Self-Enforcing Smart Contracts

Here’s Matt Levine on why my earlier smart contracts post was wrong:

Just because your contract has enforced itself automatically, that doesn’t mean that courts don’t get any say. They can order you to un-enforce it, or to pay damages for enforcing it wrong.

It’s not that the courts don’t get any say, it’s that it’s not economically rational for the courts to have any say. Oliver Hart’s 1989 paper on incomplete contracts talks about “self-enforcing contracts” [1]. Not smart contracts or anything on the blockchain, but the fact that people mostly do the things described in a contract without a court order and a pointed gun.

This is largely motivated by the assumption that it’s cheaper NOT to go to court. If I don’t make my monthly car payments, a repo man will take my car. And maybe I can hide the car in the backyard for a few days, but that just means the repo man has to obtain a court order that forces me to not only return the car but also pay for the associated costs. If I still ignore THAT, then I go to jail.

Most people anticipate this sequence of events so they do what they promised without getting the courts involved. A smart contract that disables a car’s starter after a missed payment simply replaces the steps between the repo man and the court order.

Levine points out a case where someone missed a car payment (or three) and the creditor used a starter interrupt device to disable her car. So she sued the creditor.

The starter interrupt device worked exactly right! Asking a court to enforce (or un-enforce) a contract is expensive, and someone has to bear the cost of taking the case to court. In this case, the starter interrupt device placed the burden on the person who breached the contract. Without this device, it’s the job of the creditor to hire a repo man and deal with the cost of repossessing the car.

By removing the burden of lawsuit from the creditor, lenders will have a lower cost of lending, and be able to offer lower rates and provide more loans. Repo men don’t have a perfect recovery rate, which makes it hard for a lender to assess a transaction’s risks and set appropriate rates to accommodate the allocation of costs. Smart contracts offer accurate loss expectations that mean creditors are better able to repackage the loans, sell the debt, increase bond market liquidity, and avoid a potential subprime-auto-loan financial crisis.

Or maybe you think that technological determinism is bad, because a computer can’t have the warmth and compassion of a repo man. That’s fine! Not everyone needs to use a smart contract or agree to have a starter interrupt device!

There’s an unfortunately popular notion that smart contracts are standalone agreements that exist as “immutable, unstoppable, and irrefutable computer code.” I blame the idiots who created the DAO.

Even irrefutable computer code has human user interfaces that set the expectations for contract performance. Those who felt that the DAO’s performance failed to meet their expectations have every right to use the legal process. Presumably these people live in some human jurisdiction, and in that jurisdiction there are courts. The courts don’t even need to be able to interpret computer code, because the DAO came with human-language terms and conditions:

The terms of The DAO Creation are set forth in the smart contract code existing on the Ethereum blockchain at 0xbb9bc244d798123fde783fcc1c72d3bb8c189413. Nothing in this explanation of terms or in any other document or communication may modify or add any additional obligations or guarantees beyond those set forth in The DAO’s code.

The fact that no one has turned to the legal process doesn’t mean that they live in a techno-utopian absolutism; it just means that going to court is a gamble that no one wants to bet on. A smart contract can shift the burden of lawsuit, but it can’t shift the law.

References
1. Allocation, Information and Markets (I can’t find a copy of the paper outside of this book so here is an excerpt: 1, 2)

Vending Machines for Plane Crash Insurance

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Remember airport life insurance kiosks? Airport terminals used to have vending machines where passengers could buy life insurance policies before boarding. The machines accepted quarters and dispensed an insurance policy, which the buyer would fill out and deposit in an envelope addressed to the beneficiary. The insurance policy expired the next day.

Source: StraightDope
Woodrow Wilson bought the first flight passenger policy in 1919.

This is a brilliant business model! Airplane accidents were uncommon, but planes were new and intimidating enough that the media made a big deal every time an airplane crashed. As a result, passengers thought they were taking a very real risk every time they flew. Plus, dying in a fiery crash is easy to verify, so there was little opportunity for insurance fraud.

