvement, and an improvement over
a system many consider imperfect but adequate.</p>
- <h3>Saving the First World</h3>
+ <h3><a name="firstsecond"></a>Saving the First World</h3>
<p>Should the third world be the first to succeed at the digital path, and
should this in fact unleash their potential capital, causing markets to
bloom, creating vast wealth, how would this effect the first world?</p>
@@ -921,7 +943,7 @@
jurisdiction-free networks of commerce. Once such unregulatable trade
is made legitimate, the dam will have burst. What will be the character
of the resulting world?</p>
- <h1> The Rule of Law and Not of Men</h1>
+ <h1> <a name="rulelaw"></a>The Rule of Law and Not of Men</h1>
<p>Surprisingly perhaps, the character of the digital path may best be described
as a pure form of the classical liberal ideal -- <i>the rule of law and
not of men</i>. Indeed, the digital path could more literally realize
@@ -944,10 +966,11 @@
<h3><a name="acks"></a>Acknowledgments</h3>
<p>These ideas have formed over much time and many valuable conversations,
for which we thank Darius Bacon, Greg Burch, K. Eric Drexler, Charles
- Evans, Ian Grigg, Robin Hanson, Doug Jackson, Don Lavoie, Ted Nelson,
- Zooko (Bryce Wilcox-O'Hearn), Gayle Pergamit, Chris Peterson, Jonathan
- Shapiro, Terry Stanley, Nick Szabo, E-Dean Tribble, Bill Tulloh, Ka-Ping
- Yee, and the members of the e-lang mailing list.</p>
+ Evans, John Gilmore, Michael Glenn, Ian Grigg, Robin Hanson, Doug Jackson,
+ Ken Kahn, Don Lavoie, Ted Nelson, Zooko (Bryce Wilcox-O'Hearn), Gayle
+ Pergamit, Chris Peterson, Jonathan Shapiro, 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="Amix91"></a>[Amix91] Derived from work done by Dean Tribble
and Randy Farmer for AMIX, The American Information Exchange, circa 1991.</p>
@@ -1027,8 +1050,11 @@
<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",
+ <p><a name="Vinge84"></a>[Vinge84] Vernor Vinge, "<b>True Names</b>",
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="Walker89"></a>[Walker89] John Walker, "<b>Understanding
+ AMIX</b>", in The Autodesk File 4th edition, ed. John Walker, 1994.
+ Online at <a href="http://www.fourmilab.ch/autofile/www/chapter2_76.html">http://www.fourmilab.ch/autofile/www/chapter2_76.html</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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