Smart Contracts in a Free Society

In light of the recent drama surrounding The DAO's unexpected behavior, it is time we reconsider the use of the word contract. This word is loaded with all kinds of implicit meaning and expectations. Perhaps the most dangerous aspect of contracts is the presumption that they can be enforced at gunpoint.

What is a Contract?

Let's get back to the basis and consider the actual meaning of a contract:

A legal obligation or duty is enforced by a court of law, it can be a debt and the legal responsibility to carry out what the law asks. -- thelawdictionary.com

To summarize, in the event of a dispute, parties ask a judge to make a ruling. After the judge decides, one party is compelled by threat of force to obey the court's ruling. If he does not obey, then he can be arrested for contempt of court. If he resists arrest then he may be shot and killed.

Those of us who believe in the silver rule know that we would never want someone else to kill us for failing to abide by the ruling of a judge whom we did not consent to. Violence and death is just not an acceptable means for a civilized society to resolve conflicts.

What is the problem with Contracts?

The problem is that as soon as you enter a contract with someone, the government presumes to have jurisdiction. They use their jurisdiction to determine whether or not to enforce the terms. Often they will completely ignore the terms and replace them with terms defined by law.

Almost all laws and regulations are based upon restricting the types of contracts that people can enter into. If you attempt to construct a contract that the government does not like, then government courts will not enforce it. I know from personal experience that this isn't limited to things like hiring an assassin, but includes ordinary family affairs.

When going through a divorce my ex-wife and I opted for legally binding arbitration. We both signed a contract agreeing to allow a neutral panel of 3 arbiters decide how to divide our assets, liabilities, and child custody. At the end of the day, the government overturned the ruling of the arbiters. In other words, it is not possible to rely on governments to enforce legitimate contracts in an unbiased manner.

What is the promise of Smart Contracts

The promise of smart contracts is to create a new jurisdiction that is beyond the reach of government courts. Smart contracts are not enforced by violence, but through complex economic interactions of a decentralized community utilizing a common crypto-currency.

Smart contracts are pure information and as such they should be protected under freedom of speech. The result of a contract impacts someone's reputation in the community. Their reputation takes the form of purchasing power of a communities cryptocurrency.

The larger the community and the more economic might placed on its currency, the more powerful the rulings of its contracts can become. These rulings are enforced by everyone in the community having a clear and objective evaluation of who owns what and why.

The Dangers of Mixing Contracts and Smart Contracts

People are starting to realize the benefits of Smart Contracts cannot be had without tradeoffs. In this case, the tradeoff is that programming errors can cause the automatic consensus process to render results that are perceived as unjust.

Almost instantly everyone falls back to the "safety" of contracts. The threat of lawsuits is thrown out by both sides of the dispute. In effect, those calling for lawsuits are begging the government to claim jurisdiction over the interpretation of the smart contracts. They are begging the government to render an opinion on the intent of the parties involved.

This is very dangerous. If the government were to have jurisdiction on judging the intent of the parties, then it might conclude that the intent was a conspiracy to create an illegal joint partnership. The liability would fall on the creators. Rather than just arresting the so-called 'attacker', the government would likely arrest everyone involved in creating The DAO, including investors like the so-called attacker.

It is becoming all too common that people call the police for help, and when the police show up they kill the person they were supposed to help. I am afraid that those who have the mindset that the so-called attacker did something illegal need to be very careful what they wish for.

The Power of Community

At the end of the day, it is the job of any community to ensure there is a sense of justice. This means that to the extent possible, wrongs must be made right. Communities that are able to protect its members from both intentional and accidental injustices are stronger than those who are unable to protect their members. The problem is that with great power comes great responsibility.

Whether or not anyone wants to admit it, every cryptocurrency community has this power and must decide how they will use it. Many people argue that using this power will ultimately cause a smart contract platform to turn into something just as corrupt as we have today. I consider this a slippery slope fallacy.

There is one critical distinction between blockchain hard forks and arbitrary government power. A hardfork does not utilize force. No one is forcing anyone to use a platform or to run the same version of the code. A decision to hardfork must be accepted by the majority of participants and is enforced without any violence.

It is true that ending up on the wrong side of a hardfork is like becoming an economic outcast. The outcast may feel like something has been stolen from them, but the reality is that everyone else just changed their opinion. Individuals do not have a right to any particular reputation.

Free Market Competition

Capital will flow to wherever it is treated best. Countries that have low taxes and favorable / predictable court rulings tend to flourish. Countries that have unpredictable business environment tend to flounder. This same principle will apply to blockchain communities.

The Smart contract industry is still young and capital is learning the hard way that there are risks involved in writing code. The market will have to offer options to mitigate these risks. Options can include: review periods, insurance policies, standardization, and hard forks. Platforms that have insufficient options to mitigate these risks will face challenges in the market.

Conclusion

As we move into a future of smart contracts, we need to do everything we can to keep them outside the jurisdiction of governments. This means we need to be very explicit that there is no legal recourse to losses as a result of bugs in smart contracts. This means that communities must develop alternative systems to ensure that intent is judged fairly and that bugs don't result in disputes that eventually yield jurisdiction to governments.

With respect to Ethereum the process of resolving disputes involves miners voting with their hash power. The process also allows for miners to be bribed. If there is a large enough divide, then two communities will emerge each of which adopts a different philosophy toward who is liable for bugs. The market will then determine which approach has more value.