Airplane accident insurance companies had one of the lowest loss ratios in the industry.

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Over time, people realized that airplanes didn’t actually crash all that much, so passengers stopped buying accident insurance at the airport and now we waste our money on duty free shopping instead.

Insurograph machine. Floyd Bennett Field I think. 1946.
Insurograph machine. Floyd Bennett Field (I think). 1946.

See Also:
Airplane Trip Insurance, 20 Wash. & Lee L. Rev. 346 (1963)

Can Smart Contracts Be Legally Binding?

A couple weeks ago, I was pointed to this whitepaper (h/t @squarelyrooted) by law firm Norton Rose Fulbright that asks, Can smart contracts be legally binding contracts? I was totally gonna read it and post a summary, except that I couldn’t manage to get past the first page without vomiting.

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Turns out I had norovirus (the KFC on El Camino, I bet), but I’m all better now so let’s get to it.

I’ll skip straight to the whitepaper’s conclusion: Can smart contracts be legally binding? It depends! Okay, done.

But being written by lawyers, the key findings are summarized using a lot more words:

Legally binding contractual effect depends on a number of variables. It is tempting to conclude that, just because the moniker “smart contract” includes the word contract, it is a legally binding contract as a matter of law. This is not necessarily correct. Whether it is so in a given situation may turn in part on the type of smart contract at issue, the factual matrix within which it operates, and the applicable law determining the issue.

Huh. The conclusion is nonsensical because the entire question is nonsensical. Asking whether smart contracts can be legally binding is like asking whether submarines have gills or blowholes. You’re thinking of the wrong animal! Except you’ve not only got the wrong animal, you’ve got the entirely wrong thing.

A smart contract isn’t a legally binding contract. It makes no attempt to be a legally binding contract. It’s only called a “contract” because it mimics the effect of a legal contract.

Legal contracts exist to provide incentives for certain actions. One really big incentive that legal contracts provide is “Do the things you promised or else I will take you to court.”

You could also call that a threat, but that’s just the other side of the same token. “Do things or I will take you to court” is a really shitty and expensive incentive that most people only turn to as a last resort.

Smart contracts incentivize performance too, but they do it using software instead of the threat of litigation. The incentives tend to look more like “Make your car payments on time or else your ignition won’t start,” or “Deposit a quarter or else you don’t get a candy bar.”

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The whitepaper isn’t just 52 pages of ambivalence; it explores nuances like the elements needed to form a legally binding contract. Under English common law, that means there needs to be an offer, acceptance, an exchange of value (consideration), intent, and certainty.

Like, does a stationary vending machine constitute an offer? The paper says Yes, as demonstrated in the case of Thornton v Shoe Lane Parking.

And if you put money into the vending machine, does that constitute acceptance?

In the case of Thornton v Shoe Lane, some guy named Francis Thornton bought a parking lot ticket from a vending machine, parked his car, and later got hit by another car. He sued the parking lot company for his injuries, and there was a lot of arguing because the vending machine had printed a ticket that said: “This ticket is issued subject to the conditions of issue as displayed on the premises.”

There were signs on the parking lot pillars that said the management shall not be held liable for damage or injury, but Thornton was not aware that those signs applied to him until the ticket told him so. Really, those signs could have been for anybody. So the acceptance didn’t count cuz the terms were uncertain.

The Norton Rose Fulbright paper also draws comparisons to clickwrap agreements. When you download an iPhone update and click “I Agree” on the Terms & Conditions, is that legally binding??

centipad

It doesn’t matter! None of this is a smart contract!

Smart contracts make it so lawyers don’t get to argue over nonsense and write 52-page papers discussing clickwrap case law. The whole point of a smart contract is to NOT go to court.

If you need to ask whether your smart contract is legally enforceable, you’re doing it wrong. Smart contracts make it so people don’t have to litigate over details like “Did this guy pay for parking or not?” Sure, smart contracts should be designed to model the common-law process of contract formation – not because that makes them legally binding, but because it’s a highly-evolved process that has been used for hundreds of years.

