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ICIDCA 2019: pp 543-550 | Blockchain Technology in Healthcare Domain: Applications and Challenges AuthorsChavanMadhuriPatilDeepaliShinganePriyankaConference paperFirst Online: Part of the book series …
ICIDCA 2019: pp 543-550 | Blockchain Technology in Healthcare Domain: Applications and Challenges AuthorsChavanMadhuriPatilDeepaliShinganePriyankaConference paperFirst Online: Part of the book series (LNDECT, volume 46)Abstract Blockchain is a technology which is proposed to address various problems in different domains as like in the banking sector, supply chain. Blockchain is distributed public ledger that can hold permanent records in a secured way. Blockchain ensures that transactions can never be modified. Blockchain also provide data transparency, integrity, security and interoperability. To address the need for patients to manage and control their electronic health records, blockchain technology could be successfully applied in the healthcare sector. Using blockchain decentralized storage of patient information is possible. Health records which are up to date will be accessed by authenticated user only. It is possible for patient to share his records with other doctors for diagnosis of diseases for example chronological disease, thus blockchain provides personal data transaction in health care sector using blockchain. In this paper we reviewed different applications of blockchain in healthcare system and also challenges for deployment of this technology in healthcare industry.Keywords BlockchainDistributed ledgerEHRHealthcare applicationsSecurityInteroperabilityThis is a preview of subscription content, to check access.References 1.Deep shift: technology tipping points and societal impact. Technical report, World Economic Forum, September 20152.Coleman, N.: VC Fintech funding sets record in 2015, Fueling Bitcoin and Blockchain Growth, March 20163.Krawiec, R.J., et al.: Blockchain: opportunities for health care. 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In: IEEE 12th International Conference on Global Security, Safety and Sustainability (ICGS3), pp. 19 (2019)31.Azaria, A., Ekblaw, A., Vieira, T., Lippman, A.: MedRec: using blockchain for medical data access and permission management. In: International Conference on Open and Big Data (OBD), Vienna, Austria, pp. 2530. IEEE (2016)32.Kumar, T., Liyanage, M., Braeken, A., Ahmad, I., Ylianttila, M.: From gadget to gadget-free hyperconnected world: conceptual analysis of user privacy challenges. In: European Conference on Networks and Communications (EuCNC), Oulu, pp. 16, June 201733.Stgnaro, C.: White Paper: Innovative Blockchain Uses in Healthcare. Freed Associates, August 201734.Yli-Huumo, J., Ko, D., Choi, S., Park, S., Smolander, K.: Where is current research on blockchain technology? - a systematic review. PLoS ONE 11 , 127 (2016)35.Linn, L., Koo, M.: Blockchain for health data and its potential use in health IT and health care related research (2016)36.Puppala, M., He, T., Yu, X., Chen, S., Ogunti, R., Wong, S.T.C.: Data security and privacy management in healthcare applications and clinical data warehouse environment. In: IEEE-EMBS International Conference on Biomedical and Health Informatics (BHI), p. 58, February 201637.Omar, A.l., Rahman, M.S., Basu, A., Kiyomoto, S.: MediBchain: a blockchain based privacy preserving platform for healthcare data. In: International Conference on Security, Privacy and Anonymity in Computation, Communication and Storage, December 201738.Attia, O., Khoufi, I., Laouiti, A., Adjih, C.: An IoT-blockchain architecture based on hyperledger framework for healthcare monitoring application. In: 10th IFIP International Conference on New Technologies, Mobility and Security (NTMS), pp. 15. IEEE (2019)Copyright information Springer Nature Switzerland AG2020Authors and Affiliations ChavanMadhuri1PatilDeepali1ShinganePriyanka11.Ramrao Adik Institute of TechnologyNavi MumbaiIndia
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). This paper showed how the traditional (secrecy) conceptualization of cryptography is wanting; in its place, I argued for a new conceptualization as a notational system. As Leibniz and Turing …
). This paper showed how the traditional (secrecy) conceptualization of cryptography is wanting; in its place, I argued for a new conceptualization as a notational system. As Leibniz and Turing understood, a notational system can order the world in powerful ways. Reading the politics of Bitcoin in light of a reimagination of Deleuze’s control society (replacing modulation with order) I suggested that cryptography is a powerful “new weapon,” functioning as an ordering machine. I argued that Bitcoin is at the forefront of advancing this ordering logic, updating the economic system for our new control society. Quinn DuPont firstname.lastname@example.org Faculty of Information, University of Toronto i Mt. Gox was the most popular bitcoin exchange, and dealt primarily in USD, although many other exchanges are available (some with regional or jurisdictional foci). Mt. Gox started as a trading card exchange for the online game Magic: The Gathering Online, but eventually rebranded to focus exclusively on bitcoin. ii This was the first spike in value for 2013; the second (much larger) spike occurred a few months later when bitcoins were trading above 1000 USD/bitcoin, often swinging more than 50% in value in a matter of hours. iii The recent revelations of US military contractor Edward Snowden perpetuate this ideology, even if they eroded the universal trust in cryptography. For many, the response was simply a need for better cryptography, seemingly safe from the revealed fact that US Intelligence services can readily crack or circumvent available cryptography. iv The Electronic Frontier Foundation advocates the widespread use of cryptography (Opsahl et al., 2013); see below for evidence of bitcoin’s origins on the Cypherpunks mailing list. v See for example Rosenheim (1997) and Shoptaw (2000) on literature and poetics, Ellison (2011, 2008) on textual studies, Gleick (2011) on information, Pesic (2000a, 2000b, 1997) on science, Blanchette (2012) on documentation, Eco (1986) on semiotics, and Zielinski (2008) on media. vi See the journal of record, Cryptologia, for the history of cryptography. While many of the articles published in Cryptologia are the only source of history and should be applauded for their trailblazing work, most are published by hobbyists or experts in engineering who have an interest in historical matters. Even Kahn himself, who over the years has become a highly capable self-trained historian, started as a journalist. These histories, correspondingly, usually suffer from the evils of bad historiographical methodology: “impact” accounts of technical change, over-reporting of military technologies, and whiggish, teleologically-driven narratives. vii Although written prior to his famous Essay, Mercury was published posthumously. viii For an assessment of universal and philosophical language schemes, with occasional reference to the role of cryptography, see (Cohen, 1954; Formigari, 2004, 1993, 1988; Maat, 2004; Rossi, 2000; Salmon, 1971, 1966; Slaughter, 1982; Wilding, 2001). ix Note that Glidden (1987) argues that the French version (here pictured) of Trithemius’ Polygraphiae contains a slightly artificial “reinforced” link to Lullian and cabalistic influences. x Cryptography is often twinned with war. At times these associations can be productive (Deleuze and Guattari, 1987; Kittler, 1999), but far too often they constrain our thinking, leading to discourse (and associated models) of “adversaries,” “man-in-the-middle,” “attack” and so on. The bellicose nature of cryptography cannot be dismissed—it is a war machine—but I think we should derive, not assume, such connections. xi Although only occasionally recognized, the histories of information and cryptography are intimately tied (see e.g., Gleick, 2011). xii “Discrete” and “discreet” share the Latin origin discretus. xiii For a more extensive description of the dialectic of mimetic and algorithmic technologies see Takhteyev and DuPont (n.d.). xiv The skytale has been disqualified as cryptography simply because it doesn’t offer plausibly good secrecy. As I have been trying to argue, we need to think more expansively about our conceptualization of cryptography, and may want to return to the original understanding of the skytale as an encryption device, but one that offers something other than secrecy. xv It is worth noting that Alberti’s cryptographic work was also influenced by Lull (Kahn, 1980). xvi Asymmetric-key cryptography was initially invented in 1973 at the Government Communication Headquarters in the UK by James Ellis, Clifford Cocks, and Malcom Williamson but kept secret; it was then publically re-invented in 1976 by Whitfield Diffie and Martin Hellman (Levy, 2002). xvii More complicated three-pass schemes are possible too, in which I encrypt a message and pass it to you, then you encrypt the already-encrypted message and pass it back, I then decrypt my encryption and pass it back to you, at which point you can finally decrypt your encryption and read the message—successfully transferred in public while remaining encrypted. xviii At this point the anarchist/libertarian undercurrents are completely at the fore, Dai (1998) starts his proposal, “I am fascinated by Tim May’s crypto-anarchy.” xix Of course, this is the ideal scenario. Any competing network of greater computational power could best the legitimate one, and therefore human vagaries of collusion and consolidation come to play. This has actually happened, when due to a technical bug the blockchain became “forked,” and was only reset when a cartel of powerful mining pools colluded to switch to the “corrected” blockchain. Alberti, G. B. (2010). De componendis cifris. In K. Williams, L. March, & S. R. Wassell (Eds.), The Mathematical Works of Leon Battista Alberti (pp. 169–187). Basel: Springer Basel. Retrieved from 007%2F978-3-0346-0474-1_4 Aspray, W. F. (1985). The Scientific Conceptualization of Information: A Survey. Annals of the History of Computing, 7(2), 117–140. Back, A. (1997, March 28). hash cash postage implementation. Cypherpunks. Retrieved from http://www.hashcash.org/papers/announce.txt Bacon, F. (1762). Novum organum scientiarum. Venetiis: Typis G. Girardi. Bauer, F. L. (2005). Cryptology. In Encyclopedia of cryptography and security. 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(1561). Polygraphie: Universelle escriture Cabalistique de M.I. Tritheme Abbé. Paris: Jaques Keruer. Retrieved from http://fantastic.library.cornell.edu/bookrecord.php?record=F034 Turing, A. (c. 1939-42). Turing’s Notes on the Enigma Machine (Catalogue reference: HW 25/3). Retrieved from http://www.nationalarchives.gov.uk/spies/ciphers/enigma/en1.htm West, S. (1988). Archilochus’ Message-Stick. The Classical Quarterly, 38(1), 42–48. Wilding, N. (2001). “If You Have A Secret, Either Keep It, Or Reveal It”: Cryptography and Universal Language. In D. Stolzenberg (Ed.), The Great Art of Knowing: The Baroque Encyclopedia of Athanasius Kircher (pp. 93–103). Firenze, Italia: CADMO. Wilkins, J. (1668). Essay Towards a Real Character and a Philosophical Language. London: Royal Society. Wilkins, J. (1694). Mercury: or, The secret and swift messenger. Shewing, how a man may with privacy and speed communicate his thoughts to a friend at any distance. London: R. Baldwin. Winthrop-Young, G. (2011). Kittler and the Media. Cambridge, UK; Malden, MA: Polity Press. Zielinski, S. (2008). Deep Time of the Media: Toward an Archaeology of Hearing and Seeing by Technical Means. (G. Custance, Trans.). The MIT Press. You must be logged in to post a comment. Joining Humanity+ as a Full, Plus or Sponsor Member enables you to participate in Humanity+ governance and decision-making - an important role in the growing Transhumanist movement. It also, of course, gives you the opportunity to support us in the work Humanity+ does![Editor’s note, see http://www.iqdupont.com/ and H/T Žarko Almuli] It was April 10th, 2013 and the price of a single Bitcoin surged past 250 USD on the Mt. Gox exchange. A few months prior I had purchased seven Bitcoins for just under $200, and now they were nearing $2000 in value (Figure 1). But, just as fast as the market went up, it came down. Ever the amateur gambler, I panicked and sold too early. But, I was lulled by my humming money machine, permuting cryptographic codes by the millions every second. I was not the only one interested in playing the Bitcoin market, and the increasing price of Bitcoin was due to a number of factors, including a sustained distributed denial-of-service attack on Mt. Gox, and other people like me gambling in the latest crypto-anarchist adventure. It was April 10th, 2013 and the price of a single Bitcoin surged past 250 USD on the Mt. Gox exchange. A few months prior I had purchased seven Bitcoins for just under $200, and now they were nearing $2000 in value (Figure 1). But, just as fast as the market went up, it came down. Ever the amateur gambler, I panicked and sold too early. But, I was lulled by my humming money machine, permuting cryptographic codes by the millions every second. I was not the only one interested in playing the Bitcoin market, and the increasing price of Bitcoin was due to a number of factors, including a sustained distributed denial-of-service attack on Mt. Gox, and other people like me gambling in the latest crypto-anarchist adventure. Like many other modern currencies, Bitcoin is fiat money. But, unlike traditional fiat money, Bitcoin is cryptographic and electronic. There is no “physical” substrate to Bitcoin; the “coins” exist only as cryptographic representations stored in digital wallets. In the simplest caricature of complex economics, fiat money has no intrinsic value and thus requires people to trust that it will retain value. Usually government backing provides this semblance of trust, but when this trust is eroded (e.g., a weak government), value often plummets. Technical flaws also cripple the trust that sustains fiat money, such as rampant fraud, counterfeiting, or hyperinflation. Trust in Bitcoin rests on a range of technical advantages supplied by cryptography. According to advocates, cryptography is secure (safe from technical or mathematical error).iii When applied to economic apparatuses, counterfeiting and double-spending is prevented through the use of public key cryptography, and hyperinflation is kept in check because the cryptographically-secure mining protocol ensures the measured production of money (with a maximum number of coins produced). Yet, as with general discussions of cryptography, complicated political issues often transform into a binary of state versus personal power. On the one hand, when cryptography is used for Privacy Enhancing Technologies it is seen as a block against government snooping. On the other hand, these same cryptographic technologies are often used against the people. This debate is particularly important for crypto/cyber-libertarians,iv who often believe that Bitcoin’s lack of government backing is a virtue (J.M.P., 2013). Described generally, cryptography is typically understood as a means to ensure “information security” or “information secrecy” (see e.g. Kohno et al., 2010). Here, security and secrecy are understood in terms of social relations (c.f. Bellman, 1979). Modelled in its simplest formulation, a secret is some information that I possess and you do not, while information security might be described more abstractly as control of information within a relationship. Or, the encyclopaedic definition: “the aim [of cryptography] is secrecy and confidentiality: the practice of keeping secrets, maintaining privacy, or concealing valuables” (Bauer, 2005). Though the conceptual analysis usually stops here, cryptography also functions more deeply, in ways rarely appreciated by those developing the technology. Understanding how cryptography functions at this deeper level is essential to understanding how Bitcoin functions. I argue that cryptography is central to Bitcoin and yet produces a set of non-secret powers for its social (and economic) effect. This paper suggests that cryptography can be reimagined and reconceptualised, putting forth an alternative to the dominant view that cryptography is secrecy. The long history of cryptography is abbreviated to show that cryptography previously functioned in many different ways, but has been systematically black-boxed. By opening up this black box and reconceptualizing cryptography I argue that we can attend to the history of cryptography yet retain analytical rigour by viewing cryptography as a discrete notational system. Then, returning to Bitcoin, I describe the specific cryptographic mechanisms as used in Bitcoin. Building on this foundation I offer a description of a full Bitcoin transaction. My method for understanding this technical foundation was to engage in praxis, and so, returning to my introductory story about my own experiences with Bitcoin I describe the lessons I learned by running a Bitcoin mining machine. Finally, I take up Gilles Deleuze’s suggestion to “look for new weapons” in our control society. By drawing on my reconceptualization of cryptography as a discrete notational system I suggest that Bitcoin functions as a new weapon in a logic of order. Given the important role that cryptography plays in our lives, it is surprising how little attention it receives outside of the academic worlds of mathematics/engineering and privacy/law. A few authors outside of these fields have explored how cryptography intersects with other domains, but for the most part, cryptography has been a mathematical and legal concern.v Perhaps the most useful of these authors is Kahn (1967) who provides a history of cryptography,vi identifying how the golden age of Western cryptography started with Leon Battista Alberti (1404-1472). Reaching far beyond mathematics and law, Alberti identified cryptography as an intriguing mix of technologies and practices: the “occult arts,” “mysteries of nature,” “strange characters with unusual meanings,” ”movable type,” and secrecy (Alberti, 2010). Over the next six centuries these themes played out in interesting ways. In the 17th century, John Wilkins (1614-1672) developed a proposal for an unambiguous, universal/philosophical language (1668) after developing the ideas in Mercury (1694), the first English-language cryptography manual.vii Athanasius Kircher (c. 1601-1680), similarly, reworked Johannes Trithemius’ (1462-1516) troubled work on cryptography for his universal language scheme (Figure 2).viii Francis Bacon (1561-1626) worked out a method for universally signifying nature with his bilateral cipher before launching his “great reformation” of scientific interpretation (Bacon, 1762). And Gottfried Wilhelm Leibniz (1646-1716) contributed to discrete mathematics after writing his dissertation (1989) on the cryptographic combinatorics of Raymund Lull’s (1232-1315) occult and cabalistic science (Gardner, 1958). The richness of these historical themes has now, in contemporary cryptography, practically disappeared. Cryptography has become operationalized and nearly univocal—gone are the vibrant connections to language, science, and art. Today, our most influential conceptualization is Claude Shannon’s (1945) linked notion of secrecy and information. Prior to his famous Mathematical Theory of Communication (Shannon and Weaver, 1948), Shannon had been working on war-time encryption systems.x Shannon’s cryptographic work stemmed from a long line of influences and prior work (e.g., Nyquist, Hartley, and Wiener) (Thomsen, 2009), as well a richer, multivocal, and open conceptual backdrop (Cherry, 1953; Geoghegan, 2008). Research on cryptography set the stage for Shannon’s more general, and more rigorous portrayal of information. It was in working out the coding issues for cryptography that Shannon developed his theory of information.xi In contrast to much of the engineering work being done on information transmission at that time, Shannon focused on discrete rather than continuous signals (Thomsen, 2009). Drawing on Hartley, Shannon bracketed the issue of meaning, and discussed only how much information can pass through a channel. This conceptualization, combined with Nyquist’s observation that information transmission obeys a logarithmic rule, allowed Shannon to generalize the issue and show that information accords to physical properties of the world (Aspray, 1985; Hayles, 1999). Despite being central to his study, Shannon left his understanding of “secrecy” implicit. The closest we get to a description of secrecy is that it arises from the “a priori probability associated with… choosing that [enciphering] key” (Shannon, 1945). The a priori probability is a function of the statistics of the transformation from one (information) space to another. In ideal situations, secrecy becomes a matter of making guesses in the presence of a stochastic phenomenon. Before Shannon “won” the battle for our history—how we come to think of cryptography—the field of possibility was more open (Cherry, 1953). Competing conceptualizations existed but none were better prepared than Shannon’s for the coming changes in cybernetics and informatics (also made possible, in large part, by his work on the Mathematical Theory of Communication). By identifying “secret information” as the endpoint of cryptographic conceptualization, however, we risk teleological explanations that make it difficult to understand cryptography’s non-secret role in contemporary society. If we start to reconfigure our understanding of cryptography—open the socio-technical black box—we stand to gain a deeper appreciation, and may be better able to understand the politics of technologies that use cryptography. In order to open the black box of cryptography our metaphors must also be rethought. The analysis of cryptography rarely penetrates beyond metaphors, so it is especially important to dispel any mistaken notions. There are two closely related classes of metaphor most often used to describe cryptography: the dead, and the missing or hidden. The metaphor of death is most common in literary accounts, if for no other reason than the association of “crypt” and “cryptography.” On this account cryptography “buries” (Derrida, 1998; Turing quoted in Mackenzie, 1996) and even communes with the dead (Poe, 1991; Rosenheim, 1997). The metaphor of being “hidden” is likely due to the perceived semiotic shift that occurs when a text gets encrypted: at one moment it is there and seen by all, and (like a good magic trick) the next moment it is gone (until conjured up again in decryption). Here the language used is “hidden” (Schmeh, 2012), “veiled” (Cooke, 1983), or perhaps text containing a “false bottom” (Glidden, 1987). These metaphors are evocative but lacking. As will become clear below, a more useful metaphor is “discreet,” in the sense of being circumspect, but also “discrete” as separate or distinct.xii I argue that cryptography can be re-conceptualized as a generic notational system, quite appropriately sharing the ambiguous name “code.” To get to this conclusion, I argue that cryptography is unspeakable in the sense of being a written language without syllables (which perhaps disqualifies it as a language at all). Due to the curious nature of being unspeakable, cryptography shifts from mimetic to algorithmic representation. Algorithmic representation permits the transposition and combination of its symbolic elements, but only when made of disjoint, articulate, and unambiguous marks. This system of marks is a discrete notational scheme. Additionally, because algorithmic representation permits the rearrangement of its symbolic structure it can be used to order the world, in subtle but powerful ways. “Literature has nothing more to say,” remarks Friedrich Kittler, “because it all ends in cryptograms” (1999). This is only true if we take Kittler very literally, that literature has been silenced and can no longer speak. Kittler reminds us that speaking written words is not natural and immediate. First, the Greeks needed to “invent” vowels so as to create a storage system able to capture the wealth of articulable knowledge (Winthrop-Young, 2011). Second, in what Kittler (1990) called the Discourse Network 1800, the Mother’s Mouth must teach children how to speak these written marks. Kittler goes on to accuse those languages lacking written vowels as being unable to perfectly capture the world’s information. Written languages that lack vowels are not as expressive, Kittler problematically suggests, and so are not as mimetic (Winthrop-Young, 2011). Kittler remarks, “nobody knows how the heretic king Akhneten called his N-f-r-t-t when they were making children” (Kittler quoted in Winthrop-Young, 2011, p. 91). But, of course, this is a challenge for history, not the Egyptians. The Egyptians were able to speak the name that was recorded as N-f-r-t-t because they added the appropriate vowels, that is, they created syllables in speech. It is hard to underline this important point in the written form—I suggest you try speaking the letters, but out loud: N-f-r-t-t. The punchline is that in order to be voiced, syllables must be created, making sounds like “nef eff arr tee tee.” In the audio book version of E.A. Poe’s The Gold Bug (2013) this same comedy plays out when the poor narrator is forced to articulate a long series of cryptographic symbols, so that 5 3 ‡ ‡ † 3 0 in the text becomes “five, three, double dagger, double dagger, single dagger, three, zero” in the audio book (and to great comedic effect, this goes on for half a page). While the narrator demonstrated that it is possible to speak a cryptogram in some fashion, it no longer counts as speech in the sense of meaningful language. This is the lesson that the Mother’s Mouth must teach her children, separating the grunts of animals from those of human language (Kittler, 1990). The reason cryptography cannot be spoken is because it has very particular syntactic requirements. These requirements where formalized by Nelson Goodman (1976) in his analysis of notational schemes. Roughly, a notational scheme requires that marks can be interchanged within a class of marks without difference, and that one can in theory determine what character a particular mark belongs to. The result of this analysis is that a number of forms of writing, upon inspection, share a common ancestor. In addition to cryptography, notational schemes include musical notation, Morse code, and binary (e.g., compiled software code). Although Kittler’s accusations that consonantal written languages are less mimetic than their vowelized cousins is problematic, this lack becomes very real when writing transforms into a notational scheme. The smooth contours of the world are not well represented in a notational scheme. In Kittler’s media triptych, the gramophone and film camera are highly mimetic in that they record every gradient of nature, whereas the typewriter eradicates the “continuous movement of the hand” in handwriting (Benjamin quoted in Kittler, 1999, p. 196). The representation of likeness or verisimilitude is easy to imagine with a photograph, and yet even a typed, well-crafted story can also be very mimetic, as though the reader is transported into the scene. So the typewriter can, of course, be used to write a mimetic story, but it excels when it reduces the world to discrete symbols. Putting aside, for the moment, Kittler’s (1999) penchant for inaccurate but provocative history, it is a short historical step from typewriter to cryptogram, with the transformation of Nietzsche’s Malling typewriter into the German crypto-typewriter, the Enigma machine (Figure 3). Unlike the gramophone and film camera, recording N-f-r-t-t is no trouble for the typewriter. While the typewriter cannot capture voiced syllabification, it perfectly represents the alphabetization of language. And for the typewriter so too for cryptography: when encrypted, N-f-r-t-t readily becomes A-S-E-G-G. While notational schemes are poor at mimetic representation, the ease in which parts can be split and rearranged make them ideal for what I call “algorithmic” representation. Algorithmic technologies are powerful because they chop the world up in to discrete pieces and then re-arrange the results.xiii These technologies order the world rather than model or recreate it. To underline the point, all cryptography is just the simple substitution cipher, shuffling symbols about in determined, ordered ways. And the same principle is at work in all notational systems, where complex and surprising uses abound. Conceptualized in light of a notational scheme, cryptography surpasses the typical narrow conceptualization as secrecy. For example, Kittler’s barbarian Spartans invented a writing technology called the skytale. The skytale is a leather strap along which letters are written that, once wrapped around a wooden rod of a particular diameter, reveals a message. The device was once thought to facilitate a kind of primitive encryption, but recent research has shown it to be something else (Kelly, 1998; West, 1988).xiv How this technology was actually used is unknown, and somewhat beside the point: the skytale exemplified an early algorithmic machine, made of Kittler’s alphabet but impossible to phonetically speak. In fact, there is good evidence that the device may have been used to ensure silence, as a way of guarding against the accidental articulation of bad omens and the like (c.f. Lateiner, 2005; Montiglio, 2000). The skytaleis, perhaps, the first device to destroy syllabification, and to depart from mimetic media and move towards ordering language and the world. Another important aspect of cryptography is that it decomposes language into identical, modular pieces. This fact works equally well for other applications of the discrete notational scheme too. A thousand years after the Spartans, Alberti ushered in a new notational method for architecture that replaced the older craft-oriented way of building (Carpo, 2011). This notational system permitted architects to become designers, not makers, and enabled the construction of identical but modular buildings. So close is the connection between the notational schemes of architecture and cryptography, in fact, that Alberti generalized his architectural advancements and applied the same thinking to language to develop polyalphabetic cryptography (Alberti, 2010; Kahn, 1980). Similarly, Leibniz employed a notational scheme when he established the groundwork for discrete mathematics, and specifically, the mode of mathematics that we now use to analyze and model cryptography, known as combinatorics (what Leibniz called “complexions”). In Leibniz’s early work, Dissertation on the Art of Combinations (Dissertatio de arte combinatoria) (1989), he develops Raymund Lull’s cabalistic method of interrogating language and the natural world, setting it on firm mathematical and logical ground (Figure 4).xv To do so, Leibniz derives his metaphysical analysis of order from the existence of natural parts and wholes (or “unities”). Leibniz writes, “let the whole be ABC; then AB, BC, and AC will be smaller wholes,” which “by reason of order” results in “abcd, bcda, cbab, dabc” (calculated to be “arranged in 24 ways”) (Leibniz, 1989, p. 78). Leibniz’s development of order ultimately leads to modern symbolic logic, and by way of Stanhope, Jevons, and others to the calculating machine (Gardner, 1958). Eventually, it can be surmised, Turing’s machine would read a tape of Leibniz’s letters and re-order the input, perhaps (after von Neumann) according to a particular programmed algorithm. Although Shannon recognized the importance of discrete symbol processing (as noted above), it was Turing that really advanced this position by seeing the potential in ordering discrete symbols (Figure 5). The link from Alberti to Turing arrives by way of representational machines that employ a discrete notational scheme. When this representation is set in motion, the complex ordering is not limited to language. Cryptography has long been used to investigate the natural world or create art, and is now poised to order the economy. Before showing how Bitcoin orders the economy we must understand how cryptography functions in Bitcoin. The cryptography used in Bitcoin is not unusual or exemplary; in fact, there are no cryptographic innovations in Bitcoin (in computer security terms, this is a virtue of the system). Bitcoin uses a standard SHA-256 hashing algorithm. This hashing algorithm is put to some seemingly strange uses, but nothing unique to the history of cryptography since the development of public key cryptography in the 1970s. For the vast majority of the history of cryptography—its development from substitution ciphers and code systems to polyalphabetic and keyed algorithms—the encrypting mechanism was unitary. With the invention of public (or asymmetric) key cryptography in the 1970s it became possible to create a system that “split” the cryptographic key.xvi Splitting the cryptographic key (explained below) ushered in new uses for cryptography, and was well timed for the coming advance of the Internet and popularization of point-to-point electronic communication. In simple “code” systems (often called “nomenclators”) a letter, word, or entire phrase may be replaced with an alternative, with the substitution presumably kept private between the two communicating parties (Kahn, 1967). The basic principle is captured by so-called substitution ciphers, which exchange one letter for another in a deterministic manner. From this mechanism more complicated forms of cryptography were invented. Polyalphabetic cryptography uses multiple alphabets for the substitution, sometimes jumping from one alphabet to another according to an agreed-upon secret “key.” For much of the history of cryptography no notion of cryptographic “key” existed. In more recent usage the key became analytically separated from the cryptographic algorithm, as a result of “industrial” uses of cryptography that require reusable ciphers. We now generally speak of an immutable (public) algorithm, and a mutable (private) key. In fact, the key is no more important than the set of transformations (and should be characterized as part of the system of transformation). For purposes of cryptanalysis (“codebreaking”) a key is only as valuable as knowledge of the corresponding mechanism or set of transformations. Yet, in recent years cryptographic best practice requires keeping the key secret and the mechanism public (working on the assumption that the mechanism will eventually be discovered and reverse-engineered anyway). Symmetric-key cryptography employs the same key for encryption and decryption, so the shared secret item is identical among parties. The obvious downside is that to maintain secret communications all parties must ensure that the shared key is kept private from any so-called adversaries. Modern forms of symmetric-key cryptography work on digital bits, either encrypting the bits one at a time (or, more realistically, encrypting byte by byte or in prescribed bit-length “words”), or grouping the bits into blocks (and adding padding as needed so that each block includes the same number of bits). Other non-cryptographic features may be present in a modern cryptographic system, such as error detection, compression, and so on. The symbolic transformations in symmetric-key cryptography are fundamentally the same as that of asymmetric-key cryptography—in fact, symmetric-key primitives can be used to build asymmetric-key systems. The sole (but critically important) difference between symmetric-key and asymmetric-key cryptography is that rather than sharing a single (unitary) secret key, asymmetric-key cryptography uses a binary key, in which the two parts are linked and both are required to decrypt and encrypt. By splitting the key into two linked parts, one part can be kept secret, while the other is made public (the parts are typically linked mathematically—e.g., prime factorization or calculating the discrete logarithm—but any suitable mechanism could be used). The private key should not be easily deducible from the public key, yet the public key should be easily deducible from the private key (using so-called mathematical trap-door functions). A trap-door function such as exponentiation modulo is based on the mathematical belief that it is easy to calculate the remainder when a number is raised to some power, divided by another (the modulus), yet, if given all the information other than the exponent, it is very difficult to solve for the exponent (i.e., it is slow to compute the discrete logarithm). Only when the secret key is possessed is it easy to open the trap door, otherwise the calculation is slow (but certainly tractable). Asymmetric-key setups offer several interesting possibilities. The key used to encrypt a message is not the same key used to decrypt it, so I may encrypt a message with your public key, in which only you can decrypt (using your linked private key). Configured this way, I can send you a message that only you can read (akin to placing a piece of mail in a publicly-accessible but locked mailbox), and you can do the same for me by using my public key, ensuring confidentiality.xvii Similarly, if I encrypt a message with my private key and send you both my (cleartext) message and the encrypted message (or a “digest” of it), your ability to decrypt the encrypted message with my public key ensures that the message is authentic (non-repudiated, i.e., guaranteed to be mine). These features work to permit secret message communication without ever requiring a secret communication channel, or to ensure that a message has not been changed. In a world where the communication channel is necessarily open to eavesdropping, asymmetrical-key cryptography performs a kind of magic trick: secret messages over public channels without ever requiring the prior transmission of secret information. A related application of asymmetric-key cryptography is the hash function. A hash function is a set of permutations that transform some data into a fixed-sized output (a digest), which changes considerably given even a slightly different input datum. When a hash function uses cryptographic mechanisms to create the digest it can be used to ensure the message is not repudiated (its integrity can be verified), which is especially useful for creating compact, easily transmittable “fingerprints” of data. Similarly, by computing a hash for a password, the hash may be stored in place of the secret password, and authenticated against the digest representation instead of the actual password (allowing the digest to be captured by an adversary without losing secrecy). The hash algorithm used in Bitcoin is SHA-256, a protocol for hashing in the Secure Hash Algorithm 2 family that outputs 256 bit digests. SHA-256 is composed of a simple set of logic transformations configured to perform the necessary mathematical trap-door function required by the asymmetric-key cryptography. Thus, described in as many of levels of abstraction as I can muster, from the basics of digital computation to a full ASCII-encoded hash digest, the SHA-256 hash algorithm operates as follows. Electromagnetic flux is discretized on a clock-cycle. Bits are then transformed using logical operations performed by transistors. The binary representation is collected into 64 bit “words” that function as high-level data structures (integers). Mathematical trap-door/one-way functions are constructed from the set of transformations (+, and, or, xor, shr, rot), with the entire algorithmic structure corresponding to the Merkle–Damgård padding and compression scheme (Figure 6). The resulting 256-bit hash digest may then be encoded into an ASCII-encoded character string for portability and human-readability. In sum, SHA-256 is the process of successively interpreting electric-magnetic flux as a series of different ordering mechanisms or techniques. The primary ordering is the first: from flux to binary, and once this discretization is accepted as real (by fiat) the ordering techniques are limited only by human imagination. The fundamental cryptographic algorithm used in Bitcoin is SHA-256, however, its conceptual utility draws on a recent history of academic and practical developments. Of the numerous developments, the most significant and relevant are: Ralph Merkle’s hash-trees (patent filed in 1979), David Chaum’s blind signatures (1982), Adam Back’s hashcash proof of work system (1997), Wei Dai’s b-money scheme (1998), Nick Szabo’s bit gold concept (1999), and Hal Finney’s reusable proofs of work (2004). In addition to having a hand in the invention of public key cryptography, Ralph Merkle developed a system for efficiently verifying large data structures through a tree structure of hash digests (Merkle, 1982). As described above, a hash digest can be used to verify the non-reputability of a datum, but for large data structures it would be extremely time-consuming to perform a hash function on every datum. Merkle realized that by organizing hash digests into a tree structure (where each node is a hash digest) it is possible to compute the hash digest for only the top-most node (while authenticating the left and right nodes) rather than every node, to ensure non-reputability. Hash trees are commonly used to ensure data integrity, but when used with cryptographic hash functions every prior message is checked for authenticity (none of the messages can be faked). Blind signatures are another result of public key cryptography being used in unexpected ways. In Chaum’s original concept for blinded signatures, payment systems with the anonymity of cash but the security of digital money (like Bitcoin) were the intended target (Chaum, 1982). By using public key cryptography Chaum proposed a system that ensured 1) the inability of third parties to determine information about the payee, 2) the ability of individuals to provide proof of payment, and 3) the ability to stop payments when needed (in cases of theft). Chaum envisioned a digital equivalent of paper envelopes lined with carbon paper. By writing a signature on the outside of the envelope a second “blind” signature is duplicated on the inside. In Chaum’s example of authenticated secret voting, the blinded signature is sent to the elector, removed from the envelope, signed by the elector, and mailed back to the voter in a new envelope (thus only the elector views the signature). If a voting dispute arises the signatures can be authenticated against the signatures on the envelopes, but each vote remains anonymous. While the mutability of binary digits is useful for much computing, a system of electronic cash requires the opposite quality: money needs to be made solid, slow, and non-(token)replicable. Originally proposed and developed by Adam Back (1997) for limiting email spam, hashcash uses two facts of public key cryptography: non-reputability of hash digests, and the computational difficulty of finding a hash “collision.” Due to the fact that it is nearly impossible to predict the outcome of a hash function on an arbitrary input (with current knowledge of the mathematical underpinnings of asymmetric-key cryptography used in hash functions), but easy to verify the results, a challenge-response mechanism can be created to require “work” (computational effort). By arbitrarily requiring a specified output of a hash function—such as that the first 20 or more bits of the hash digest must be zeros—the sender can establish a “difficulty” threshold. The only way to find a hash digest with a specified output is to compute the hash of a different input value over and over until the result meets the necessary difficulty, and since the result can be verified easily the receiver of the hash function does not need to repeat the computational work to verify that the sender expended a set amount of work. For its original purpose of limiting email spam, the requirement to perform work when sending email would make sending email slow and computationally expensive, thus, sending a single email would result in a modest slow-down, but sending millions would become nearly impossible (or at least would require many expensive computers). In such an email system any email that was sent without corresponding evidence of computational work would not pass verification by the receiver (which is a quick calculation, in comparison to performing the original hash calculation), and would be discarded as spam. As part of the discussion of applications to Back’s hashcash proposal on the Cypherpunks mailing list, Wei Dai proposed a system of currency generation using Back’s mechanism (Dai, 1998).xviii Dai applies Back’s hashcash mechanism in an effort to create a world where cryptography functions as the “medium of exchange,” and as a way to “enforce contracts” without the intervention of a government (Dai, 1998). Dai’s protocol for the creation of bmoney requires a specified amount of computational work (that anyone can perform), which is then verified by the community who update a collective ledger book, awarding the worker the specified funds. In the bmoney proposal, exchange of funds is accomplished by collective bookkeeping (authenticated with cryptographic hashes), and contracts are enforced through the broadcast and signing of transactions with digital signatures (i.e., public key cryptography). Hal Finney (2004) extended the bmoney and hashcash proposals by suggesting a formalization of the proof of work mechanism, a scheme that permits the reuse and exchange of proof of work tokens (hash digests). With these extensions it became possible for Nick Szabo (Szabo, 2008, 1997) to conceive a system that accurately calculates the “difficulty” of proof of work for the purpose of money generation, and to allow the generated money (hash digests) to be exchanged and reused. When the pseudonymous programmer Satoshi Nakamoto proposed Bitcoin in 2008 it built on the crypto-anarchist developments from the following two decades (Nakamoto, 2008). In terms of invention, Bitcoin introduced a modest change to the bmoney, bit money (and other) proposals already in existence. Rather than require a single collective ledger of transactions, or awkwardly share the ledger among parties, Nakamoto suggested that a “blockchain” contain all transactions (including generated money by “miners” performing cryptographic proofs of work, described in more detail below). The blockchain is a Merkle hash tree of transactions. For each transaction the mining servers verify the hash digests that result from transactions, incentivised to perform computational work by being awarded money for successfully performing proofs of work. The transactions are verified by the miners and grouped into “blocks”; once the top node of each block is verified a specified amount of work is required to seal the block and win the resulting money. A full round of a transaction requires several steps. Money is stored in a wallet, which is a unique hash digest generated by each user (and any number of wallets are possible). To send you money I first digitally sign the transaction request with my private key (that is, I perform asymmetric-key encryption on the transaction request data). Using my public key, the network can verify my transaction request. The transaction request is sent (via peer-to-peer communication protocols) to the network and then bundled with others into blocks every ten minutes. Each block includes a hash digest of the previous blocks (arranged in a hash tree), a hash digest of the current block, and a “nonce”. A nonce is added input that (when hashed) results in a radically different output. Only when an output value meets a certainly “difficulty” (proof of work) will a block be considered authenticated (the difficulty is specified by requiring at least n leading zeros in the hash digest output, set by the protocol to regulate the speed of block generation). As each subsequent block is verified the previous blocks fall further down the hash-tree, with the newer hashes contingent on the previous hash digests’ value. In this way any fraudulent changes to the blockchain are instantly discovered (and rejected). It is improbable to create fraudulent transactions because as time goes on, and block upon block is verified by the miners, fraudulent transactions would require changing every subsequent block, at a rate greater than the (legitimate) network of miners. A fraudulent block would only be accepted if the alternative blockchain is longer, which would require performing more proofs of work than the legitimate network.xix In many ways the Bitcoin miner is at the heart of Bitcoin cryptography, since it creates money and verifies transactions. Starting in 2013, I engaged in the practical operation of a Bitcoin miner. What follows is a description of this Bitcoin praxis as I learned the details of the protocol. As described above, the Bitcoin algorithm uses the SHA-256 method of computing hash digests. While any computing mechanism could in theory calculate a SHA-256 hash, there are certain reasons why conventional Central Processing Unit (CPU) mining is now rarely used. With even the fastest modern CPUs running software designed to take advantage of multithreaded computation the number of hashes computed per second is low compared to other technologies, and because the ability to “win” the awarded money for a successfully verified block is in competition with other miners, an arms race is always at hand. CPUs are usually designed to manage and switch computational tasks, and take care of a variety of sub-processes, which makes a CPU ideal for general computing but inefficient for performing the same type of simple calculation repeatedly. Commercially available Graphics Processing Units (GPUs) are designed to be relatively free from the management of resources and thus (when appropriately programmed using low-level software) are able to perform repeated calculations much faster than CPUs. Additionally, GPUs are designed to work in parallel, so while a multi-core, multithreaded CPU may be able to perform a certain amount of work in parallel, a modern GPU can perform thousands of computations in parallel. Some GPUs are ideally suited to perform SHA-256 calculations because they have been designed to perform XOR logic in a single step, rather than the two steps (or cycles) needed for other devices (the SHA-256 algorithm relies extensively on XOR transformations). For real-world comparison, on a slightly aging (2008) Mac Pro computer I was able to perform roughly 30 Kh/s (kilo hashes per second, or thousands of hashes per second) using the CPU (a server-grade 3GHz quad core Intel Xeon processor). When I installed a modern mid-level gaming video card (AMD Radeon HD 5850) with a dedicated GPU the same machine was able to perform roughly 350 Mh/s (millions of hashes per second), using only the GPU for calculating the hashes. While 350 Mh/s may seem like considerable computational power—and it is, especially for the corollary purpose of password cracking—newer technologies have all but obsoleted GPU Bitcoin mining. For the last several years more dedicated Bitcoin mining individuals have purchased Field Programmable Gate Array (FPGA) devices that are tailored to perform these sorts of computational tasks, doing so much more quickly and with less power consumption. By the end of 2012 the newest type of Bitcoin mining device entered the commercial market, eclipsing even FPGA devices in terms of speed and power efficiency. These Application-Specific Integrated Circuit (ASIC) devices are custom-designed for Bitcoin mining and thus do so with remarkable speed and power efficiency. As of 2013 there are commercially available Bitcoin miners available for $150 USD that perform 5 Gh/s (billions of hashes per second) and use only 30 watts of power (compared to an average video card’s consumption of 100-150 watts), with more expensive versions performing hundreds or even thousands of Gh/s. Efficient Bitcoin mining is only possible using specially built software, tailored to take advantage of built-in hardware capabilities. On GPUs the programming language used to write the portion of software that performs the hash calculations is typically Compute Unified Device Architecture (CUDA) or Open Compute Language (OpenCL), whereas the high-level software that controls the input/output, networking, and display of graphical user interfaces can be written in any suitable programming language. Contemporary cryptography algorithms are highly repetitive, requiring round after round of simple logic transformations, just like digital signal processing, big data and science computing, and gaming (computing millions of polygons). For this reason, cryptography shares many of the technological advances with these computing fields. As demonstrated above, a more expansive view of cryptography suggests that cryptography can be used for more than just secrecy; it can be fruitfully understood as a notational system. When this notational system is operationalized it orders its symbolic input according to particular logics. When these ordered symbols represent the world, as in the case of economic transactions, a politics of ordering is present. That the economy is a “slave to the algorithm” (Slater, 2013) is not due to Bitcoin; dominant capital is now almost exclusively run through digital trading software (acknowledged as “high-frequency trading”), and much of the developed world’s “cash” passes digitally direct from bank to merchant (to bank) through debit or credit machines at point-of-sale terminals. Cash money already seems quaint: the stuff of slightly unscrupulous transactions (a manual trade exchanged for tax-free cash payment), or downright illegal transactions (purchasing drugs). The politics of this “new” economy can be read in light of Gilles Deleuze’s short “Postscript on the societies of control” (1992). Deleuze summarizes Foucault’s (1979) periodization of history by reflecting on the “transience of the model,” noting that the sovereign society was replaced by a disciplinary one—a transition occurring roughly at the dawn of the eighteenth century. According to Deleuze, the next shift occurs at the outset of the twentieth century, towards a control society (Deleuze, 1992). Deleuze charges his readers not to “fear or hope [for]” these mechanisms but instead to “look for new weapons” (Deleuze, 1992, p. 4). I argue that cryptography is one such new weapon in the control society: controlling economics through the ordering application of Bitcoin. Deleuze argues that the control society is characterized by modulation, rather than the “molds, distinct castings” of the prior disciplinary society (Deleuze, 1992). In the English translation “modulation” evokes the Latin modus, meaning measurement, accomplished by numbers (“numerical”). Similarly, each society is characterized by a kind of language: the disciplinary society is analogical and the control society is numerical. Yet, Foucault spends considerable effort in Order of Things (2002) showing how measurement and number are still foundational to the logic of the classical era, summed up in the term “order.” While it is commonly believed that cryptography is mathematical (mathematicians, after all, are the gatekeepers of contemporary cryptography), above I showed how mathematics is but one of many ways to enact a deeper ordering. The notational system—discrete marks capable of being rearranged—is, I argue, the heart of cryptography. Numeracy is an after-effect of the deeper logic that Leibniz, Turing, and others recognized—and proven daily by capable software developers with almost no mathematical skill. So long as you can represent objects within a notational system, the world can be ordered with no mathematics at all. Yet, Deleuze thinks that the mechanism of the control society is modulation or measurement, and Kittler too thinks that by counting the Greek alphabet we arrive at all the mathematical truths of the world (Winthrop-Young, 2011). It is exactly the infinite variability of measurement that cannot be ordered, since there is always a more precise measurement possible (Goodman’s formalization explicitly rules out continuous measurement). Kittler’s gramophone records the smooth contours of a voice perfectly, but the result is not susceptible to decomposition, and therefore cannot be ordered. It is only by ignoring the measurements (continuous waves) that ordering technologies are able to function. When we discretize the voice we perform violence, and we lose the knowledge of what king Akhneten called his N-f-r-t-t. For Bitcoin, the smooth transfer of cash (previously “filthy lucre”) from hand-to-hand is replaced with an algorithmic logic. In our society, the largely invisible but very powerful effects of control often result from ordering technologies. Algorithmic technologies are able to sort, move, and re-arrange entire populations in ways that mimetic technologies are unable to accomplish. The Hollerith tabulator, an early proto-computer, was effective in aiding the Nazi extermination of Jews (Luebeke and Milton, 1994) because it could collect, process, and order entire populations in ways that mimetic technologies such as radio or television were incapable of. Cryptography now functions infrastructurally, and sits invisibly behind most of the world’s communications (machinic “data” transmissions such as encrypted Netflix TV streams or Trusted Computing modules, but also human correspondences such as email communications). As Bitcoin and other electronic crypto-cash systems become prevalent, cryptographic ordering will become more entrenched in the economic realm (it already functions invisibly at electronic point-of-sale machines, automated bank tellers, financial trading, and so on). For Bitcoin, the specific ordering is the logic of SHA-256 described above: discrete symbols arranged through a collection of logical transformations, built block by block of irreversible containers with strong identity parameters (necessarily discrete and disjoint). The hash digests are then organized into a tree structure. Finally, the hash tree is sent through peer-to-peer networks, succumbing to a logic of collusion and virality. Cryptography is “code,” and code is cryptography. Code is powerful because it represents, that is, it both “re-presents” or makes something present again, and “stands for” or “substitutes” (Prendergast, 2000). Code worries us for the reasons that Rousseau rallied against political representation, fearing a dictatorial relationship where we permit others to “stand in” for us (2003). Similarly, Heidegger calls representation the master category of modern thought because it forces the division of subject and object (Heidegger, 2002; Prendergast, 2000). More concretely, our cryptographic technologies are at once Privacy Enhancing Technologies and also weapons in the commonplace cyberwars amongst developed nations. Even prosaic questions become ambiguous. Does Google increase my privacy by encrypting my Gmail communications, now open to only the machinic display of advertising? Am I better off by having a cryptographically secure boot sequence for my computer (and thus preventing the installation of “competitor” operating systems, like Linux)? Is it a “feature” that Bitcoin transactions are cryptographically irreversible? In this new control society there is no second-guessing your economic decisions, and no need to involve messy legal and political authorities, since code has become law in frighteningly efficient ways (Lessig, 2006
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The actual writing of this piece took around six hours, though I have been thinking on this issue for at least the past nine years since I started writing my Easy Money book. I have been told …
The actual writing of this piece took around six hours, though I have been thinking on this issue for at least the past nine years since I started writing my Easy Money book. I have been told that the backlash from the bitcoins believers will be huge. All feedback is welcome, as long as you don’t abuse. And if you choose to abuse at least read the piece first. You will be able to abuse better.
Bulbulon ko abhi intezar karne do. (Let the bubbles wait for now). — Gulzar, Vishal Bhardwaj, Usha Uthup and Rekha Bhardwaj in 7 Khoon Maaf.
Let’s start this one with a small story.
Salvador Dalí was a famous painter who lived through much of the twentieth century. He was a pioneering figure in what is known as Surrealism.
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Other than being a fantastic painter, Dalí was also a sharp businessman. The story goes that once Dalí had treated some friends at an expensive New York restaurant. When the time to pay for the meal came, Dalí instead of paying in dollars, like anyone else would have, decided to carry out a small experiment.
On the back of the cheque Dalí had signed to pay for the expensive meal, he drew a sketch in his inimitable style. He signed it and handed it to the waiter. The waiter passed it on to the manager.
The manager realised the value of what Dalí had given him and decided to frame the cheque and hang it on the wall, making sure that anyone who came to the restaurant saw it.
Of course, this meant that Dalí’s cheque wasn’t encashed and he didn’t really have to pay in dollars for the expensive meal he had taken his friends out for.
This trick worked for Dalí. He was delighted and he used the same trick at different New York restaurants to pay for meals. The managers of all these different restaurants framed the cheque and hung it on one of the walls in their restaurants, so that everybody who came to the restaurant could see and realise that the famous painter Salvador Dalí had dined at the same place as they were.
This interesting story is recounted by Mauro F Guillén in his book 2030—How Today’s Biggest Trends Will Collide and Reshape the Future of Everything: “
Now what was happening here? If I can state this in simple English, Salvador Dalí, had turned his art into money. As Guillén writes:
“The money offered to pay for the meals was never deposited, as the cheques were transformed into artworks and took on a separate life. For Dalí, this maneuver was a stroke of genius. He could print his own money (his drawings had value), and people were willing to accept it as a form of payment.”
The trouble was Dalí went overboard and paid for one too many meals using this trick. In the end, the restaurant managers wised up and Dalí probably had to start paying real dollars for the expensive meals he took his friends out for.
What’s the moral of this story? Anyone can create his or her own money as long as others are willing to accept it, though one thing needs to be kept in mind. As Guillén writes: “As with national currencies, any money can be felled by the laws of supply and demand, as an excessive supply depreciates its worth and reduces people’s willingness to use it.”
What Dalí ended up doing in a very small way, governments have done over and over again, over the centuries. They have gone overboard with printing money and spending it, created high inflation, as too much has chased the same set of goods and services, and in the process destroyed the prevailing form of money. (If you are interested in details, I would suggest that you read my Easy Money trilogy).
Dear Reader, you must be wondering by now why am I recounting this story in a piece which is headlined to be about the bitcoin bubble. Have some patience, everything will become clear very soon. Read on.
Bitcoin is a digital currency that does not use banks or any third party as a medium or at least that is how it is conventionally defined. It is governed by a string of cryptographical codes, which are believed to be military grade and very tough to break.
The price of a bitcoin has rallied big-time over the last few months. It rose from a little over $10,000 per bitcoin in early September to more than $40,000 per bitcoin in early January. As of January 8, 2021, the price of bitcoin touched an all-time high of $40,599.
One of the core selling points of bitcoins as well as its raison d’être is that unlike paper money they cannot be created out of thin air. The number of bitcoins is finite and the code behind it is so written that they cannot go beyond a limit of 21 million tokens.
Interestingly, mining, or the generation of a bitcoin, happens when a computer solves a complex algorithm. Anyone can try to mine bitcoins, but with a finite number being generated at regular intervals and with an increase in the number of people joining the mining race, it has become increasingly difficult to solve the algorithm and generate bitcoins.
As of January 11, 2021, the number of bitcoins in circulation stood at 18.6 million units. The rate at which bitcoins are being created has slowed down over the years and the last fraction of the 21 millionth bitcoin will be created only in 2140.
The larger point here is that unlike the paper money system (or to put it slightly more technically the fiat money system) which can be manipulated by central banks and the governments, the bitcoin system can’t.
Hence, there is an overall limit to the number of bitcoins that can be created. This is the main logic offered in support of buying and owning bitcoins. Unlike central banks or governments or Salvador Dalí (in case you are still wondering why I started with that story), money in the form of bitcoin cannot be created out of thin air and beyond a certain limit.
In fact, this core idea/message at the heart of the bitcoin was built into the first fifty coins, now known as the genesis block, created by Satoshi Nakamoto, the mysterious inventor behind it. The beauty of bitcoin is that even not knowing who really Nakamoto is, doesn’t impact the way the system he created, works.
The genesis block contained a headline from The Times newspaper published in London dated January 3, 2009. The headline was: “Chancellor on brink of second bail-out for banks”. The headline and the date are permanently embedded into the bitcoin data.
As Nakamoto wrote on a message board in February 2009: “The root problem with conventional currency is all the trust that’s required to make it work… The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Bitcoin was supposed to be this grand idea meant to save the world from the way the central banks and governments manipulate the paper money system. As William Quinn and John D Turner write in Boom and Bust—A Global History of Financial Bubbles: “To its advocates, bitcoin was the money of the future: it could not be devalued through inflation by a central bank, you could spend it on anything without having to worry about government interference or taxes, and it cut out the middleman, namely commercial banks.”
The question is, in these times of easy money, has bitcoin reached anywhere near its original goal or is it just another way of pure speculation.
Let’s look at this pointwise.
1) Here is a chart of the price of bitcoin in dollars since July 18, 2010 (I couldn’t find the price of bitcoin before this in the public domain, hence, the random date).
It doesn’t take rocket science to understand that if you have been a long-term investor in bitcoin, you would have made shitloads of money by now. But the fundamental question is, is bitcoin money or even the future of money, as it is made out to be, by those who are in love with it, or is it simply another form of speculation.
One of the key characteristics of money is that it is a store of value. The recent rally in bitcoin has led to many bitcoin believers telling us that bitcoin is a store of value. This comes from a very shaky understanding of what the term store of value actually means.
A store of value basically means that something has a stable value over time. As Jacob Goldstein writes in Money: The True Story of a Made-Up Thing: “If $100 buys your family a week’s worth of groceries today, there is a very good chance it will buy approximately a week’s worth of groceries a year from now. The dollar is a good store of value (it tends to lose about 2 percent of its value every year).”
Let’s look at what has happened to bitcoin over the last few months. It rose from a little over $10,000 per bitcoin in early September 2020 to more than $40,000 per bitcoin in early January 2021.
As of January 8, 2021, the price of bitcoin touched an all-time high of $40,599. As I write this early in the morning on January 14, 2021, the price of a bitcoin is around $37,329. The price has fallen by 8% in a little over five days’ time. So, where is the stability of value? And this isn’t a one-off event. Bitcoin has moved rapidly up and down on many occasions.
But this is a very simple point. Here’s the more complicated point. The price of a bitcoin as of September 5, 2020, was $ 10,092. On January 8, 2021, it reached $40,599, a rise of 302% in a matter of a little over four months.
If bitcoin really was money, using which we could make and receive payments and borrow and lend, the recent rally would have created a havoc in the economy.
What does the rise in the value of any form of money really mean? It means that the price of everything that money can buy is falling. And in this case prices would have fallen big-time. As Goldstein puts it: “This rise in the value of bitcoin would have caused a deflation far worse than the one in the Great Depression.” Deflation is the scenario of falling prices and is deemed to be dangerous because people keep postponing their consumption in the hope of getting a lower price. This hurts businesses and the overall economy.
Now take a look at the following chart which plots the price of a bitcoin in dollars between December 2017 and December 2018.
The price of a bitcoin as on December 16, 2017, was $19,345. A year later on December 15, 2018, it had fallen by 83% to around $3,229. What would this have meant if bitcoin really was money? It would mean that the price of money has fallen and hence, the price of other things has gone up. In this case, it would mean very high inflation, even hyperinflation.
In its current form, bitcoin is no store of value. If it was to be used as money, the world would hyperventilate between deflation and inflation.
2) Another key characteristic of money is that it is a medium of exchange or to put it in simple English, it can be used to buy things (like Dalí bought meals at expensive restaurants).
According to financial services company Fundera 2,352 American businesses, accept bitcoins as a payment. The United States is the mecca of bitcoin believers. As per the US Census Bureau there were around 7.7 million companies in the US with at least one paid employee. This statistic doesn’t inspire much confidence. Barely anyone takes payments in bitcoins even in the United States.
Of course, it takes time for any new form of money to be adopted, but for something that has been around for 12 years, the rate of adoption seems quite poor.
Personally, I don’t know of any business that accepts bitcoin as a payment in India. Maybe, there is some coffee shop in Bengaluru that does. Dear reader, if you know of it, do let me know.
3) The bitcoin believers like to compare it with gold. The reason gold has acted as a hedge against the proclivity of the governments and central banks to create paper money out of thin air, is that it cannot be created out of thin air. While alchemists, which included Isaac Newton as well, have tried this over the centuries, no one has been successful in developing a chemical formula that converts other metals into gold. Bitcoin works because of a similar dynamic, the believers tell us. There is a limit to the number of bitcoins that can be created and as time passes by it becomes more and more difficult to mine bitcoins. That’s how the code behind bitcoin is written.
But the thing is that the code behind bitcoin is freely available. Anyone can take it and tweak it and come up with a new kind of money. Over the years this has happened and many of these new forms of money have ended up as shitcoins.
As Quinn and Turner write:
“In August 2016, one bitcoin was trading at $555; in the next 16 months its price rose by almost 3,400 per cent to a peak of $19,783.3 This was accompanied by a promotion boom, as a mix of cryptocurrency enthusiasts and opportunistic charlatans issued their own virtual currencies in the form of initial coin offerings, or ICOs. These coins had, on the face of it, no intrinsic value – to entitle their holders to future cash flows would have violated laws against issuing unregistered securities – but they nevertheless attracted $6.2 billion of money from investors in 2017 and a further $7.9 billion in 2018.”
A lot of this money never came back to the investors. There is no way to make sure that this won’t happen in the future.
Also, at a broader level, a free market in money is a bad idea. The United States went through this situation sometime in the nineteenth century (Something I discuss in detail in the first volume of Easy Money). It was very easy to get a banking license and banks could print their own money.
As Goldstein writes: “Not all banks were shady. Not even most banks were shady. But the notes printed by the shady banks looked as legit as the notes printed by the honest banks. And there were a lot of notes—at one point, the Chicago Tribune reported that the country had 8,370 different kinds of paper money in circulation.” Imagine the confusion this would have created.
It was also easy for counterfeiters to manufacture their own paper money. In this scenario, a guide called Leonori’s New York Bank Note List, Counterfeit Detector, and Wholesale Prices Current was published once a month. An issue of this guide, dated 18 November 1854, shows that 1,276 such banks were in operation in various states and 825 different kinds of forged notes were in circulation. The financial system was in a total anarchy.
While it is easy to make a case for a non-government decentralised money system, what may lie in store isn’t something we may want in the first place. The sad part is very little thinking has happened on this front. Saying, let the best money win is a very insensitive way to go about it.
4) The bitcoin code which limits their number to 21 million units is written in C++. As Sean Williams writes on Fool.com: “Last I checked, code can always be erased and rewritten. While it’s unlikely that a community consensus would be reached to increase the circulating supply of bitcoin, the possibility of this happening isn’t zero.” Anyway this possibility isn’t going to arise until 2140, when the last fraction of the bitcoin will be mined, and by then you and I, won’t be around. So, it doesn’t really matter.
5) Let’s talk a little more about paper money. Why do others accept it as money? Because they know that the government bank/central bank deems it to be money and hence, still others will accept it as money as well.
As L Randall Wray writes in Modern Money Theory – A Primer on Macroeconomics for Sovereign Monetary Systems: “The typical answer provided in textbooks is that you will accept your national currency because you know that others will accept it. In other words, it is accepted because it is accepted. The typical explanation thus relies on an ‘infinite regress’: John accepts it because he thinks Mary will accept it, and she accepts it because she thinks Walmart will take it.”
While this sounds correct there is a slightly more nuanced answer to the question.
There are three main powers that any government has: 1) The right to “legal” violence. 2) The right to tax. 3) The right to create money out of thin air by printing it.
As Wray writes:
“One of the most important powers claimed by sovereign government is the authority to levy and collect taxes (and other payments made to government, including fees and fines). Tax obligations are levied in the national money of account: Dollars in the United States, Canada, and Australia; Yen in Japan; Yuan in China; and Pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In most developed nations, it is the government’s own currency that is accepted in payment of taxes.”
What does this mean?
As Wray puts it:
“Ultimately, it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations. The government cannot easily force others to use its currency in private payments, or to hoard it in piggybanks, but government can force use of currency to meet the tax obligations that it imposes… It is the tax liability (or other obligatory payments) that stands behind the curtain.”
Hence, the government creates demand for paper/fiat money by accepting taxes in it. This has ensured that the paper money system has kept going despite its weaknesses.
What this also means is that for bitcoin to become popular and move beyond the nerds, it needs a use case as solid as paying taxes in what government deems to be money, is.
It is worth remembering here what Wray writes: “For the past 4,000 years (“at least”, as Keynes put it), our monetary system has been a “state money system”. To simplify, that is one in which the state chooses the money of account, imposes obligations (taxes, tribute, tithes, fines, and fees), denominated in that money unit, and issues a currency accepted in payment of those obligations.”
This is not to say that governments haven’t destroyed money systems in the past. The history of money is littered with examples of kings, queens, rulers, dictators, general secretaries and politicians, representing governments in different eras, having destroyed different money systems at different points of time. But the government has always comeback and controlled the money system the way it has wanted to.
And unless governments and central banks start taking a liking to bitcoin, there is no way its usage is going to spread to a level where it can hope to challenge the prevailing paper money system. It is worth remembering that if governments start taking interest in bitcoin, it in a way beats the entire purpose behind its creation.
Also, every government will want to protect its right to create money out of thin air. Right now bitcoin is too small in the overall scheme of things for governments to be bothered about it and hence, they have largely humoured it (not in India though).
The market capitalisation of bitcoins (number of coins multiplied by the dollar price) as of January 8, peaked at around $759 billion. The global GDP in 2019 was around $88 trillion. So the price of bitcoin even at its peak was lower than 1% of the global GDP.
Hence, the bitcoin story is like that of a rich Indian father basically allowing his son to play around, until he thinks that the son now needs to grow up.
6) There is another point that needs to be made here regarding the paper money system. This is something I realised while writing the third volume of Easy Money and it makes me sceptical of anyone who wants to write off the paper money system in a hurry. (Before you jump on me for being a blanket supporter of the paper money system, I am not, but then that doesn’t mean I don’t see logical arguments when they are offered).
Many years back, in one of my first freelancing assignments, I happened to interview the financial historian Russel Napier. He explained to me the link between paper money and democracy. As he told me on that occasion:
“The history of the paper currency system, or the fiat currency system is really the history of democracy … Within the metal currency, there was very limited ability for elected governments to manipulate that currency. And I know this is why people with savings and people with money like the gold standard. They like it because it reduces the ability of politicians to play around with the quantity of money. But we have to remember that most people don’t have savings. They don’t have capital. And that’s why we got the paper currency in the first place. It was to allow the democracies. Democracy will always turn towards paper currency and unless you see the destruction of democracy in the developed world, and I do not see that, we will stay with paper currencies and not return to metallic currencies or metallic-based currencies.”
Back then bitcoin wasn’t really on the radar. The reason people with savings liked gold back then, is why many of them like bitcoins now.
The twentieth century saw the rise of both paper money and democracy. Pure paper money started coming into being after the First World War. The reason for this is very straightforward. In a democracy whenever there is a crisis, the politicians and the technocrats advising them need to be seen to be doing something.
As an ex-RBI Governor once told me, do nothing cannot be a strategy. And this need to be seen to be doing something, can most easily be fulfilled by manipulating the paper money system that prevails in a democracy. It gives central bankers the option of printing money and driving down interest rates in the hope that people will borrow and spend more and businesses will borrow and expand.
Of course, this has its own problems (as I keep highlighting in my pieces over and over again). But then, the prevailing system does really allow politicians to show that they are trying. Any other system would take this option away from politicians. Hence, the paper money system is not going to be replaced in a hurry. No government is going to let go of this privilege.
7) This is a slightly technical point, but I think it needs to be made. As I have mentioned through this piece, over the years it has become more and more difficult to mine bitcoins. Now bitcoin farms with giant racks of mining computers, are needed to mine bitcoins. The days when bitcoins could be mined using the processing power of a PC are long gone.
The bitcoin farms, as they are known as, need a lot of electricity. Hence, mining operations have moved to countries where electricity is cheap. They have moved to countries like Iceland, Mongolia and primarily, China.
This has created another problem. As Goldstein writes: “By the beginning of 2020, Chinese miners had grown so large that they controlled most of the processing power on the bitcoin network. And the way the code for bitcoin was written gave them control over the system.”
While, bitcoin might be a decentralised democratic system running on code, but it’s people who ultimately control the mining of bitcoins and hence, can direct its future.
So, will the future of bitcoin be driven by China? And if that turns out to be the case, what does this do to its chances of spreading as actual money, used in the selling and buying of things? There are no easy answers to these questions.
8) One of the key points of bitcoins was that it was a non-government decentralised money system which promised freedom from the middlemen. But that hasn’t really happened. As Quinn and Turner write: “[Bitcoin] had promised freedom from middlemen, but trading it without a third party was cumbersome unless the user was expert in cybersecurity.”
If you are using a broker to trade bitcoin it beats the entire idea of freedom from middlemen. Also, the moment you convert your money into fiat money and the money comes into your bank account, the entire idea of remaining unknown and the government not knowing what you are doing goes for a toss. Hence, you may have your reasons to buy bitcoins, but basically you are speculating.
9) You might want to ask why you haven’t heard all this in the mainstream media. The reason for that lies in the fact that the incentives of the media are misaligned these days. Most investment related news is presented as a money-making opportunity. Hence, in this case the bitcoin believers have gotten more space and screen time in the media.
Many of the bitcoin believers are like the original investors in a Ponzi scheme. They have an incentive to talk up bitcoin, get more investors into it, drive up its price and make more money in the process. (In fact, these are precisely the kind of stock market investors that you get to see on TV and read in the media most of the time, but that is another topic for another day).
Also, given the extremely short attention spans that people have these days, the written word doesn’t find much of an audience. As Quinn and Turner put it: “More fundamentally, the move away from the written word to television financial news, docusoaps and social media may corrode the ability of investors to think clearly and understand the complexities of the financial system.”
You cannot understand economic history and the complexities of the financial system by watching TV or watching stuff over the internet or even listening to extremely detailed podcasts (podcasts can just give you a flavour of things and a feeling that you are actually learning a lot). The only way to understand complex issues is to read, read and read more.
In an era of short attention spans, bitcoins are just the right asset to speculate on. Their price goes up or falls even before you can say Virat Kohli. (This is another reason to support my writing).
10) We live in an era of easy money. Central banks have printed trillions of dollars during the course of 2020 to drive down interest rates in the hope of encouraging people to borrow and spend and businesses to borrow and expand. Interest rates are in negative territory in some of the European nations.
In this scenario of very low interest rates, investors are desperate to earn returns. Hence, a lot of money has been invested into stock markets all over the world, driving them to levels not justified by earnings that companies are expected to earn in the years to come.
Some money has also found its way into bitcoins. As The Economist puts it: “The current surge seems to have been spurred by interest from the financial establishment, most of which had long scorned it.” In simple English, hedge funds are buying bitcoins. Given that bitcoins are thinly traded, this has driven up prices by astonishing levels. Hence, like stock markets, bitcoin is also in bubble territory.
And as we have seen over the past few decades, hedge fund money can be quite mercurial. They can drive down prices faster than they drove them up.
To conclude, the fact that the price of bitcoin is so volatile tells us that most people investing in it aren’t really bothered about the long-term story of bitcoin as money, the bitcoin believers try selling all the time. If they did believe in this story they would have bought bitcoin and held on to it. But as the crash of 2018 showed that is clearly not the case.
As Saifedean Ammous writes in The Bitcoin Standard, the bible of the bitcoin believers:
“Buying a Bitcoin token today can be considered an investment in the fast growth of the network and currency as a store of value, because it is still very small and able to grow many multiples of its size and value very quickly. Should Bitcoin’s share of the global money supply and international settlement transactions become a majority share of the global market, the level of demand for it will become far more predictable and stable, leading to a stabilization in the value of the currency.”
(Ha ha, this is to show that I also read stuff I don’t really agree with).
I am not clairvoyant. This may happen. This may not happen. My reading of economic history tells me it won’t. But then I might turn out to be wrong. What do they say about history not repeating itself but rhyming? But what if it doesn’t rhyme as well?
There are no guarantees when it comes to economics. The trouble is that while you are waiting for all this to happen, the price of a bitcoin is at the level of a very very very very expensive large cap stock and its volatility is that of a small cap penny stock.
So, if you do invest in bitcoin, do understand that you are taking a punt, you are speculating, you are hoping that the price goes up and does not fall. Also, don’t go looking for fundamental reasons for investing in it.
Given that investing in bitcoin is equal to taking a punt, please don’t bet your life on it. As the old cliché goes, don’t put all your eggs in one basket.
PS: This doesn’t mean I don’t believe in digital money. I do. But I also believe that it will be controlled by large corporations and the governments.
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A new technology called smart contracts has emerged. What makes these legal agreements innovative is that their execution is made automatic through the use of computers. This Article examines smart …
A new technology called smart contracts has emerged. What makes these legal agreements innovative is that their execution is made automatic through the use of computers. This Article examines smart contracts from a legal perspective. Specifically, this Article explains smart contracts operation and place in existing contract law. It introduces a distinction between strong and weak smart contracts, as defined by the costs of their revocation and modification. The article concludes that smart contracts are simply a new form of preemptive self-help that should not be discouraged by the legislatures or courts. While certain unconscionable examples of strong smart contracts may need to be policed, judges and policymakers should foster a climate that treats smart contracts as another form of more traditional agreements.IntroductionSelf-help is nothing new. Whether building walls to stymie trespassers or changing locks to evict squatters, individuals regularly act on their own before invoking the formal legal system. Over the past few years, a group of innovators have begun designing computer technologies that bring self-help to the realm of contracts.1 See infra pp. 41. Such technologies are discussed below. They range from options contracts that automatically trigger on certain conditions (prediction markets) to fundraising platforms that automatically disburse funds when funding thresholds are met. They call these new contracts smart contracts. Their aim is to allow contracting parties to ensure their agreement is enforced by raising the costs of any breach by a prohibitive amount.Smart contracts are defined as agreements wherein execution is automated, usually by computers. Such contracts are designed to ensure performance without recourse to the courts. Automation ensures performance, for better or worse, by excising human discretion from contract execution.One example of a smart contract is the humble vending machine. If the machine is operating properly and money is inserted into the machine, then a contract for sale will be executed automatically. This is a smart contract. Such a contract poses no legal problems if the machine were to dispense soda, but legal questions arise if the machine instead dispenses heroin. Should laws be passed to ban vending machines because they can be used to further illegal ends? Or should their use be regulated ex post?Certain situations will arise that will force the law to deal with smart contracts, and the purpose of this article is to assess their legality and demonstrate that there is little difficulty situating smart contracts within existing contract law. Innovative technology does not necessitate innovative jurisprudence, and traditional legal analysis can help craft simple rules as a framework for this complex phenomenon.2 Compare Frank H. Easterbrook, Cyberspace and the Law of the Horse, 1996 U. CHI. LEGAL F. 207 (1996) (arguing that the best way to learn and craft the law of a particular field is to study general rules), with Lawrence Lessig, The Law of the Horse: What Cyberlaw Might Teach, 113 HARV. L. REV. 501 (1999) (arguing that the nature of cyberspace is unique and can reveal general principles of law); and RICHARD A. EPSTEIN, SIMPLE RULES FOR A COMPLEX WORLD, (Harv. Univ. Press. 1995) (arguing that basic legal principles can and should govern a complex, industrial society).The Article begins with a definition of smart contracts and an explanation of the interplay between legal prose and machines. This analysis will also engage with the existing smart contract research, which is often written from a computer science perspective. The salient features of smart contracts differ between the technical and legal discussions, a fact which is lost in the existing literature. To help clarify, the article will introduce a classification of strong and weak smart contracts. To provide context to the above discussion, a short history of the idea will be included.Next, the two technological components that have enabled smart contracts will be explained. The first component will be termed contractware, which can be defined as the physical or digital instantiations of contract terms onto machines or other property involved in the performance of the contract.3 The pieces of property do not need to be tangible; software systems can be embedded with contractware.4 The term contractware has appeared elsewhere to refer to commercial software offerings that facilitate the workflow and writing of traditional contracts. By instantiation, we mean taking the terms of the agreement and either writing them into previously existing software or writing them into software that is connected in some way to a machine that implements the contract. Take, for example, the innards of our aforementioned vending machine. A physical device within the machine is encoded with a sellers offer. The machine will only dispense a soda if the terms of the agreement are met, for instance, by depositing a Krugerrand into the device. In addition to discussing the legal theory behind the vending machine, the contraptions radical history will also be discussed to remedy the paucity of vending machine literature that exists in legal academia.5 Cf. Orin Kerr, The Influence of Immanuel Kant on Evidentiary Approaches in Eighteenth Century Bulgaria, 18 GREEN BAG 2d 251 (2015); see also Chief Justice of the United States John G. Roberts, Jr., Interview at Fourth Circuit Court of Appeals Annual Conference (June 25, 2011) (much like how Professor Kerrs work remedied the paucity of legal literature on the influence of Immanuel Kant on evidentiary approaches in eighteenth century Bulgaria, a paucity that was observed by Chief Justice Roberts). This history sheds light on the power of the smart contract to protect individual autonomy over state diktat.There is a second technological component this article will discuss: decentralized ledgers, also known as blockchains. These are databases of information that are created by a network with no central authority.6 See, e.g., Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN PROJECT, http://bitcoin.org/bitcoin.pdf [https://perma.cc/GXZ8-6SDR]. For instance, instead of a public recordation system that exists on paper files stored in city hall, a blockchain system would keep a decentralized ledger on the computers of every node running the software.7 Id. at 2, 4. It has become easier to build and enforce secure contracts without recourse to the state through the use of shared, instead of centralized, consensus-establishing mechanisms. The combination of these componentscontractware and blockchainshas made smart contracts that are enforced by a decentralized, third-party network possible.8 Other systems of verification are possible, but blockchains have become a sort of Schelling point. Attention from the media and capital have established this particular technology as the one to work with.Part *TK* of the Article will analyze smart contracts through the lens of existing doctrines in contract law. The section will provide an overview of the classic stages of contract formation and pose a series of observations and questions that are implicated by smart contracts. In particular, this section will discuss consideration, formation, avoidance, performance, breach, and remedy. Section TK will explore one existing application of smart contracts: automobile starter interrupters. These are devices that are installed in cars by creditors, allowing them to remotely disable the car if a debtor has breached the terms of an agreement. The subject of this section will be how courts and legislatures have dealt with these devices. This is a current instance where courts have passed judgment on the legality of smart contracts, albeit not self-consciously. They were not setting out to rule on legality, but implicitly did so as a collateral matter.Next, the Article will examine the benefits of smart contracts. Like many technologies, the creators and early adopters of smart contracts are ideologically driven and believe that the invention can radically alter the nature of society and its relationship with the traditional centralized state. Many believe that private enforcement of contracts can reduce the need and extent of monopolized police and legal services provided by the state.9 See, e.g., ROBERT NOZICK, ANARCHY, STATE, AND UTOPIA (1974); MURRAY ROTHBARD, THE ETHICS OF LIBERTY (1982); DAVID FRIEDMAN, THE MACHINERY OF FRIEDMAN (1973); EDWARD STRINGHAM, ANARCHY AND THE LAW (2007). However, the vision of the first movers often gives way to the realities of a conservative world that looks askance at new technologies. There are, however, benefits of smart contracts that do not upend the existing social order, but instead decrease transaction costs by cutting out intermediaries. This allows for industrial society to operate more effectively. These benefits extend to financial transactions, corporate governance, financial products, and a host of other potential applications that have been analyzed by economists.The final section of the Articlediscusses both a philosophical and practical set of problems with smart contracts. The benefits of smart contracts must be viewed in light of their inherent limitations. A smart contract asks its parties to tie themselves to the mast like Ulysses and ex ante commit to abiding by the terms of the agreement.10 HOMER, THE ODYSSEY, Book XII, 36-54 (A.T. Murray trans.) (c. 800 B.C.E.), http://www.theoi.com/Text/HomerOdyssey12.html [https://perma.cc/WSP5-VGPN] (describing Ulysses commands that his troops tie him to the mast of his ship so that he would not be tempted by the Sirens and their alluring voices, which would have resulted in his death). In certain instances, the state may want to prevent individuals from committing themselves if the terms of the contract are substantively unconscionable.Smart Contracts: Strong and Weak DefinitionA smart contract is an agreement whose execution is automated.11 Alternative and broader definitions of smart contracts exist and these may be better for computer science purposes, but for legal purposes, what is relevant is the excision of human control. See, e.g., Christopher D. Clack et al., Smart Contract Templates: Foundations, Design Landscape and Research Directions 2 (Aug. 4, 2016) (unpublished manuscript), http://arxiv.org/pdf/1608.00771v2.pdf [https://perma.cc/8Z5P-QRM9] (A smart contract is an agreement whose execution is both automatable and enforceable. Automatable by computer, although some parts may require human input and control. Enforceable by either legal enforcement of rights and obligations or tamper-proof execution.). Much of the remainder of this paper will discuss under what conditions smart contracts are legally enforceable, but if they have been executed, then the agreement has been enforced in some sense. The cogs of a vending machine enforce the agreement, even if ex post a court finds the sale to be impermissible. This automatic execution is often effected through a computer running code that has translated legal prose into an executable program.12 Automation is generally taken to mean being executed by one or more computers. Smart Contract Templates. For a discussion of this translation process see Tom Hvitved, Contract Formalisation and Modular Implementation of Domain-Specific Languages (Mar. 2, 2012) (unpublished Ph.D. thesis, University of Copenhagen) (on file with author). It is an open area of research as to whether computers can actually affect this execution, but for the purposes of this paper, what poses the most novel legal questions is what happens when human legal prose and execution are subordinate to mechanical execution. This program has control over the physical or digital objects needed to effect execution. Examples are a car that has a program installed to prevent ignition if the terms of a debt contract are not met or banking software that automatically transfers money if certain conditions are met. A smart contract does not rely on the state for enforcement, but is a way for contracting parties to ensure performance.For legal purposes, I will further differentiate between strong and weak smart contracts. Strong smart contracts have prohibitive costs of revocation and modification, while weak smart contracts do not. This means that if a court is able to alter a contract after it has been executed with relative ease, then it will be defined as a weak smart contract. If there is some large cost to altering the contract in a way that it would not make sense for a court to do so, then the contract will be defined as strong.Numerous alternative definitions of smart contracts have been proposed.13 See, e.g., Clack et al., supra note 9; Josh Stark, Making Sense of Blockchain Smart Contracts, COINDESK (June 4, 2016, 18:36 GMT), http://www.coindesk.com/making-sense-smart-contracts/ [https://perma.cc/37QL-6TCN]. In a paper outlining a template for creating standard smart contracts, Clack et al. proposed a broader definition of smart contracts that bifurcates into what they call traditional and non-traditional methods of enforcement.14 Clack et al., supra note 9, at 4. Clack et al. define traditional means of enforcement as those through institutions like arbitration or courts of law these are weak smart contracts in our classification scheme, because the costs to change or revoke the contract are not high enough to proscribe courts or arbitrators from doing so.15 Id. An example of a weak smart contract would be an easily revocable money transfer between two large financial institutions where a court could simply order the transfer undone or modified if necessary. They define non-traditional means of enforcement as those through tamper-proof technology with the assumption that in a perfect implementation of the system wrong-performance or non-performance become impossible.16 Id. This narrower set of smart contracts is what I deem the strong variety. The reason is that the execution of the contract can be tampered with by the courts in the sense that the court can alter the original intentions of the parties.From the perspective of innovators, this bifurcation makes sense because as a practical matter, technology and society are far away from the pure, strong smart contract definition this paper considers. For instance, personal service contracts are not subject to computer control.Clack et al.s broad definition does not capture what is unique about smart contracts from a legal perspective. The broad definition that includes instances where courts can interpret and enforce the contract is indistinguishable from a traditional contract law. If a court has power to interpret and then enforce a contract, then it is the smart actor and will abide by previous precedential rules and statutory frameworks. Traditional enforcers who are confronted with contracts that use technology, but ultimately rely on some form of alterable behavior, will be able to award damages, issue injunctions, or enforce criminal penalties to enforce their understanding of the law. For instance, consider a smart contract that requires a party to mow a lawn if funds are dispersed. And suppose the mechanism for enforcing the dispersal of funds was a sensor that measures the lawns average grass length. Although one side of the contract could be automatically enforced, because the behavior of the human party is alterable by a court, i.e. a court can excuse performance, the contract will not necessarily execute.But traditional enforcers who are confronted with strong smart contracts will be helpless ex post. This is the novel situation that a legal definition of smart contracts needs to address. Unlike non-smart contracts whose performance can be stopped by the parties either voluntarily or by court order, once a strong smart contract has been initiated, by definition, it must execute. If, for instance, an individual in our above hypothetical were to install a device in his brain that would cause crippling pain if the lawn was not mowed, there is a case that the contract is in a stronger sense self-enforcing. This is the novel question posed to courts, and so this article will examine this second set of contracts. Much of this article will deal with smart contracts whose execution is contrary to governing law.ContractwareContracts are most often enforced by the parties to the contract. This is because most contracts do not end in breach and rancor, but rather in performance and completion. Modern industrial society would not be possible if this were not the case.It is only when there is a dispute over a contract that there is a need for enforcement. Yet resorting to the court system is a resource-intensive process.17 See Paula Hannaford-Agor & Nicole L. Waters, Estimating the Cost of Civil Litigation, 20 NATL CTR. STATE CTS. 1, 7 (2013), /CSPH_online2.ashx [https://perma.cc/E3FV-AK8P]. The opportunity to ensure performance ex ante is a preferable situation if the expected value of the costs of litigation outweigh the expected value of the contract. Because litigation can be a resource-intensive undertaking, the rise of contractware qua enforcer could be a welcome possibility.I will define contractware as the physical instantiation of a computer-decipherable contract.18 Nick Szabo, A Formal Language for Analyzing Contracts, NICK SZABOS ESSAYS, PAPERS, & CONCISE TUTORIALS (2002), ture/LOTwinterschool2006/szabo.best.vwh.net/contractlanguage.html [https://perma.cc/N8LX-9FXG] (refers to a similar idea as proplets.); see also Ian Grigg, The Ricardian Contract, IANG.ORG, http://iang.org/papers/ricardian_contract.html (last visited Feb. 6, 2017) [https://perma.cc/M2S5-9EJF]. The terms of many contracts can be written in programming languages that are communicated to a machine.19 See, e.g., Szabo, supra note 26; Simon Peyton Jones et al., Composing Contracts: An Adventure In Financial Engineering, 5 P. ACM SIGPLAN INTL CONF. ON FUNCTIONAL PROGRAMMING I CONF. F P 280 (2000); see also The Solidity Contract-Oriented Programming Language, GITHUB, https://github.com/ethereum/solidity/ (last visited Feb. 6, 2017) [https://perma.cc/K8AN-DX3Z] (displaying the Ethereum platforms Solidity language for programming smart contracts). The reason for this is that performance and enforcement of a contract essentially boils down to conditional statements, which are foundational to computing.20 Computers take inputs and apply functions to them to derive outputs. John McCarthy, Recursive Functions of Symbolic Expressions and Their Computation by Machine, Part I, 3 Comm. ACM 184 (1960).For example, in a secured auto loan, if a certain amount of money is not received by a certain date, then the car can be repossessed. While many contracts are certainly more complex, at base, conditional statements stand behind all enforcement.21 As a theoretical matter, perhaps not all conditionals in law can be reduced to code, but parties can certainly reduce many conditionals to code, and where they cannot, they should not consider using a smart contract. Whether interpreting private contracts, statutes, or the Constitution, American courts take a series of inputs, run them through a series of conditionals, and then have an executor to enforce their output. For instance, if a city tried to segregate its schools, a court would run this factual input through the conditional of Brown, viz. if segregation, then enjoin, and have someone enforce the output.22 Admittedly, equitable doctrines complicate matters and nebulous judicial standards, such as with all deliberate speed and rational basis, escape formulaic application, likely by design. But outside of the realm of constitutional law, courts tend to value the law be settled than that it be settled right. Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting).It is important to mention that the instantiation of the contract need not be in a physical piece of property or hardware, but can instead be in another piece of computer code. For instance, a bank account could include contractware that interacts with the banks systems. As an example, such contractware could commit a buyer to send money to escrow once certain external conditions were met. Automatic payment of credit card bills, such as the service offered by Chase, are already in operation.23 Cf. CHASE, ONLINE SERV. AGREEMENT, https://chaseonline.chase.com/Content.aspx?ContentId=COLSA1A_LA (last visited Feb. 6, 2017) [https://perma.cc/76BC-6ZWJ] (Some Chase Loan and Credit Accounts will allow you to set up automatic payments. Automatic payments differ from repeating payments in that automatic payments are triggered based on the associated billing date and the payment amount may vary each month. Terms and conditions for automatic payments to Chase Loan and Credit Accounts will be presented to you at the time you set up the payments.). As a technological matter, until the advent of computers, it was difficult to use contractware. This left a larger role for courts and their agents to enforce contracts. Now, however, with increased digitization and the so-called Internet of Things, the feasibility of installing contractware has increased dramatically.24 For example, even refrigerators can now connect to the Internet. See, e.g., Folasade Osisanwo et al., Internet Refrigerator A typical Internet of Things (IoT), 3 INTL CONF. ADVANCES ENGG SCI. & APPLIED MATHEMATICS 59 (2015), http://iieng.org/images/proceedings_pdf/2602E0315051.pdf. [https://perma.cc/R9BB-DYJ9]. Consider a world where HVAC systems are connected to the internet. Smart contracts can be used to ensure payment and services altered if customers are in default.On the above view, the enforcement of a contract is nothing more than the running of a circumstance through a conditional statement. The central question to ask is: who runs the conditional statement? The most common and least disputed enforcement of a contract comes from the parties themselves. Take the contract, Max agrees to buy Whiteacre from Richard for 500 Krugerrands. The conditional can be written If Max pays Richard 500 Krugerrands, then Richard will sign a piece of paper granting Max legal title to Whiteacre. In most instances, Max gives Richard 500 Krugerrands and Richard then signs the document granting him Whiteacre. The parties themselves interpreted and enforced the contract.When things go wrong, however, a third party can be invoked to interpret and enforce the conditional statements. The most familiar example of such a third party is a common-law judge using his legal reasoning combined with his sheriff to physically enforce the output of the conditional statement. At base, the judge is nothing more than a computer who applies a series of rules to a set of facts and then instructs others to enforce his output.25 Cf. Anthony DAmato, Can/Should Computers Replace Judges?, 11 G. L. R. 1277, 1277-1301 (1977).But judicial enforcement of contracts is not the only way that contracts can be enforced. Instead of having a judge interpret and enforce the statements, it is possible to have a machine do so. Such a machine would need to have two abilities. First, it must be able to render correct outputs from given factual inputs. Second, its output needs to be reified some way in the real world. The vending machine is the archetypical example of a self-executing smart contract. Vending machines have been defined as self-contained automatic machines that dispense goods or provide services when coins are inserted.26 KERRY SEGRAVE, VENDING MACHINES: AN AMERICAN SOCIAL HISTORY 1 (McFarland & Co.) (2002). In other words, they complete one side of a contract once unilateral acceptance in the form of money tender has been effected.27. In Ricketts, it is likely that the grandfather would have happily tied his executor to the mast. If the counterparty did not give this additional promise in the code, then the gift recipient would be able to act accordingly; if the counterparty did give the promise, rights are more clearly defined.Smart contracts solve the problem of gift-promises by giving both the promisor and promisee the ability to encode finality so that parties can organize their behaviors around a mechanical certainty or lack thereof.Instead of going to court to ask the state to enforce the contract, the parties can agree to a cheaper enforcement mechanism. This is the method by which smart contracts reduce transaction costs. In the realm of wills and estates, like in Ricketts, smart contracts can be of particularly high value because they will bind the hands of the executor to the will of the testator, with little room for deviation.Some of the most difficult problems of early contract law involved defenses of misunderstanding and mistake.68 See, e.g., E. Allan Farnsworth, Meaning in the Law of Contracts, 76 YALE L.J. 939 (1967); E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217 (1987). With respect to interpretation, the use of computer code has the potential to minimize future conflicts over terms.69 This potential is not certain, as examples of fraud abound in the world of computer code. We discuss the DAO incident is discussed below, infra p. 37. Much like contracts of adhesion, many lay individuals will not comb through the code of their contract. But like open source software, granting everyone access to potentially review the code is a strong bulwark against fraud. Code can minimize, but not completely erase these problems because humans and their misunderstandings of code could provide a basis for contract rescission. In Raffles v. Wichelhaus a controversy arose over a cotton shipment contract when two ships named Peerless could both fulfill the terms; one party claimed he intended one ship, the other party, the other.70 Raffles v. Wichelhaus, 2 H. & C. 906 (1864). Such problems are virtually non-existent now, at least in the shipping world, but for similar problems that may exist, the precision of cryptographic identifiers is able to dispatch with such issues.71 David Wu et al, Privacy, Discovery, and Authentication for the Internet of Things (Feb. 28, 2017) (unpublished manuscript), https://crypto.stanford.edu/~dwu4/papers/PrivateIoTFull.pdf [https://perma.cc/PXQ6-ZGMY]. Although ambiguity certainly exists in programming languages, these ambiguities are less than in the real world because of the fact that there are simply fewer terms that a computer can recognize than a human can recognize.72 While computer code is subject to the same human error that written language is, it is much less subject to uncertainty. Two humans may read the same words and ascribe different meaning. Two compatible computers reading the same piece of code will not, although that code may not be the correct code that was meant to be written by the programmer; average adults have a vocabulary of between 20,000 and 35,000 words. See Vocabulary size: Lexical Facts, ECONOMIST (May 29, 2013), http://www.economist.com/blogs/johnson/2013/05/vocabulary-size [https://perma.cc/UQV4-3W32]. Because computer programs are written by humans, anything a human can write into code, a human can at least recognize as a word or signifier.Ambiguity is celebrated in human language. It is a central feature of literature, poetry, and humor. Ambiguity is anathema to computer language. An ambiguous computer language is a nonsensical concept because the predictability of computers is what gives part of their value; imagine a computer that was asked, what is 1 and 1 it randomly returned either two or 11. Although it is debatable whether every contract can be translated into machine language, many of them can be.73 See, e.g., Ian Grigg, The Ricardian Contract, IANG http://iang.org/papers/ricardian_contract.html (last visited Apr. 1, 2017) [https://perma.cc/8PS3-YCLP]. When lawyers or the programmers they hire write contracts in code, there is less of a chance for ambiguity than in natural language if only for the simple fact that artificial language must be complete and predefined, whereas natural language is infinite.74 See CARL A. GUNTER, SEMANTICS OF PROGRAMMING LANGUAGES: STRUCTURES AND TECHNIQUES, 4 (Perhaps the most basic characteristic of the distinction is the fact that an artificial language can be fully circumscribed and studied in its entirety.); John W.L. Ogilvie, Defining Computer Program Parts Under Learned Hands Abstractions Test, 91 MICH. L. REV. 526 (1992), http://digital-law-online.info/misc/ogilvie.htm [https://perma.cc/58SG-HC6U]. That is to say a person can walk around and verbally recite lines of code and people can at least understand what he is saying; a machine cannot understand human language that it is not programmed to understand. All of this is simply to say that the problem of ambiguity is reduced in the smart contract context.Finally, all of the usual defenses to formation of a contract also apply in the realm of smart contracts, although as will be seen later, enforcing the remedy against a strong smart contract may prove problematic to a court. Take unconscionability and illegality, for instance. If a vending machine were to sell alcohol to minors or sell alcohol in a dry jurisdiction, then the contract could be voided as illegal.75 Modern Cigarette, Inc. v. Town of Orange, 774 A.2d 969, 97071 (Conn. 2001). As will be discussed, the remedies will be either ex post through legal action or ex ante through regulation. In this instance, the illegal contract can either be policed through a prohibition on alcoholic vending machines76Or a prohibition on filling the vending machines with illegal substances. or a system of preclearance where a drivers license scanner or some mechanism are required to ensure compliance with age requirements. Similarly, suppose the vending machine charged $1,000 for a can of Coke and a court were to find this to be substantively unconscionable. The remedies would again either be in damages or in policing the use of such vending machines before the contract could be formed.Because the possibility of policing and damages exist, the issues of contract formation are largely the same in the traditional and smart contract world. The main difference is in the precision with which terms can be defined and inserted. Ambiguities must be taken care of by a functioning program and there is no I do not know. The history of computing shows that programs do not always operate as their designers expect, but when code is executed, the code does operate.77 This is true of human contracts too, at least in the sense that something always happens. But with code these happenings are predetermined and predictable and therefore parties can have certainty to organize around. Although the actual output of a smart contract may differ from the intentions of the parties, this system provides a more optimal first approximation. This is because computer code can be predicted according to a set of rules, whereas the ambiguity in human interpretation is less robotic by definition.Performance and ModificationA contract can be performed, modified, or breached. This section addresses performance and modification issues.The performance phase is made easier with smart contracts as they offer a tool to solve ambiguity problems addressed above. A potential problem here, however, comes with imperfect performance. Courts in the United States do not demand perfect performance for a contract to be recognized and enforced.78 See RESTATEMENT (SECOND) OF CONTRACTS 237 cmt. d (1981). The common law doctrine of substantial performance permits a contract to be recognized even if the performance does not fully comport with the express terms laid out.79 Id. This is the kind of leeway that a computer program cannot recognize because it involves an outcome that was not contemplated and specified by the parties. Imagine, for instance, a contract for a painting that is contingent on the reasonable personal satisfaction of the buyer. One way parties can deal with this is by baking in a certain degree of discretion into the terms of the contract initially or by simply not using a smart contract if discretion is a necessary part of the contract. However, if the terms were to diverge from what the law recognizes, the law would have to again decide between ex ante and ex post solutions to the problem.Most conceptually challenging, however, is how smart contracts will deal with modification. The law recognizes certain excuses that will absolve a party from performance or require some sort of modification.80 See, e.g., RESTATEMENT (FIRST) OF CONTRACTS 456 (1932). Impossibility and impracticability are two such excuses. When a contract becomes illegal after it is formed, then the parties can be excused from performance and there is generally no remedy for an aggrieved party.81 See id. at 598. This poses a problem for the smart contract.There needs to be a method by which smart contracts can be updated to incorporate changes that may be required by the evolving legal landscape. Suppose that at the time of contract formation, the time a debtor needs to be in default for the creditor to repossess is 30 days and that after the contract is executed, a legislature changes the law requiring that time period to be 90 days.82 Other examples of changing provisions include retroactive protection for veterans against foreclosure. See, e.g., 50 U.S.C.A. 3958. There are numerous ways of addressing this situation, ranging from state-backed to purely private. One method could be a system in which the relevant jurisdiction creates a publicly available database and application programming interface (API) of relevant legal provisions. These would be provisions related to the terms of the contract. The smart contract would call these terms and would be able to update those provisions terms in accord with the jurisdictions update of the database.83 Updating the code of a smart contract is a technically difficult task, but for the purposes of this paper, it will be assumed that it will become possible.Another method would be through ex post policing of the parties; this puts the burden on the parties or their agents to update the code. The benefit of this option is that there is no need to rely on the third-party government to create a new infrastructure, while the downside is that the parties themselves can potentially unilaterally change the terms of the contract, which is one of the problems smart contracts try to rectify. This could be obviated by leaving certain terms of the contract modifiable, while restricting others from modification. That payment is necessary could be an immutable term, whereas the length of time a debtor has before he is in default could be modifiable. This suggests that government APIs may have a master override over contract terms, which reflect the application of prevailing law over contracts in certain circumstances.84 Further, a similar override can be installed as between federal and state governments, as the software of the Supremacy Clause. U.S. CONST. art. VI, cl. 2.Finally, computer programs are regularly written with the option of inserting code later. Only those contracts that would involve some kind of irrevocability would force courts hands. This is because a court would be tasked with enforcing a law that would override the terms of the contract; there would be conflicting dictates. Party autonomy does not trump all other values in state-based legal systems.Enforcement, Breach, and RemediesThe central problem in the final question of contract law is what happens when the outcomes of the smart contract diverge from the outcomes that the law demands. Above are numerous examples where the technical outcome of the smart contract would not be permitted by a court under existing law, e.g. the heroin vending machine.As a threshold, it is possible that contract law and the actual written contracts would have influence on each other so as to minimize these divergences. Courts are going to be more likely to enforce smart contract terms because the courts will have more certainty as to party intent because the parties explicitly laid out their terms. Smart contracts drafters are going to be more likely to write smart contracts that comport with extant law and write terms that are variable to accommodate future changes in the law. The terms of a lease, for instance, will change to accommodate the property law of the jurisdiction. Additionally, torts could emerge for negligent coding or negligent update that would further ensure smart contracts are drafted in accord with existing legal standards. But what happens when these forces are not enough to overcome the divergence?It is a good rule of thumb that the entity with more guns wins. Here, governments generally have more guns than private parties and so the states courts are in a position of enforcing their law over the private law. Enforcement either occurs before or after the damage has occurred. This damage is not to either of the contracting parties because they are getting, by definition, their bargain.85 It may be the case, as with the decentralized autonomous organization, that the parties regret their decisions ex post. But in their agreement, the code was the code they signed on to. Instead, the damage is done to the exogenous laws of the society and not the parties themselves.86 Damage may also be done to efficiencysmart contracts prohibit or make more costly efficient breach. If two parties contract to buy liquor, both are satisfied with the bargain ex ante. If one of those parties is below the drinking age, he is still satisfied with the bargain. The only one ex ante not satisfied is the government and the government is in a position to respond to that dissatisfaction in some way.In the United States and other common law systems, ex post enforcement is the preferred system and there are many reasons to believe why this is a system conducive to greater prosperity and vibrancy.87 Samuel Issacharoff, Regulating after the Fact, 56 DEPAUL L. REV. 375, 377-78 (2007). In the sections below this article will discuss the merits of these two positions, but here it suffices to say that the two likely categories are regulation/policing and criminal/civil actions. There is a spectrum on which these remedies should be offered. In the United States, it is the exception that the government bans certain objects because their possession is per se problematic for society. Automatic weapons and child pornography both fall into this category.88 18 U.S.C. 922. If the government does not take this tack, then it is largely left with ex post enforcement.Some unenforceable contracts result in criminal prosecutions, while some result in non-enforcement.89 See RESTATEMENT (SECOND) OF CONTRACTS 178 (1981). It is too speculative at this point to see how the governments will respond to smart contracts because these technologies have yet to reach a level that requires a government response. They may not reach this level because individuals may not want to change their current contracting patterns because they are fine with the level of leeway and ambiguity that currently exists. It is unlikely, for example, that individuals will want to implant mini-bombs in themselves to ensure compliance with credit card payment. Because egregious bargains like those using the mini-bomb are unusual, it is likely that responses to unenforceable private contracts will remain in the ex post phase and tend towards civil, not criminal enforcement.It will be helpful to solidify the above discussion in a law that is embryonic, but at least extant: starter interrupters.Case Study: Starter InterruptersThe existence of a public court system is the antithesis of private self-help because the parties seek external recourse from a third party.90 For a discussion of self-help see infra p. 31. There are reasons for this, including a desire to prevent might from making right.91 Cf. Kirby v. Foster, 22 A. 1111, 1112 (R.I. 1891) (The law does not permit parties to take the settlement of conflicting claims into their own hands.). But recourse to courts is not without its costs.92 Douglas Lichtman, How the Law Responds to Self-Help, 1 J.L. ECON. & POLY 215, 257 (2005). Forcing a landlord to go through a lengthy eviction process raises the costs for non-breaching tenants, for example.93 Cf. Berg v. Wiley, 264 N.W.2d 145, 148 (Minn. 1978) (awarding tenant $31,000 for lost profits and $3540 for lost chattels resulting from a wrongful lockout). The situation is similar to when automobiles are collateral. In an attempt to increase recovery rates for their collateral, automobile lenders have turned to using devices called starter interrupters.94 See Michael Corkery & Jessica Silver-Greenberg, Miss a Payment? Good Luck Moving That Car, N.Y. TIMES DEAL BOOK (Sept. 24, 2014), g-that-car/?_r=0 [https://perma.cc/ZK4J-J96R] (This is not technically a smart contract because the creditor here has discretion, but as the technology proliferates and this becomes automated, the salient features are the same in this nascent state, so it is an appropriate case study.)Starter interrupters are an archetypical example of a smart contract and how the law deals with them is instructive in crafting appropriate legal regimes. A starter interrupter is a device that is installed in an automobile that allows for a remote party to prevent the engine from starting.95 Kwesi D. Atta-Krah, Preventing A Boom from Turning Bust: Regulators Should Turn Their Attention to Starter Interrupt Devices Before the Subprime Auto Lending Bubble Bursts, 101 IOWA L. REV. 1187, 1191 (2016). It allows a user who controls the starter interrupter to remotely shut off an automobile. These devices often also include global position systems, so that the collateral can be located.96 Id. The New York Times reported on an Arizona company, C.A.G. Acceptance Corporation, which offers its automobile loans on a condition that if the debtor is in default, the company reserves the right use the device to prevent the car from starting.97 Corkery & Silver-Greenberg, supra note 103. Such devices are estimated to be installed in over two million automobiles.98 Id.; see also Sydney Ember, Morning Agenda: Devices Fuel Subprime Auto Boom, N.Y. TIMES DEAL BOOK (Sept. 24, 2014), bprime-auto-boom/?_php=true&_type=blogs [https://perma.cc/J68M-E6B9]. The analogy to the housing crisis is inapt because the marginal loans given out are based solely on the new ability to repossess or have assurances about collateral. There does not seem to be evidence that lenders are extrapolating the marginal increase in recovery rate to a greater belief in the value of the collateral, for instance. Auto lenders generally do not believe that their collateral will appreciate in value with usage; there are standardized depreciation schedules in contrast with the value of real estate.There are a number of safeguards to the power of the starter interrupters that companies use to ensure that there are not egregious problems with their use.99 Eric L. Johnson & Corinne Kirkendall, Starter Interrupt and GPS Devices: Best Practices, PASSTIME GPS (Jan. 14, 2016), es/ [https://perma.cc/7QSU-A6UU]. For instance, a starter interrupter cannot disengage a car while it is currently running, which would have the obvious potential of causing accidents. The starter interrupter can be manually overridden with a code in certain instances in cases where life and limb are at stake. The creditor can give a sheet of a number overwrite codes, each of which can only be used once to prevent abusing the leniency for exigent circumstances. These common-sense exceptions to the power of the starter interrupters are included in best practices guidelines for the industry.100 Eric L. Johnson & Corinne Kirkendall, GPS & Payment Assurance Technology: Are You Compliant?, PASSTIME (2015), NABD_PAT_GPS_Compliance_Presentation_1.2015.pdf [https://perma.cc/GC7C-XPSZ]. This would allow the companies to comply with existing law that prevents, for instance, tortious conduct on highways.The cost of locating and then repossessing automobiles is a significant one and the starter interrupter, a form of contractware, is a powerful tool to drive down these transaction costs. This technology is currently being used and developed by creditors who are able to increase their collection rates by locating their collateral and preventing its misuse.Some critics view such use by creditors to collect collateral as unfair to those debtors who rely on the collateral for transportation to work.101 Corkery & Silver-Greenberg, supra note 103. Other critics in response point to the lower interest rates that debtors can afford because of the increased rates of recovery and therefore the systemically lower credit risk.102 Thomas Hudson, The Consumer Wins Argument For Starter Interrupt Devices, AUTO DEALER MONTHLY (Aug. 2006), /08/the-consumer-wins-argument-for-starter-interrupt-devices.aspx [https://perma.cc/XAQ7-QC5Z]. This debate is beyond the scope of this article, but if there is an economic incentive for both creditors and debtors to use these devices, the law will be forced and indeed has been forced to determine the legality of their use.Contract law is generally governed by states and there is no preempting federal law specifically dealing with starter interrupters,103 Atta-Krah, supra note 104, at 1201 (federal regulations do not provide any direct guidance relating to the use of SIDs by auto dealers and lenders.); Consumer Information: Vehicle Repossession, FED. TRADE COMMN, http://www.consumer.ftc.gov/articles/0144-vehicle-repossession (last visited Jan. 13, 2016) [https://perma.cc/HM9D-GRT9] (noting that [d]epending on [the borrowers] contract with the lender and [the borrowers] states laws, [a lenders use of an SID] may be considered the same as a repossession or a breach of the peace). but there is not much state law applicable to contractware. As one recent survey of the extant law concluded, generallySIDs [starter interrupter devices] may be legal in most states due to the secured partys right to the self-help repossession provisions of Uniform Commercial Code (UCC) section 9-609.104 Atta-Krah, supra note 104, at 1207.Section 9-609 of the Uniform Commercial Code, as adopted in various forms by the states, governs self-help of secured creditors. The UCC gives a secured creditor the right to either take possession of the collateral or render equipment unusable without judicial process so long as the action proceeds without breach of the peace.105 U.C.C. 9-609. A rich case law exists on what constitutes a breach of the peace, and as will be shown below, it will not be difficult to fit starter interrupters into this existing corpus.California, Colorado, and Connecticut all explicitly affirm the legality of starter interrupters but place certain restrictions on their use.106 See Colo. Rev. Stat. 4-9-609(e); 4-9-629; Conn. Gen. Stat. Ann. 42-419; 42a-2A-702; 42a-9-609; Cal. Civ. Code 2983.37. The primary concerns of the state legislatures are both that the debtor has notice that the device has been installed and has a right to cure the breach.The rights of debtors under the Bankruptcy Code add another wrinkle in the straightforward use of starter interrupters. A bankruptcy court in Arkansas ruled that the installation of a starter interrupter, while not per se illegal, violated the Bankruptcy Codes automatic stay because it prevented the debtor from the normal use of her car.107 11 U.S.C. 362. The court noted that the creditor could have remedied the situation by taking action to ensure that Debtor had the correct code to operate her car each month, such as by mailing the correct code to Debtor each month.108 In re Hampton, 319 B.R. 163, 175 (Bankr. E.D. Ark. 2005). A line of code written that would honor a courts grant of an automatic stay motion by allowing the car to operate is another potential remedy.The automatic stay, like the prohibition on selling alcohol to minors, acts as an external condition that the smart contract must incorporate into its terms if it is to comply with the law. The reason is because an individual cannot contractually waive his right to file for bankruptcy as a matter of public policy.109 In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. M.D. Fla. 1988) (A total prohibition against filing for bankruptcy would be contrary to Constitutional authority as well as public policy.). As seen before, this can either be solved ex ante or ex post. This situation seems ripe for private solution, as it is not difficult to determine whether a party has filed for bankruptcy, given the public nature of these proceedings. A simple conditional could be written that if bankruptcy has been filed, then the starter interrupt cannot be engaged.As blockchains currently exist, starter interrupters are operated by the creditor and done so with the use of discretion.110 May 2012 Payment Devices Best Practices NABD Study #3, NATL ALLIANCE OF BUY HERE PAY HERE DEALERS (Apr. y-2012-Payment-Devices-Best-Practices.pdf [https://perma.cc/H3B9-TFM2]. But large corporations, like Toyota, have contemplated using blockchains to enforce their contractual arrangements.111 Peter Coy & Olga Kharif, This Is Your Company on Blockchain, BLOOMBERG BUSINESSWEEK (Aug. 25, 2016), -on-blockchain [https://perma.cc/Q49W-CXUC]. By invoking a blockchain for third-party verification, this discretion would be lost, but the debtor would be able to ensure that an interested party did not have the unilateral ability to control his collateral. The lower interest rates that come along with the blockchains assurances may provide a valuable option to some debtors who view the rigidity as enticing.Self-Help and Smart Contracts Private Enforcement and Political PhilosophySelf-help remedies have been defined as legally permissible conduct that individuals undertake absent the compulsion of law and without the assistance of a government official in efforts to prevent or remedy a civil wrong.112 Douglas I. Brandon et al., Self-Help: Extrajudicial Rights, Privileges and Remedies in Contemporary American Society, 37 VAND. L. REV. 845, 850 (1984). Automated execution of a contract is a preemptive form of self-help because no recourse to a court is needed for the machine to execute the agreement. A smart contract may not, however, meet the first terms of the definition because of illegal contracts like the vending machine that dispenses heroin or the implanted bomb that explodes when a debtor defaults. These contracts are outliers that must be dealt with, but the background approach the state should take towards smart contracts is a liberal one.113 See Richard A. Epstein, The Theory and Practice of Self-Help, 1 J.L. ECON. & POLY 1, 26 (2005) ([W]hat the law should do is to supply a second legal remedy that offers the complete relief (or at least more complete relief) that the self-help remedy could not supply.).Smart contracts offer a wider range of assurances to parties who previously had to use other mechanisms to ensure performance. For example, without smart contracts parties are more likely to prefer instantaneous performance or overvalue the reputation of the counterparty. These are good proxies for ensuring performance, but not ironclad and come with their own costs.114 Id. at 22-23 (To be sure, there are risks even in this context. Against these perils, the simplest form of protection is a simultaneous exchange in which each side gets to inspect the goods or services provided by the other before going through with the dealThe situation gets more difficult when the exchange takes place sequentially, that is, when one side performs before the other. But once again these trading systems do not suffer a total meltdown. The potential for long-term gain may be sufficient to induce individuals from taking what is left in the first round.). Much of the literature on self-help in contract law has dealt with how a party who has been aggrieved can remedy the wrong that has been committed against him.115 See, e.g., Mark P. Gergen, A Theory of Self-Help Remedies in Contract, 89 B.U. L. REV. 1397, 1449 (2009) (The primary goal was to give a general account of the rules that regulate the powers to withhold or refuse performance in response to breach, and the power to threaten to do so to extract concessions, which is normatively appealing and well-grounded in the laws specifics.). The advent and proliferation of the smart contract will focus the attention on the harms done to the breaching party, ensuring that party autonomy take a backseat to other norms that society wishes to enforce. In what follows, this Article will examine the potential benefits to non-breaching parties and society at large and then examine the costs to breaching parties and what limits the state will place on the use of smart contracts.As with many new technologies, behind bitcoin stood a political ideology skeptical of centralized power and supportive of capitalism and free markets. Although he116Some will object to using he as the personal pronoun for Nakamoto when it is not known if Nakamoto is a male, let alone an individual. This article uses he for brevitys sake, fully aware that this footnote defeats this purpose. never identified himself as such, many describe the creator of bitcoin, Satoshi Nakamoto, as a libertarian. Certainly many of the early adopters of bitcoin were self-described libertarians.117 Max Raskin, Meet the Bitcoin Millionaires, BUSINESSWEEK (Apr. 10, 2013), onaires [https://perma.cc/P4LQ-C87Y] (The surge in a Bitcoins value has made millionaires out of people who loaded up on them early onhowever briefly. Many of them are self-described libertarians, drawn by the idea of a currency that exists outside the control of governments. Some were so taken with the concept that they launched Bitcoin businesses, such as exchanges where people can buy the coins or exchange them for dollars.). Szabo has been called libertarian and his writings emphasize alternatives to the states enforcement of rights.118 See, e.g., Nick Szabo, Ten ways to make a political difference, UNENUMERATED BLOG (Aug. 12, 2007, 2:10 PM), tml [https://perma.cc/D9Q8-BERY] (Advising those who want to make a political difference to, among other things, Be prepared to vote with your feet.make your own lawdonate to or get involved with the [libertarian/conservative] Institute for JusticeTell us about your good research and good ideas.). Traditionally, states have been defined as monopoly holders of force with a power to tax.119 MAX WEBER, POLITICS AS A VOCATION (1919). Among the most radical visions for smart contracts is that the technology will subject the provision of justice to market forces and break the states monopoly over the court system. This is an idea that has been discussed by many libertarians, including Robert Nozick, Murray Rothbard, and David Friedman.120 ROBERT NOZICK, ANARCHY, STATE, AND UTOPIA (1974); MURRAY ROTHBARD, THE ETHICS OF LIBERTY (1982); DAVID FRIEDMAN, THE MACHINERY OF FRIEDMAN (1973); EDWARD STRINGHAM, ANARCHY AND THE LAW (2007).For many libertarians, the purpose of civil government is to protect private property and enforce natural rights.121 JOHN LOCKE, TWO TREATISES OF GOVERNMENT, Chapter VII, 85 (1689). Most fundamental here is the harm principle that an individual should be free to do as he chooses, coterminous with the rights of others.122 JOHN STUART MILL, ON LIBERTY, 2122. (1859). This implies a strict adherence to freedom of contract.123 Cf. Michael W. McConnell, Contract Rights and Property Rights: A Case Study in the Relationship Between Individual Liberties and Constitutional Structure, 76 CALIF. L. REV. 267 (1988). On this view, smart contracts use technology to enforce party autonomy in a more effective manner because they prevent external interference. If contractware progresses to a point where there is truly no need for third-party enforcement, there would be no need for a state and the attendant costs that many libertarians see as unjustifiable.Smart contracts could be used to encode certain constitutional principles into armaments, such that weapons would not work if certain conditions were not met, e.g. if Congress does not declare war, weapons will not function on foreign soil. Although fanciful, applications like this limn the concerns animating many early proponents.124 In the recent novel Seveneves, Neal Stephenson imagines a gun that fires robots as projectiles and can only respond to a certain user futuristic smart bullets. NEAL STEPHENSON, SEVENEVES 676 (2015).This speculative and radical vision of smart contracts is not held by all proponents of the technology. Rather, some proponents are primarily focused on the capability of smart contracts to reduce transaction costs. Instead of fundamentally changing the nature of political governance, a new wave of smart contract proponents is concentrating on the idea that their use can make the economy and corporate governance more efficient. I call these individuals the Coaseans because they care about reducing transaction costs.125 See Ronald Coase, The Nature of the Firm, 4 ECONOMICA 16, 386-405 (1937). One of the main areas to do so is corporate governance within firms, where a number of proposals have been discussed.126 See Yermack, supra note 58. These proposals include improving shareholding voting systems, tracking debt and equity issues, and enabling triple-entry accounting.127 Id.; Ian Grigg, Triple Entry Accounting, IANG (Dec. 25, 2005, 11:04 PM), http://iang.org/papers/triple_entry.html [https://perma.cc/2FDZ-38YG].An example of a firm that utilizes smart-contract technology to execute its corporate-governance rules is a decentralized autonomous organization (DAO). One way of thinking of a DAO is that it is an organization where the rules of management are predetermined and run on computers.128 Decentralized Autonomous Organization, WIKIPEDIA, https://en.wikipedia.org/wiki/Decentralized_autonomous_organization (last visited Feb. 13, 2017) [https://perma.cc/3FVN-4PP9]. One such DAO was formed in 2016.129 Coy & Kharif, supra note 120. The idea was to create an investing entity that would not be controlled by any one individual, but by shareholders voting based on their stakes on a blockchain. This would reduce transaction costs by obviating the need for a management team.130 Don Tapscott & Alex Tapscott, The Impact of the Blockchain Goes Beyond Financial Services, HARV. BUS. REV. (May 10, 2016), cial-services [https://perma.cc/ES9W-XHPX]. The entity was funded with $150 million.131 Coy & Kharif, supra note 120. Soon after this money was raised, about $40 million of those funds were diverted from the organization by a hacker who used the code in an unanticipated way.132 Izabella Kaminska, Legal Exploits and Arbitrage, DAO Edition, FIN. TIMES (June 21, 2016), trage-dao-edition/ [https://perma.cc/DW5A-KTVY]. Strictly speaking, however, the hacker did not hack the code in a malicious way, but rather used the terms of the existing smart contracts to accomplish something others later found objectionable, i.e. the diversion of their money.133 Id. Consider this using a legal loophole to effect a result that was clearly within the letter of the law, but not within its spirit.134 Id.Another example of smart contracts enabling novel corporate-governance procedures is the use of prediction contracts. A prediction contract is a binary option contract whose value is contingent on an events occurrence.135 Prediction Market, WIKIPEDIA, https://en.wikipedia.org/wiki/Prediction_market (last visited Feb. 13, 2016) [https://perma.cc/3DNG-PPLE]. These contracts are often cited as predictors of presidential elections, where market participants buy and sell contracts in accord with shifting beliefs in a candidates probability of being elected.136 Adam Mann, The Power of Prediction Markets, NATURE (Oct. 18, 2016), http://www.nature.com/news/the-power-of-prediction-markets-1.20820 [https://perma.cc/V8QF-CRUD]. But, they can also be viewed as a form of smart contract that can be executed on a blockchain without any input from a single third party. In many credit default swaps, for instance, a third party, the International Swaps and Derivatives Association, will determine whether a credit event has been triggered.137 Credit Derivatives Determinations Committee Rules, INTL SWAPS & DERIVATIVES ASSOC. (2016), __Jan_2016_Update.pdf [https://perma.cc/8HRK-LKU3]. With a smart contract using a decentralized blockchain for authorization, a network itself can verify whether an event took place and whether the contract will pay out. This has applications in the realm of corporate governance, where decisions can be automated based on discrepancies between the option price and the stock price, directing a board of directors to take one course of action over another.138 Robin Hanson, Markets for Telling CEOs to Step Down, GMU.EDU (Apr. 26, 1996), http://mason.gmu.edu/~rhanson/dumpceo.html [https://perma.cc/Q6QD-4H4G]. These contracts also act as a potential hedge of political or event risk for companies, see also MICHAEL ABRAMOWICZ, PREDICTOCRACY: MARKET MECHANISMS FOR PUBLIC AND PRIVATE DECISION MAKING 87.Limiting PrinciplesThe above has shown the benefits that come from judicial recognition and enforcement of smart contracts. Some of the believers in smart contracts think that these benefits can be appreciated without judicial recognition and enforcement because smart contracts can supplant traditional judicial systems enforced by a centralized state.139 See, e.g., Atzori, Marcella, Blockchain Technology and Decentralized Governance: Is the State Still Necessary? (Dec. 1, 2015) (unpublished manuscript), https://ssrn.com/abstract=2731132 [https://perma.cc/B2F6-8UBX]. This section of the Articleanalyzes the positive question of where the outer-bound of a states acceptance of smart contracts lies. Three examples along a spectrum will demonstrate the degrees to which states and their judicial systems can approach smart contracts. On the one end of the spectrum is permitting the use of smart contracts use and recognizing them in collateral matters, e.g. recognizing a smart contract when going through the probate process. On the other end of the spectrum is prohibiting the use of smart contracts or banning certain forms of contractware. Similar to the manner in which non-smart contracts cover a variety of different agreements employment contracts are different from marriage contracts smart contracts will likely be adapted to cover a wide range of subject matter. The application of a particular contract will likely be relevant to which attitude the courts adopt, much as not all non-smart contracts are the same; employment contracts are different than marriage contracts.Starter interrupter devices are illustrative of the permissive side of the spectrum. As was shown, courts have recognized these devices as legitimate and allowed companies to use them to repossess vehicles, provided there is no violation to external laws, including the Uniform Commercial Codes breach of peace provision and the Bankruptcy Code.140 U.C.C. 9-609. How courts treat violations will likely be instructive. Suppose a starter interrupter is placed in a truck that is essential to a business. Instead of merely shutting the car off, this starter interrupter will permanently damage the cars engine, rendering it unusable, if payments are not received on time. Then, suppose the debtor files for Chapter 11 bankruptcy. The debtor-in-possession or trustee could charge that the use of the starter interrupter is a violation of an automatic stay, as it is an attempt by the creditor to control the property of the estate, even though the control is automatic and out of the creditors hands.141 11 U.S.C. 362. The question then put to the court is whether starter interrupter can be used at all if they have such potential.A second example in the middle of the spectrum, would be a modern version of Williams v. Walker-Thomas Furniture Co. In Williams, the court set forth a standard of unconscionability by asking whether the terms of a particular cross-collateralization contract were so unfair that enforcement should be withheld.142 Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 44950 (D.C. Cir. 1965). Imagine, however, that the furniture in that case was installed with contractware that blasted an annoying siren if payment was not received. Further, imagine that this was explicitly agreed to by the debtor ex ante. A court bound by Williams, could easily deem the contract unconscionable. This would leave the court to determine the proper remedy. The court could award damages to account for the harms caused by the automatic execution of the contract, which damaged the collateral in an unacceptable way. In this instance, such a remedy seems appropriate because the damage is not irreparable. It is likely that what the court would do is create a new breaching the of peace doctrine that creditors and the contractware would have to abide by.The final, and most egregious, example is contractware installed into humans. Although certainly a dystopian gedankenexperiment, it is worth imagining a scenario where creditors can install devices into the bodies of debtors and have the device force them into slavery or some state of impaired consciousness if they default. Such a scheme would certainly be unconstitutional as a violation of the Thirteenth Amendment even if the debtors supported the scheme as a way of securing lower interest rates. This is not the interesting question, however. What is worth analyzing is how a court would deal with such installation. Despite consent by each party, the court would likely nullify the contract. But will the court prevent the installation of the contractware into the body? Much more likely than judicial intervention is a legislative solution. States can and have banned objects that are not per se violative of rights, but pose an unacceptable risk to the morals of the community.143 Cf. Ashcroft v. Free Speech Coal., 535 U.S. 234, 251 (2002) (The case reaffirmed that where the speech is neither obscene nor the product of sexual abuse, it does not fall outside the protection of the First Amendment.). This can be a legitimate exercise of the police power of the state, such as, for instance, when the government bans the private possession of bazookas.144 18 U.S.C. 921(a)(4).What the above illustrates is that smart contracts exist in preexisting legal structures that do not unequivocally value party autonomy with respect to the formation and performance of contracts. The central question, however, is whether the state can use prior restraint to prevent the formation of contracts that have the potential to become contrary to public policy, but are not necessarily contrary to public policy themselves.The likely answer is yes. It is hard to imagine a state sitting idly by while devices are installed to self-enforce contracts that are contrary to the states own interests and policies. Although, the proposition is not black-and-white. When dealing with any question of prior restraint, the magnitude of the mischief must be weighed against the likelihood of its occurrence. The Supreme Courts First Amendment jurisprudence provides a useful model; n that realm, the Court has erred on the side of respecting autonomy and policing ex post.145 See, e.g., Near v. Minnesota, 283 U.S. 697 (1931). In this instance, contractware ought not be analyzed in toto, but discrete devices and software applications should be evaluated. This evaluation should be based upon the rights implications, as opposed to the particular functions of the contractware device. So, while devices that prevent the usage of personal property could be allowed, implants that enforce unconstitutional contracts or contracts that are unconscionable or void against public policy would not be permitted.These are questions for judges to decide on a case-by-case basis.146 Lichtman, supra note 101, at 257 (arguing that private self-help mechanisms should be analyzed on a case-by-case basis). Common law principles ought to form the background of such analysis.ConclusionThe creators of smart contracts have invited society to a party they are throwing. They say that this party has better food, booze, and music than the party being thrown down the street. But the other party has all of the people, even if the amenities are not as good. Whether society shows up to this new party is an open question. This is because legacy systems exist for a reason. By definition, they work. Both switching costs and uncertainty stand as barriers to the adoption of any new technology. Yet if the value of the new technology is overwhelming, such a change is more likely to occur.One way of reducing uncertainty is by situating the new in the old. While there may be many barriers to the adoption of smart contracts, legal uncertainty need not be one of them. Courts need not upend extant jurisprudence to accommodate smart contracts.. All Rights Reserved. 2016.Privacy | Alumni This is not to say that contracts cannot be executed without computers. In a world without vending machines, in the vast majority of instances, a seller would give the soda once money has been tendered. But introducing humans into the equation does introduce some uncertainty and cost. By some measures, employee theft accounts for over $40 billion a year in the United States. See Anne Fisher, U.S. retail workers are No. 1. .. in employee theft, FORTUNE (Jan. 26, 2015), http://fortune.com/2015/01/26/us-retail-worker-theft/ [https://perma.cc/7F86-G8D3]. The courts would be needed to rectify this, but as mentioned, the costs of litigation, especially for these relatively small amounts (they are likely to be small by their very nature) make such litigation prohibitive.The contract at its most essential can be written in the following way: Seller agrees to release one can of Dr. Browns Cel-Ray Soda if Buyer inserts one Krugerrand into this vending machine. The Seller here is not the vending machine, in contradistinction to our Whiteacre property sale, where Richard was the Seller. Instead, the Seller is effectively outsourcing the contract execution, with the vending machine merely acting as his third-party distribution agent and enforcement mechanism. Buyer inserts his Krugerrand, and vending machine performs by releasing one Cel-Ray Soda.During the transaction, the computer inside of the vending machine is presented with a factual situation, i.e. the insertion of a Krugerrand and selection of Cel-Ray as the Buyers choice. Next, the vending machine applies the contractual rules to the instant case, leading to a judgment output, i.e. dispensing one Cel-Ray Soda, which is the benefit of the bargain. The computer then directs the physical mechanisms of the vending machine to enforce the contract between the Buyer and the Seller. Had the factual situation been slightly different, for example Buyer inserted a penny, then our computer-judge would have rendered a different output and would have directed the vending machine to a different action, i.e. returning the penny without dispensing the Cel-Ray Soda.One reason for the existence of contractware may be the lowering of costs through the ensuring of performance without recourse to the courts.28 The lowering of transaction costs does not mean their abolition. When vending machines malfunction a typical self-help remedy is to pound the machine with a fist in the manner of Fonzie. A manufacturers allowance of this remedy may lower the cost of enforcement by avoiding the courts, but it may also increase the risk of illegitimate whacks to the machine. The point here being that so long as self-help is a less costly alternative than judicial recourse, it is a worthwhile alternative. As we will be shown now, another reason may be the subordination of state authority to individual autonomy. The vending machine demonstrates this clearly in both its utilitarian and utopian purposes.The Radical History of the Vending MachineThe first known reference to a vending machine came in 215 B.C. in Pneumatika, a book by the Greek mathematician, Hero.29 See G.R. SCHREIBER, A CONCISE HISTORY OF VENDING IN THE U.S.A. 9 (Vend 1961). In it, he detailed a machine that dispensed holy water for use in Egyptian temples. The user would put a coin in a particular spot, which would trigger a lever that opened a valve that dispensed the water.30 See SEGRAVE, supra note 35, at 4. Fear of divine retribution would combat the use of fake coins.Although coin-activated snuff and tobacco boxes were used in England in the 17th century, one of the most conceptually important early uses of vending machines was as a means of evading censors.31 Id. at 5. The British bookseller, Richard Carlile, invented a book-dispensing machine so as to avoid prosecution under the countrys libel and sedition laws.32 See id. He had been jailed previously and wanted to avoid any future liability, so the idea was to make it impossible for the Crown to prove that any individual bookseller actually sold the blasphemous material.33 Id. He argued that it was purely a contract between the buyer and the machine with the publisher having no formal involvement.Here is Carliles description of the machine as it appeared in The Republican:Perhaps it will amuse you to be informed that in the new Temple of Reason my publications are sold by CLOCKWORK!! In the shop is the dial on which is written every publication for sale: the purchaser enters and turns the hand of the dial to the publication he wants, when, on depositing his money, the publication drops down before him.34 Richard Carlile, To the Republicans of the Island of Great Britain, REPUBLICAN, No. 16 Vol. V, (Apr. 19, 1822).The Crown, however, was not amused. Use of the device was ineffective and both Carlile and his employee were convicted of selling blasphemous literature through the device.35 See SEGRAVE, supra note 35, at 5. Although unsuccessful in this instance, the vending machine demonstrated its ability both to help achieve political and economic ends.36 Opposition to the Crowns system of licensure and seditious libel laws were some of the driving forces behind the First Amendment. MICHAEL PAULSEN ET AL., THE CONSTITUTION OF THE UNITED STATES 839-49 (2d ed. 2013). The fact that Carlile flaunted his attempts to evade prosecution would make this an easy case for the court, but this articlediscussed belowwill deal with the theoretical question of how a court should approach a less flagrant smart contractor. Before moving onto this question, a second technological advancement will be highlighted.Decentralized LedgersAs mentioned above, contractware solves the problem of performing contracts by eliminating the human element ex post. From a technical sense, if nothing intervenes to prevent the machine from working, then, by definition, it will ensure performance. Yet a machine owned by one of the parties of a contract does not solve the problem of interpreting or writing the contract. The problem, briefly stated, is that an independent third party must interpret the contract in accord with the intentions of the parties.37 This is not to say that courts try to divine out party intent to the exclusion of the text of the contract, but rather contract law is about agreements between autonomous parties whose intentions are the foundation of the agreement. This is a problem that public courts often try to solve. Another solution to this problem is blockchain technology.A blockchain is a decentralized collection of data that is verified by members of a peer-to-peer network.38 For an explanation of the mechanics of a blockchain, see Rainer Bohme et al., Bitcoin: Economics, Technology, and Governance, 29 J. ECON. PERSPECTIVES 213, 213-238 (2015). The concept most famously arose in the context of bitcoin, where the data collection is a ledger of time-stamped financial transactions.39 See Nakamoto, supra note 5, at 2, 4. The bitcoin blockchain, like all others, is a solution to the double-spend problem, a variation of the above problem of human interpretation and the possibility of judging ones own case.40 See Jaap-Henk Hoepman, Distributed Double Spending Prevention, ARXIV (2008), https://arxiv.org/pdf/0802.0832.pdf [https://perma.cc/PSX3-MG4D] (describing double spending as the risk that many copies of the same bitstring are spent at different merchants.).Modern industrial society requires trust. As an example, Americans generally trust that corrupt officials have not doctored the states real property records. If a malicious county clerk were to forge a deed, it could cause all sorts of problems for bona fide property owners. Although this is not a huge problem in the developed world indeed, our world is developed because this is not a huge problem in countries with less of a commitment to the rule of law and property rights, property recordation is a problem. Citizens in other countries do not have such trust.41 Laura Shin, Republic of Georgia to Pilot Land Titling on Blockchain with Economist Hernando de Soto, Bitfury, FORBES (Apr. 21, 2016), fury/#1dc086c26550 [https://perma.cc/Q9UD-WNE6]; see also Kenneth W. Dam, Land, Law and Economic Development (John M. Olin Law & Econ., Working Paper No. 272, 2006).Another example of faith that is placed in centralized institutions is in the banking system. Americans generally trust our banking institutions to keep an accurate reading of the balance on our checking accounts. While these banks have redundancies in the form of backup servers, they are still centralized institutions and, in some sense, judges in their own cases until brought before a court. If a bank asserts an individual has a balance of $1,000 and the individual claims a balance of $10,000, then a third party is likely needed to adjudicate the dispute.This is what blockchains seek to solve: the problem of establishing consensus without the need for a centralized repository of information. Blockchains are decentralized collections of data. The unit of a blockchain is a block, which contains certain information, such as credits and debits or property ownership. A block is verified by a large number of computers in a network, called nodes, and then tacked on to the previously verified blocks. This chain of data blocks is known as a blockchain.42 See generally, Bohme, supra note 47.A well-known blockchain is the Bitcoin blockchain; it encodes data that has a market capitalization of $9 billion as of August 28, 2016.43 Market Capitalization, BLOCKCHAIN.INFO, https://blockchain.info/charts/market-cap (last visited Aug. 28, 2016) [https://perma.cc/BYF2-LBYD]. The data stored on each block consists of transactions, which are debits and credits to bitcoin accounts. Murray paid Reuben 10 bitcoins on March 2 at 4 p.m. is an example of a transaction that would be recorded on the Bitcoin blockchain.44 The block would not include the proper names Murray and Reuben, but rather their public addresses. One such public address is: 15KGAfhff1B15nsrhbLYHH9WpHvpCaKPK5. That block of data would then be verified by a large number of nodes and then tacked on to the previous chain, so that the blockchain would be one block longer. As it currently exists, the Bitcoin network has amassed the worlds largest amount of computing power.45 Reuven Cohen, Global Bitcoin Computing Power Now 256 Times Faster than Top 500 Supercomputers Combined, FORBES (Nov. 28, 2013), 828b7 [https://perma.cc/6BWX-9E2C]; Eric Limer, The Worlds Most Powerful Computer Network Is Being Wasted on Bitcoin, GIZMODO (May 13, 2013), was-504503726 [https://perma.cc/N8ZG-R4AF].What makes the Bitcoin blockchain novel is that it relies on a decentralized network to verify the data as valid according to a set of shared rules. Information already contained in a verified blockchain cannot be overwritten without reaching consensus with the entire network to propagate the altered information. So, while this is not to say that the invalid data cannot be posted, a strong effort is needed to do so.46 See, e.g., Michael del Castillo, Ethereum Executes Blockchain Hard Fork to Return DAO Funds, COINDESK (July 20, 2016), dao-investor-funds/ [https://perma.cc/S2DV-7FZE]. In the case of a single bookkeeping instrument, all a malicious actor would have to do to credit himself a million dollars would be to gain access to the instrument. The security of the Bitcoin blockchain and other blockchains is beyond the scope of this Article. Although this has been borne out by recent history, it is an assumption of this paper that individuals will trust blockchains.47 See, e.g., The Trust Machine, ECONOMIST (Oct. 31, 2015), in-could-transform-how-economy-works-trust-machine [https://perma.cc/K5UB-7EV6].The implications for the smart contract are that terms of the contract and the state of facts relating to the performance of the contract can be programmed into a decentralized blockchain that cannot be overridden by any individual malicious or mistaken node. If millions of computers verified that Murray paid Reuben $100 on March 2 at 4 p.m. and these computers are disinterested and do not make computational mistakes, then one can assume with an exceptionally large degree of certainty that Murray did, in fact, pay Reuben $100 on March 2nd at 4 p.m.48 It is possible to nearly instantaneously transfer from U.S. dollars into bitcoins, such that there is an identity between $10 and some amount of bitcoins that would actually be recorded on the blockchain or in the records maintained by the provider of the merchant service.The implications are vast.49 David Yermack, Corporate Governance and Blockchains, J. FIN. (forthcoming Jan. 2017), http://ssrn.com/abstract=2700475 [http://perma.cc/F8VY-CHRL]. Stock recordation, corporate governance, and auditing have all been proposed as areas where blockchains can increase efficiency. Whether the benefits of adopting blockchains outweigh the costs of doing so is beyond the scope of this article.The starter interrupter combined with a decentralized ledger offers a powerful example of the combination between these two technologies. Instead of programming the contractware so that its inputs and outputs are determined and executed by the creditors software, a cars contractware can be programmed so that its inputs and outputs are determined and executed by a neutral blockchain. Suppose the relevant term of the contract is that If Murray does not pay Reuben $100 by March 2nd at 4 p.m., then Murrays car will be rendered immobile, and Reuben can repossess. The contractware will search the blockchain for such a transaction, and if it finds it, will allow the car to start. If it does not find such a transaction, it will prevent the car from starting. Neither of the parties must trust the other for the contract to be performed. They must trust the disinterested blockchain, which is capable of enforcing the relevant terms.The contractware reifies the terms of the contract in such a way that technology can compel performance. The decentralized ledger ensures that such contractware operates in an independent manner, free from the problems of self-help. It therefore makes sense to call it a smart contract because it is able to do more than a traditional contract. It can endogenously enforce an ex ante bargain (contractware) and can also allow neutral, third-party enforcement (decentralized ledger).History of the Idea and Some Preliminary ObservationsSmart contracts have existed long before they were consciously described as such. They are the result of human action, not human design.50 ADAM FERGUSON, AN ESSAY ON THE HISTORY OF CIVIL SOCIETY 305 (5th ed. 1767). This means that contracting parties were incentivized to lower costs without consciously heeding the advice of academics.51 Example of smart contracts throughout history abound. See infra pp pages 15-16. More contemporary uses include subway tokens, bike sharing programs, and E-ZPass.Smart contracts were first described by lawyer and technologist, Nick Szabo, in 1997.52 Nick Szabo, Formalizing and Securing Relationships on Public Networks, 2 FIRST MONDAY (1997), http://ojphi.org/ojs/index.php/fm/article/view/548/469 [https://perma.cc/EWU2-VM35] (discussing the refinement of smart contracts since the early 1990s); see also Mark S. Miller, Computer Security as the Future of Law, Presentation on Aug. 15, 1997, http://www.caplet.com/security/futurelaw/; f0fe84ec57af [https://perma.cc/W49B-S4WU] Szabo defines smart contracts as contractual clauses embedded into hardware and software in such a way that makes breach more expensive.53 See Szabo, supra note 17. (The basic idea behind smart contracts is that many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.). He provides two examples: vending machines and devices for repossessing automobile-collateral. By decreasing the costs of mediation, self-enforcement, and arbitration, Szabo saw smart contracts as representing a fundamental shift in the world away from paper and towards digital systems, like the banking backed by computers and digital databases.54 Id. This shift was not to take place immediately, however, as Szabo recognized the value of the long history of paper.55 Id.Long before Szabo, however, financial institutions were using computer code to facilitate transactions, like options contracts and bookkeeping.56 John Markoff, Hewitt D. Crane, 81, Early Computer Engineer, Is Dead, N.Y. Ts (Jun. 21, 2008), http://www.nytimes.com/2008/06/21/us/21crane.html [https://perma.cc/G6PZ-WS5D]. The real breakthrough for smart contracts came with the advent of bitcoin and the proliferation of blockchain technology. First proposed in 2008, the Bitcoin protocol was a successful experiment in the mass usage of decentralized ledgers, which form an important basis of smart contracts.57 Max Raskin, Realm of the Coin: Bitcoin and Civil Procedure, 20 FORDHAM J. CORP. & FIN. L. 969, 971 (2015).The proliferation of decentralized ledgers led to a new discussion of using technology to enforce agreements between individuals without recourse to third parties. New companies and protocols have aggregated the essential code to write smart contracts. This code exists apart from the bitcoin ecosystem. These new companies are building an ecosystem for experimentation with an implementation of smart contracts.58 See, e.g., Gavin Wood, Ethereum: A Secure Decentralised Generalised Transaction Ledger (Apr. 2014) (unpublished manuscript), http://gavwood.com/paper.pdf [https://perma.cc/6C8D-3CB8]; Vitalik Buterin, Ethereum: A Next-Generation Cryptocurrency and Decentralized Application Platform, BITCOIN MAGAZINE (Jan. 24, 2014), DJQ8-NB7P]. There has been a proliferation of writing about the subject, mostly from a technical or financial perspective.59 See Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology and the Rise of Lex Cryptographia (March 10, 2015) (unpublished manuscript), http://ssrn.com/abstract=2580664 [https://perma.cc/2UGR-ZFFF] (describing and analyzing the benefits and drawbacks of decentralized technology, and predicting the rise of a Lex Cryptographia, which they define as rules administered through self-executing smart contracts and decentralized (autonomous) organizations.).Place in Existing Contract LawA contract is a legally enforceable agreement.60 RESTATEMENT (FIRST) OF CONTRACTS 1 (1932). The novel issue of smart contracts is what happens when an agreement can be enforced not by public law enforcers, but through the terms and mechanisms set forth in the terms of the contract itself. The typical legal action for breach of contract involves an aggrieved party going to a court of law or equity to demand money damages, restitution, or specific performance.61 Id. at 326. With a smart contract, the aggrieved party will need to go to the court to remedy a contract that has already been executed or is in the process of being performed. This is because, by definition, a strong smart contract is already executed or in the process of being executed by the time the court hears the case. So the remedy must come after the fact to undo or alter the agreement in some way.The three phases of contract law this section will address are formation, performance, and breach. Each of these phases will be covered to understand how these new contracts can be placed in the context of traditional doctrines and concepts.FormationThe initial stage of a contractual agreement is not markedly different between smart and traditional contracts. This is because before any contractware can operate, two parties must agree to some set of terms that initiates the program.62 Id. at 3. In the realm of smart contracts, unlike traditional contracts, acceptance comes through performance. An individual can say they will initiate a smart contract, which may be a contract in regular law, but until the program initiates, there is no smart contract. Smart contract code can be posted to a ledger as an offer though. Once an action is taken to initiate acceptance, such as by ceding control over a certain amount of money to the code, the contract is formed.Just as there is bargained-for consideration in a traditional contract, there is consideration in a smart contract. One of the reasons for have the doctrine of consideration is that courts believe that mutuality of obligation distinguishes a contract from a gift, for which parties do not have the same rights of legal enforcement.63 Val D. Ricks, In Defense of Mutuality of Obligation: Why Both Should Be Bound, or Neither, 78 NEB. L. REV. 491, 494 (1999) (Courts have held a promise traded for another promise to be enforceable for well over 400 years, since the early to mid-1500s. Courts currently say that a mutual (or reciprocal, or bargained-for) promise constitutes consideration for a promise, causing it to be enforceable.). As will be shown below, where a gift induces action, that action can serve as a substitute for consideration.64 Id. Smart contracts have the potential to formalize the instances where courts will allow contracts to be enforced. This is because the terms of the smart contract are explicitly laid out and each sides obligations and benefits are immediately apparently.In a contract, the bargain can be presented unilaterally, like a vending machine, or can be bargained-for as in the terms of a loan agreement.65 Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1173 (1983). But what happens in a smart contract when there is no consideration? A foundational contracts case will be analyzed through the lens of both traditional and smart contracts.In Ricketts v. Scothorn, a grandfather promised to his granddaughter a sum of money, inducing her to quit her job. The grandfather dies and the executor of the estate refuses to pay her.66 Ricketts v. Scothorn, 77 N.W. 365 (Neb. 1898). The granddaughter brought an action against the executor of his estate, claiming that she relied on the grandfathers promise. The court held that the daughter could recover money damages because she detrimentally relied on the promise of her grandfather.67 Id.But imagine a situation where the grandfather wrote into the gift-promise code that he or his estate could retain the right to change his mind or explicitly wrote into the code that he or his estate could not change his mind. This would be done using a smart contract. In this instance, it would be impossible for the grandfather to change his mind if the computer program did not allow for a change. The grandfather then writes the terms of this gift-promise into computer language that is readable by his bank including terms that do not allow for revocation.An ability to write into the code options to change ones mind or the mind of ones assignees would make the doctrine of detrimental reliance less important because recipients of gifts could demand that their gifts come with a promise of finality; thus, the ability to recant the promise becomes a disclosed term of the contract
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