In the Ethereum mempool, these apex predators take the form of “arbitrage bots.” Arbitrage bots monitor pending transactions and attempt to exploit profitable opportunities created by them. No white hat knows more about these bots than Phil Daian, the smart contract researcher who, along with his colleagues, wrote the Flash Boys 2.0 paper and coined the term “miner extractable value” (MEV).Phil once told me about a cosmic horror that he called a “generalized frontrunner.” Arbitrage bots typically look for specific types of transactions in the mempool (such a DEX trade or an oracle update) and try to frontrun them according to a predetermined algorithm. Generalized frontrunners look for any transaction that they could profitably frontrun by copying it and replacing addresses with their own. They can even execute the transaction and copy profitable internal transactions generated by its execution trace.
By consensus, smart contracts are a revolution in private ordering: they offer guaranteed enforcement, independent of the whims of territorial governments; efficient formation and interpretation; immunity from external interference; and complete deference to the parties’ wishes. Each of these claims is a myth. While smart contracts present themselves as natural and neutral, they are in fact deeply politicized. The Legal Realists tore down the foundations of smart contracts almost a century ago. Advocates for them have not solved the problems of the past—they have forgotten them.This Article offers a new critique of the optimism about smart contracts and desirability of securing mutual agreements by code rather than law. More specifically, this Article takes aim at the assertion that smart contracts can, and should, provide an alternative to traditional contract law. It contends that advocates for smart contracts rely reflexively on deeply contested assumptions from Lochner-era legal thought, including a political commitment to “freedom of contract,” insistence on a division between “public” and “private” spheres, and a minimalist view of the state’s role in managing private law systems of contract and property. More specifically, these assumptions cause smart contract partisans to fundamentally underestimate the role of the state in maintaining a functioning private law regime. This failure to recognize the inevitable extent of state intervention in private law means that smart contracts will create novel distributions of wealth and power that are normatively suspect.Furthermore, this Article draws upon two foundational moments in Internet law—early hopes for a realm beyond territorial governance, and attempts to override copyright law through technology—to demonstrate the errors that advocates and scholars alike commit based on the evanescent technology promise of this new method. Finally, this Article demonstrates that, far from realizing a utilitarian ideal of efficiency, smart contracts are constructed without democratic oversight and governance, which are essential for a legitimate system of private law.Keywords: contracts, legal theory, private law, private law theory, Lochner, smart contracts, law and technology, blockchain, Legal Realism, private order
Smart contracts are written in programming languages rather than in natural languages. This might seem to insulate them from ambiguity, because the meaning of a program is determined by technical facts rather than by social ones.
It does not. Smart contracts can be ambiguous, too, because technical facts depend on socially determined ones. To give meaning to a computer program, a community of programmers and users must agree on the semantics of the programming language in which it is written. This is a social process, and a review of some famous controversies involving blockchains and smart contracts shows that it regularly creates serious ambiguities. In the most famous case, The DAO hack, more than $150 million in virtual currency turned on the contested semantics of a blockchain-based smart-contract programming language.
The European Review of Private Law has a special issue on Smart contracts.
- ‘The Legal Meaning of Smart Contracts’, Riccardo De Caria, Issue 6, pp. 731–751
- ‘The Formation of Blockchain-based Smart Contracts in the Light of Contract Law’, Mateja Durovic, André Janssen, Issue 6, pp. 753–771
- ‘Interpretation of Contracts and Smart Contracts: Smart Interpretation or Interpretation of Smart Contracts?’, Michel Cannarsa, Issue 6, pp. 773–785
- ‘Force Majeure and Excuses in Smart Contracts’, Eric Tjong Tjin Tai, Issue 6, pp. 787–804
- ‘Quandary of Smart Contracts and Remedies: The Role of Contract Law and Self-Help Remedies’, Larry A. Dimatteo, Cristina Poncibó, Issue 6, pp. 805–824
- ‘Blockchain & Data Protection … and Why They Are Not on a Collision Course’, Lokke Moerel, Issue 6, pp. 825–851
- ‘Electronic Platforms: Openness, Transparency & Privacy Issues’, Eliza Mik, Issue 6, pp. 853–870
- ‘Contract Law and Smart Contracts: Property and Security Rights Issues’, Louis-Daniel Muka Tshibende, Issue 6, pp. 871–883
- ‘Smart Contracts as the (new) Power of the Powerless? The Stakes for Consumers’, Oscar Borgogno, Issue 6, pp. 885–902
- ‘Digital Platforms: Regulation and Liability in the EU Law’, Piotr Tereszkiewicz, Issue 6, pp. 903–920
- ‘Will Innovative Technology Result in Innovative Legal Frameworks? – Smart Contracts in China’, Jia Wang, Chen Lei, Issue 6, pp. 921–942
- ‘Smart Contracts: A Synoposis’, Linda Tissaoui, Joyling Liu, Dan M. Marcotte, Issue 6, pp. 943–949
This paper provides an analysis of how concepts pertinent to legal contracts can influence certain aspects of their digital implementation through smart contracts, as inspired by recent developments in distributed ledger technology. We discuss how properties of imperative and declarative languages including the underlying architectures to support contract management and lifecycle apply to various aspects of legal contracts. We then address these properties in the context of several blockchain architectures. While imperative languages are commonly used to implement smart contracts, we find that declarative languages provide more natural ways to deal with certain aspects of legal contracts and their automated management.