And in higher-value cases, smart contracts can be used with traditional contracts to control the burden of lawsuit. But if you’re worried about how the courts might interpret the terms of your smart contract, you should probably try using words.

See Also:
Nick Szabo, Formalizing and Securing Relationships on Public Networks. 1997.

Fidel Castro Ha Muerto

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Castro is finally dead, and Canadian Prime Minister Justin Trudeau seems to be the only one bummed about it. “It is with deep sorrow that I learned today of the death of Cuba’s longest serving President,” he said. “A legendary revolutionary and orator, Mr. Castro made significant improvements to the education and healthcare of his island nation,” Trudeau continued.

Everyone else is being a callous jerk! Sure, Fidel was a dictator who tortured and massacred tens of thousands of people. And yeah, maybe he sentenced thousands more to forced labor. And I suppose there are the millions more who fled the country or died trying. And…Maybe we’re still not happy about the time he sent 125,000 refugees over on boats, along with the contents of his prisons and mental hospitals. And I think we’re still sore about the fact that Castro asked Khrushchev to nuke us.

But still! Come on people now, try to look past the mass murders and remember the good times. Here are some New York Times headlines from Castro’s good old days as a young impassioned revolutionary.

SANTIAGO, Cuba, Aug. 1 (AP) — Cuban Army authorities announced today that Fidel Castro, 30-year-old student leader at the University of Havana, had confessed directing the unsuccessful rebellion Sunday against the Government of President Gen. Fulgencio Batista.View Full Article in Timesmachine »

The old, corrupt order in Cuba is being threatened for the first time since the Cuban Republic was proclaimed early in the century. An internal struggle is now taking place that is more than an effort by the outs to get in and enjoy the enormous spoils of office that have been the reward of political victory.View Full Article in Timesmachine »

The Cuban situation has moved into a new and important phase with new political pronouncements from the resistance leaders. The main statement came from the Sierra Maestra, where Fidel Castro and his young rebels continue their successful defiance of the Batista Government. View Full Article in Timesmachine »

Supporters of Fidel Castro, Cuban rebel leader, are selling “bonds” in the United States to help finance their movement to overthrow President Fulgencio Batista.View Full Article in Timesmachine »

Representatives of Fidel Castro, Cuban insurgent, asserted yesterday that his only present program was to bring about a provisional coalition government and free elections. Economic and social policies, they said, are still being shaped.View Full Article in Timesmachine »

A year ago today one of the strangest and most romantic episodes in Cuba’s colorful history began. On Dec. 2, 1956, a band of eighty-two Cuban youths, headed by a 30-year-old law graduate, Fidel Castro, landed on a marshy strip of beach in Oriente Province at the eastern end of the island.View Full Article in Timesmachine »

Fidel Castro has disclaimed any aspiration to the Presidency of Cuba either in a replacement of the present regime by a provisional government or in the next elected administration.View Full Article in Timesmachine »

HAVANA, Feb. 26 — A rebel leader capable of throwing into battle only 400 riflemen boasts that within a few months he will oust the Batista dictatorship and occupy all Cuba.View Full Article in Timesmachine »

Cuban rebel sympathizers ran up the red-and-black banner of Fidel Castro’s revolutionary movement on the staff reserved for Cuba at Rockefeller Plaza last night.View Full Article in Timesmachine »

It is now obvious that Fidel Castro and his rebels in Oriente Province, Cuba, are carrying out a widespread campaign of kidnapping Americans. Since last Thursday, when ten American and two Canadian engineers were captured at Moa Bay on the north shore, forty-five Americans and three Canadians have been seized. The latest outrage was the kidnapping of four Americans from a United Fruit sugar plantation early yesterday morning.View Full Article in Timesmachine »

Elaine: I like how the NY Times calls the kidnapping of 45 Americans a “folly”. Like, taking hostages was an innocent act of youthful indiscretion or whatever.

