In the previous issue (Cyborg #14) we made a brief reference to blockchain. Using the example of the first and basic application of blockchain technology, cryptocurrencies and specifically bitcoin, we tried to outline some technical details, in order to highlight the technology behind an ideology of trust alienation.
Although the use of cryptocurrencies is the most widespread concerning blockchain applications, the real “capabilities” of this technology are demonstrated with the practical emergence of “smart contracts”. The difference between cryptocurrencies and “smart contracts” is that in the latter case the object is not simply the transfer of a monetary amount from one account to another and the maintenance of decentralized “accounting books”, but the incorporation of a coded system of rules and definitions, within the decentralized blockchain network, that defines the relationships and processes of value transactions between two (or more) contracting parties.
The process of issuing a passport for example, includes certain specific steps and requires certain specific information. The novelty in the case of “smart contracts”, is not simply the digitization of all information and the networking of all services with each other, so that the only thing that will be needed is a click on the corresponding website of the service.
In the new (example), the information (e.g. full name, date of birth, criminal record, etc.) is not stored in a shelf or computer (e.g. of the registry office or the police), but in some distributed database that is part of the network. It does not exist somewhere specifically in some way – it exists everywhere. And access to each piece of information or communication between the contracting parties (people, services, etc.) does not occur by exchanging messages between the specific nodes (e.g. sending my photo from my computer to the service, informing the passport issuing service about my criminal record from the police, etc.), but through an algorithmic system of rules and definitions, which now operate and apply autonomously (after they have first been programmed for how they will “behave”) and bring the process to completion (or not), drawing the information from the network itself and regulating the communications/transactions between the parties.
Recognizing that the above is quite condensed to explain and clarify things somewhat in relation to the issue, we now present the translation of parts of a text that explains a bit more and approaches the topic of “smart contracts” in relation to legislative regulations – promising to return with a more detailed analysis shortly.
from “code is law” to “law is code” 1
There are various ways in which law and technology can influence each other. They interact through a complex system of dependencies and interdependencies, as both contribute (to a greater or lesser extent) to regulating individual behavior. With the advent of modern information and communication technology, the relationship between the two has evolved significantly, as technology is increasingly used as part of or in complement to the law. Lawyers, judges, and policy makers are increasingly surrounded by digital information and software tools, which they use in their daily routines. Although these tools can be used to support their activities, technological innovation also raises various challenges that the legal profession will ultimately have to address. Specifically, four distinct phases can be identified, at the end of the twentieth and the beginning of the twenty-first century, representing the evolving relationship between law and technology.
The first phase involves the process of digitization of information – converting paper and ink into computer-readable information. This phase is now underway: copies of cases, statutes, and regulations have been available for decades in large databases, initially accessible for a fee and now mostly free of charge.
The second phase consists of introducing automation into decision-making processes. Most of the research in legal informatics to date has focused on translating legal provisions into computer code. Both policymakers and judges increasingly rely on computer applications (e.g., specialized expert systems) to retrieve legal provisions or jurisprudence, analyze or compare them, in order to reach better decisions. This is a difficult task for many different reasons, including the ambiguity of human language and the need for legal standards to be flexible and fact-dependent. Despite these challenges, governmental institutions and businesses worldwide increasingly rely on structured rules of specific knowledge domains (such as healthcare and tax or financial regulations) for automated or semi-automated decision-making (e.g., specialized software tools for taxation, accounting, and credit scoring).
The third phase involves integrating legal rules into code on one hand and the emergence of code-based regulations on the other. With the widespread development of the Internet, new forms of regulation have emerged, increasingly based on soft law (i.e., contractual agreements and technical standards) to regulate behaviors. As more and more of our interactions are governed by software, we increasingly rely on technology not only as an aid in decision-making but also as a means of directly enforcing rules. Thus, software ends up defining what can or cannot be done in a particular electronic environment more frequently than the applicable law and often much more effectively. Joel Reidenberg (1998) called this Lex Informatica – a concept that was subsequently popularized as “Code is law” by Lawrence Lessig (1999).
Regardless of the terminology used, the basic characteristics of this new type of law are that it relies on code to determine the rules that people must follow. On the Internet, regulation is mainly carried out by private means (e.g., from the device or software designers) in an environment which, due to its transnational nature, seemed (at least initially) to exist beyond the jurisdiction of national states.
An emblematic example is digital rights management systems (DRM), which translate intellectual property law provisions into technological protection measures, thus restricting the use of copyrighted works (e.g., limiting the number of possible copies of a digital song). The advantage of this form of regulation through code is that, instead of relying on ex post enforcement by third parties (e.g., courts and police), the rules are executed ex ante, making it very difficult for people to violate them from the outset. Moreover, unlike traditional legal rules, which are inherently flexible and ambiguous, technical rules are highly standardized and leave little room for doubt, thereby eliminating the need for judicial arbitration.
Recently, a new technology has emerged that could change the way we think about law. This technology is blockchain, a decentralized, secure, and tamper-proof database that serves as the fundamental tool for creating value among peers 2 and through untrusted 3 transactions. It practically started in 2009 with the Bitcoin network – as the basic infrastructure for a decentralized payment system – and the technology rapidly evolved to take on a life of its own. Today, blockchain is used in many other types of applications, from financial applications to machine-to-machine communication, decentralized organizations, and peer-to-peer collaboration. As an untrusted technology, blockchain eliminates the need for trust between parties, enabling the coordination of large numbers of individuals who do not know (and consequently do not trust) one another.
In their evolution, the most recent blockchain applications have introduced the ability to embed small pieces of code (smart contracts) directly into the blockchain, so that they are executed in a decentralized manner by every node in the network. These rules are automatically applied by the underlying technology (blockchain), even if they do not reflect any underlying legal or contractual arrangement.
This brings us to the fourth phase – which is just beginning – that involves a new approach to regulation, the codification of law, which entails an increasing dependence on code not only for the enforcement of legal rules but also for the drafting and processing of these rules. As a result of these technological developments, the lines between legal or technical rule become more blurred, since smart contracts can be used both as support and as a replacement for legal contracts.
Indeed, although the majority of smart contracts are not directly linked to a real legal contract, depending on the way they are concluded, they could create a real contractual relationship in the traditional sense of the term. However, from a purely technological perspective, smart contracts can be used to mimic or at least simulate the operation of legal contracts through technology, thus transforming law into code.
the law is code
The idea that Code is law has now become popular. Over the years, following the extensive development of the Internet and our increasing dependence on digital technologies, there have been trends from private entities (and public institutions) to replace existing laws and regulations – which can only be enforced retroactively through state intervention – with technical regulations, which can be applied proactively through code.
However, converting legal rules into technical rules is not an easy task. Unlike legal rules, which are written as general rules in a natural language that is inherently ambiguous, technical rules can only be applied in code and therefore must necessarily be based on formal algorithms and mathematical models. Therefore, regulation through code is more specific and less flexible than the legal provisions it intends to implement.
Consequently, the transfer of legal rules into technical rules constitutes a delicate process that could have a significant impact on the legal system and may affect the way we think about law. The inherent ambiguity of the legal system – which is necessary for the proper application of the law on a case-by-case basis – provides programmers and software engineers with the power to incorporate their own interpretation of the law into the technical artifacts they create.
Therefore, while it is true that in the digital world code increasingly incorporates (and can even replace) some of the traditional functions of law, it is also true that in recent years (especially since the emergence of blockchain technology and the corresponding smart contract transactions) law has begun to gradually incorporate the characteristics of code.
Blockchain technology enhances the trend towards trusting code (rather than law) to regulate individual actions and transactions. Blockchain enables an entirely new type of regulation through code, which – in combination with smart contracts – also promotes a new way of thinking about law. Indeed, as more and more contractual rules and legal provisions are embedded into the code of smart contracts, the traditional understanding of law (as a flexible and inherently contested set of rules) will need to evolve into something that can be replicated in code. As a result of this trend, both lawyers and legislators could increasingly be tempted to deliberately design legal or contractual rules in a way that brings them much closer to how technical rules are composed. Therefore, “code is law” could lead to “law that gradually transforms into code.”
In contrast to bitcoin, which was specifically designed to function as a decentralized payment system, modern blockchain architectures introduce new additional functionalities, allowing small pieces of code to be applied directly to the blockchain and executed decentrally by every node in the network. These are usually referred to as smart contracts (SC), because they allow individuals to enter into a contractual relationship with other people (or machines) through a simple transaction on the blockchain.
Smart contracts were first introduced by Nick Szabo in the late 1990s. Szabo envisioned the formation of contracts through code, making them both “self-executing” and self-enforcing, thereby enhancing efficiency and removing the ambiguity of traditional contractual relationships. Beyond increased speed and efficiency, the key advantage of smart contracts over traditional contracts is the lack of ambiguity in their text, as their rules are written in a technical language that must be understood by a machine.
Smart contracts aim to simulate the logic of conventional rules. They are computer programs that facilitate negotiation, verify and enforce the execution of a contract or can even prevent the need for a basic contractual agreement between the parties. In fact, smart contracts are able to automatically execute the terms of a specific agreement, providing reliable transactions through integrated enforcement mechanisms.
Consequently, smart contracts can support contract execution, reducing the cost of negotiation, verification, and enforcement, by turning legal obligations into self-enforcing transactions. Earlier examples of smart contracts (without blockchain technology) include traditional vending machines, phone locking by telecommunications providers, digital rights management systems, automobiles with automated speed restrictions, etc.
When smart contracts are implemented on a blockchain, their execution does not occur on a central server/node, but is distributed among the nodes of the network. Blockchain-based smart contracts are therefore more complex than traditional means of technological regulation, since they function as software code that is simultaneously autonomous – given that it does not depend on a third party for its operation, and independent – given that it cannot be controlled by anyone.
Smart contracts can interact with both humans and other smart contracts within the same blockchain ecosystem. In some cases, a complex set of smart contracts is created in a way that allows multiple parties (humans or other smart contracts) to interact with each other. This combination of smart contracts can be considered a distributed autonomous organization (DAO), a self-governing organization controlled solely and exclusively by a rigid set of rules, which is implemented in the form of smart contracts. An individual can decide to transact with a DAO in order to, for example, be paid in exchange for a service. Thus, a DAO could in practice hire people or smart contracts to perform specific duties and could potentially sell its own services (or resources) to third parties. DAOs operate through all network nodes, do not rely on a central server and therefore cannot be terminated (unless they have a separate kill switch). DAOs are autonomous, to the extent that they do not need (nor take into account) their original creator – and self-sufficient, to the extent that they can charge users for the services they provide, in order to pay for the services they need.
DAOs (and smart contracts in general) interact with the physical world through interfaces or sensors (called Oracles) that record information from the outside world onto the blockchain. These systems are part of the Internet of Things (IoT), which consists of connected devices that act as an interface between the physical and digital worlds. Any device connected to the Internet (or a local network) can be transformed into a “smart asset” to the extent that it can read the state of a blockchain and react to its changes over time (e.g., a “smart car” that activates only if the driver possesses a valid cryptographic key). With the emergence of blockchain-enabled devices capable of interacting with each other and with other smart contracts or DAOs on the blockchain, the Internet of Things can increase its potential impacts on the physical world. This could lead to the emergence of complex ecosystems of smart devices, with humans and DAOs interacting with each other, often with unpredictable consequences.
Wintermute
cyborg #15 – 6/2019
- Blockchain technology as a regulatory technology: From code is law to law is code ↩︎
- P2P: In peer-to-peer networks, the communication of information between the various nodes takes place without a central server/node that synchronizes the connections and plays the role of a “reference point”. They are, in a way, decentralized. The “peers” therefore, are the nodes of such a network. ↩︎
- Note: In the original the term is “trustless” and its meaning is “without the need for trust”. Essentially it implies that there is no need for trust between the transacting parties, because this is ensured by the code/algorithm. We will use this term hereinafter. ↩︎