Active daily users on Dapps have been plummeting week on week. Diar number crunching shows that there are currently less than 1600 users active on the Top 10 Dapps based on user count. And transactional volume is dwindling alongside dropping users. To make matters a little more bleak, the most used decentralized exchanges, IDEX, ForkDelta and Bancor have seen their user base dwindle to less than 5% from peak in a short few months.
Source: Volume 2 Issue 28 – Diar
Swift developments in the emerging field of blockchain technology have facilitated the birth of ‘smart contracts’: computerised transaction protocols which autonomously execute the terms of a contract. Smart contracts are disintermediated and generally transparent in nature, offering the promise of increased commercial efficiency, lower transaction and legal costs, and anonymous transacting. The business world is actively investigating the use of blockchain technology for various commercial purposes. Whilst questions surround the security and reliability of this technology, and the negative impact it may have upon traditional intermediaries, there are equally significant concerns that smart contracts will encounter considerable difficulty adapting to current legal frameworks regulating contracts across jurisdictions. This article considers the potential issues with legal and practical enforceability that arise from the use of smart contracts within both civil and common law jurisdictions.
Smart contracts are fundamentally bad software engineering, part 666 of a never-ending series — PeckShield have been running an automatic scanner on the public Ethereum blockchain:Built on our earlier efforts in analyzing EOS tokens, we have developed an automated system to scan and analyze Ethereum-based (ERC-20) token transfers. Specifically, our system will automatically send out alerts if any suspicious transactions (e.g., involving unreasonably large tokens) occur.They’ve found a couple of beauties, which they’ve branded “BatchOverflow” and “ProxyOverflow.” These affect multiple ERC-20 tokens — which are the basis for almost all ICOs.The root cause is that smart contract coders just copy each other’s code a lot, because who needs formal methods when you can cut’n’paste’n’bodge.
Another Kind of Radical Market
The book as a whole tends to focus on centralized reforms that could be implemented on an economy from the top down, even if their intended long-term effect is to push more decision-making power to individuals. The proposals involve large-scale restructurings of how property rights work, how voting works, how immigration and antitrust law works, and how individuals see their relationship with property, money, prices and society. But there is also the potential to use economics and game theory to come up with decentralized economic institutions that could be adopted by smaller groups of people at a time.
Perhaps the most famous examples of decentralized institutions from game theory and economics land are (i) assurance contracts, and (ii) prediction markets. An assurance contract is a system where some public good is funded by giving anyone the opportunity to pledge money, and only collecting the pledges if the total amount pledged exceeds some threshold. This ensures that people can donate money knowing that either they will get their money back or there actually will be enough to achieve some objective. A possible extension of this concept is Alex Tabarrok’s dominant assurance contracts, where an entrepreneur offers to refund participants more than 100% of their deposits if a given assurance contract does not raise enough money.
Prediction markets allow people to bet on the probability that events will happen, potentially even conditional on some action being taken (“I bet $20 that unemployment will go down if candidate X wins the election”); there are techniques for people interested in the information to subsidize the markets. Any attempt to manipulate the probability that a prediction market shows simply creates an opportunity for people to earn free money (yes I know, risk aversion and capital efficiency etc etc; still close to free) by betting against the manipulator.
Posner and Weyl do give one example of what I would call a decentralized institution: a game for choosing who gets an asset in the event of a divorce or a company splitting in half, where both sides provide their own valuation, the person with the higher valuation gets the item, but they must then give an amount equal to half the average of the two valuations to the loser. There’s some economic reasoning by which this solution, while not perfect, is still close to mathematically optimal.
One particular category of decentralized institutions I’ve been interested in is improving incentivization for content posting and content curation in social media. Some ideas that I have had include:
- Proof of stake conditional hashcash(when you send someone an email, you give them the opportunity to burn $0.5 of your money if they think it’s spam)
- Prediction markets for content curation(use prediction markets to predict the results of a moderation vote on content, thereby encouraging a market of fast content pre-moderators while penalizing manipulative pre-moderation)
- Conditional payments for paywalled content (after you pay for a piece of downloadable content and view it, you can decide after the fact if payments should go to the author or to proportionately refund previous readers)
And ideas I have had in other contexts:
Twitter scammers: can prediction markets incentivize an autonomous swarm of human and AI-driven moderators to flag these posts and warn users not to send them ether within a few seconds of the post being made? And could such a system be generalized to the entire internet, where these is no single centralized moderator that can easily take posts down?Some ideas others have had for decentralized institutions in general include:
- TrustDavis (adding skin-in-the-game to e-commerce reputations by making e-commerce ratings be offers to insure others against the receiver of the rating committing fraud)
- Circles (decentralized basic income through locally fungible coin issuance)
- Markets for CAPTCHA services
- Digitized peer to peer rotating savings and credit associations
- Token curated registries
- Crowdsourced smart contract truth oracles
- Using blockchain-based smart contracts to coordinate unions
I would be interested in hearing Posner and Weyl’s opinion on these kinds of “radical markets”, that groups of people can spin up and start using by themselves without requiring potentially contentious society-wide changes to political and property rights. Could decentralized institutions like these be used to solve the key defining challenges of the twenty first century: promoting beneficial scientific progress, developing informational public goods, reducing global wealth inequality, and the big meta-problem behind fake news, government-driven and corporate-driven social media censorship, and regulation of cryptocurrency products: how do we do quality assurance in an open society?
All in all, I highly recommend Radical Markets(and by the way I also recommend Eliezer Yudkowsky’s Inadequate Equilibria) to anyone interested in these kinds of issues, and look forward to seeing the discussion that the book generates.