A vast majority of Americans must have been surprised, shocked and angered this week at the news from Cuba. The surprise came because the most rigid censorship in Cuban history had for months clamped a curtain of silence over what was happening in the island, which is only 100 miles from our Florida shore. View Full Article in Timesmachine »

The Cuban adventure, in which Americans and Canadians were at one time hostages of the rebels, has ended as happily as anything so rash and ill-advised could be expected to end. All the kidnapped men are now back safe and sound, having been treated with a courtesy and friendliness that in other circumstances might have been considered amusing.View Full Article in Timesmachine »

Elaine: Heehee! It was all in good fun! If only the Iran hostage crisis could have been so amusing!

HAVANA, Oct. 21 — Cuban rebels have kidnapped two Americans and seven Cubans employed at an oil refinery of the Texas Company, the United States Embassy said today.View Full Article in Timesmachine »

Fidel Castro, the rebel leader who has been operating for nearly two years in eastern Cuba, has been tolerantly regarded in this country because most of us did not care for President Batista. Batista’s arrogance as well as his fear have grown with time, and both have expressed themselves in illegal arrests, abuse of prisoners and a good deal of wanton shooting.

At first Fidel Castro, raising his banner against all this from a dreary hideout in the Sierra Maestra, seemed a sort of Robin Hood. But he appears now to be trying to alienate American sympathy. Last spring he kidnaped a number of American civilians, some American sailors from Guantanamo base and several Canadians. These were later released. But last week he picked up several more hostages, including two Americans, and appears to regard our protests as “an act of aggression.” In some other ways he is growing more unreasonable, as when he threatened to shoot and candidates he could catch who were running in the Batista elections set for next Monday.

This country has been patient, even to the point of cutting off arms shipments to Batista’s territory. We would like to see a democratic government in Cuba and a final end to the suppressions, censorships and outrages of the Batista regime. We know that revolutions, like other sorts of wars, are not Boy Scout exercises. But if he wishes to hold our friendship Fidel Castro must earn it by giving up terrorism, threats and misrepresentations. View Full Article in Timesmachine »

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” I will be a hero or a martyr!” Fidel Castro said in 1956, the year he launched what then appeared to be a forlorn attempt to overthrow the Cuban dictatorship of Fulgencio Batista. View Full Article in Timesmachine »

NY Times. January 4, 1959.
NY Times. January 4, 1959.

In general, Fidel Castro’s victory in Cuba has been hailed as another advance of liberalism and democracy over dictatorship and totalitarianism. Perhaps it is all of that. However, it gives me somehow an uneasy feeling reading in the newspapers that the victorious rebels are placing hundreds of persons — men and women — before firing squads after drumhead trials lasting a few minutes.View Full Article in Timesmachine »

Elaine: Back in 1959, New York Times reporter John Billi expressed a bit of unease about the fact that Fidel Castro and his merry men started executing hundreds of people within a week of taking power. Ordinarily, the mass murder of dissidents would draw a stronger reaction, but how could a Marxist-Leninist possibly be a bad guy? Remember, Castro promised to destroy bourgeois decadence and bring free education and healthcare. Sometimes you gotta break a few eggs to make a left-wing omelet. Fortunately, under Castro’s rationing system, each adult gets to purchase up to twelve eggs a month.

Tolerance Camp

The fact that Zuckerberg has still refused to fire Peter Thiel despite Thiel now being a formal part of Trump’s transition team is so far past shameful and embarrassing that we might need to coin some new words. –Paul Bradley Carr, Pando

Once and for all, any company defending their connection to Peter Thiel as he vocally and vigorously supports Trump is not embracing diversity. It’s making hollow excuses that show it doesn’t get the idea at all. –Davey Alba, Wired

That’s the spirit. Let’s bully the country into open-mindedness.

Sometimes Silicon Valley reminds me of South Park’s Tolerance Camp: