Smart Contracts - 0 views
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Whether enforced by a government, or otherwise, the contract is the basic building block of a free market economy.
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A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.
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The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, 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.
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A broad statement of the key idea of smart contracts, then, is to say that contracts should be embedded in the world.
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And where the vending machine, like electronic mail, implements an asynchronous protocol between the vending company and the customer, some smart contracts entail multiple synchronous steps between two or more parties
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POS (Point of Sale)
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EDI (Electronic Data Interchange
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SWIFT
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allocation of public network bandwidth via automated auctions
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Smart contracts reference that property in a dynamic, proactively enforced form, and provide much better observation and verification where proactive measures must fall short.
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The mechanisms of the world should be structured in such a way as to make the contracts (a) robust against naive vandalism, and (b) robust against sophisticated, incentive compatible (rational) breach.
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A third category, (c) sophisticated vandalism (where the vandals can and are willing to sacrifice substantial resources), for example a military attack by third parties, is of a special and difficult kind that doesn't often arise in typical contracting, so that we can place it in a separate category and ignore it here.
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The threat of physical force is an obvious way to embed a contract in the world -- have a judicial system decide what physical steps are to be taken out by an enforcement agency (including arrest, confiscation of property, etc.) in response to a breach of contract
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It is what I call a reactive form of security.
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The need to invoke reactive security can be minimized, but not eliminated, by making contractual arrangements verifiable
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Observation of a contract in progress, in order to detect the first sign of breach and minimize losses, also is a reactive form of security
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A proactive form of security is a physical mechanism that makes breach expensive
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From common law, economic theory, and contractual conditions often found in practice, we can distill four basic objectives of contract design
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observability
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The disciplines of auditing and investigation roughly correspond with verification of contract performance
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verifiability
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The field of accounting is, roughly speaking, primarily concerned with making contracts an organization is involved in more observable
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privity
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This is a generalization of the common law principle of contract privity, which states that third parties, other than the designated arbitrators and intermediaries, should have no say in the enforcement of a contract
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The field of security (especially, for smart contracts, computer and network security), roughly corresponds to the goal of privity.
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enforceability
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Reputation, built-in incentives, "self-enforcing" protocols, and verifiability can all play a strong part in meeting the fourth objective
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Smart contracts often involve trusted third parties, exemplified by an intermediary, who is involved in the performance, and an arbitrator, who is invoked to resolve disputes arising out of performance (or lack thereof)
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In smart contract design we want to get the most out of intermediaries and arbitrators, while minimizing exposure to them
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Legal barriers are the most severe cost of doing business across many jurisdictions. Smart contracts can cut through this Gordian knot of jurisdictions
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Where smart contracts can increase privity, they can decrease vulnerability to capricious jurisdictions
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Secret sharing
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The field of Electronic Data Interchange (EDI), in which elements of traditional business transactions (invoices, receipts, etc.) are exchanged electronically, sometimes including encryption and digital signature capabilities, can be viewed as a primitive forerunner to smart contracts
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One important task of smart contracts, that has been largely overlooked by traditional EDI, is critical to "the meeting of the minds" that is at the heart of a contract: communicating the semantics of the protocols to the parties involved
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There is ample opportunity in smart contracts for "smart fine print": actions taken by the software hidden from a party to the transaction.
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Thus, via hidden action of the software, the customer is giving away information they might consider valuable or confidential, but the contract has been drafted, and transaction has been designed, in such a way as to hide those important parts of that transaction from the customer.
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To properly communicate transaction semantics, we need good visual metaphors for the elements of the contract. These would hide the details of the protocol without surrendering control over the knowledge and execution of contract terms
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Protocols based on mathematics, called cryptographic protocols, tre the basic building blocks that implement the improved tradeoffs between observability, verifiability, privity, and enforceability in smart contracts
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secret key cryptography,
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Public key cryptography
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digital signatures
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blind signature
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Where smart contracts can increase observability or verifiability, they can decrease dependence on these obscure local legal codes and enforcement traditions
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zero-knowledge interactive proof
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digital mix
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Keys are not necessarily tied to identities, and the task of doing such binding turns out to be more difficult than at first glance.
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All public key operation are are done inside an unreadable hardware board on a machine with a very narrow serial-line connection (ie, it carries only a simple single-use protocol with well-verified security) to a dedicated firewall. Such a board is available, for example, from Kryptor, and I believe Viacrypt may also have a PGP-compatable board. This is economical for central sites, but may be less practical for normal users. Besides better security, it has the added advantage that hardware speeds up the public key computations.
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If Mallet's capability is to physically sieze the machine, a weaker form of key protection will suffice. The trick is to hold the keys in volatile memory.
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The data is still vulnerable to a "rubber hose attack" where the owner is coerced into revealing the hidden keys. Protection against rubber hose attacks might require some form of Shamir secret sharing which splits the keys between diverse phgsical sites.
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How does Alice know she has Bob's key? Who, indeed, can be the parties to a smart contract? Can they be defined just by their keys? Do we need biometrics (such as autographs, typed-in passwords, retina scans, etc.)?
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The public key cryptography software package "Pretty Good Privacy" (PGP) uses a model called "the web of trust". Alice chooses introducers whom she trusts to properly identify the map between other people and their public keys. PGP takes it from there, automatically validating any other keys that have been signed by Alice's designated introducers.
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1) Does the key actually belong to whom it appears to belong? In other words, has it been certified with a trusted signature?
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2) Does it belong to an introducers, someone you can trust to certify other keys?
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3) Does the key belong to someone you can trust to introduce other introducers? PGP confuses this with criterion (2). It is not clear that any single person has enough judgement to properly undertake task (3), nor has a reasonable institution been proposed that will do so. This is one of the unsolved problems in smart contracts.
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PGP also can be given trust ratings and programmed to compute a weighted score of validity-- for example, two marginally trusted signatures might be considered as credible as one fully trusted signature
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Notaries Public Two different acts are often called "notarization". The first is simply where one swears to the truth of some affidavit before a notary or some other officer entitled to take oaths. This does not require the notary to know who the affiant is. The second act is when someone "acknowledges" before a notary that he has executed a document as ``his own act and deed.'' This second act requires the notary to know the person making the acknowledgment.
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"Identity" is hardly the only thing we might want map to a key. After all, physical keys we use for our house, car, etc. are not necessarily tied to our identity -- we can loan them to trusted friends and relatives, make copies of them, etc. Indeed, in cyberspace we might create "virtual personae" to reflect such multi-person relationships, or in contrast to reflect different parts of our personality that we do not want others to link. Here is a possible classification scheme for virtual personae, pedagogically presented:
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A nym is an identifier that links only a small amount of related information about a person, usually that information deemed by the nym holder to be relevant to a particular organization or community
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A nym may gain reputation within its community.
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With Chaumian credentials, a nym can take advantage of the positive credentials of the holder's other nyms, as provably linked by the is-a-person credential
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A true name is an identifier that links many different kinds of information about an person, such as a full birth name or social security number
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As in magick, knowing a true name can confer tremendous power to one's enemies
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A persona is any perstient pattern of behavior, along with consistently grouped information such as key(s), name(s), network address(es), writing style, and services provided
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A reputable name is a nym or true name that has a good reputation, usually because it carries many positive credentials, has a good credit rating, or is otherwise highly regarded
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Reputable names can be difficult to transfer between parties, because reputation assumes persistence of behavior, but such transfer can sometimes occur (for example, the sale of brand names between companies).
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Blind signatures can be used to construct digital bearer instruments, objects identified by a unique key, and issued, cleared, and redeemed by a clearing agent.
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The clearing agent prevents multiple clearing of particular objects, but can be prevented from linking particular objects one or both of the clearing nyms who transferred that object
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These instruments come in an "online" variety, cleared during every transfer, and thus both verifiable and observable, and an "offline" variety, which can be transfered without being cleared, but is only verifiable when finally cleared, by revealing any the clearing nym of any intermediate holder who transfered the object multiple times (a breach of contract).
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To implement a full transaction of payment for services, we need more than just the digital cash protocol; we need a protocol that guarantees that service will be rendered if payment is made, and vice versa
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A credential is a claim made by one party about another. A positive credential is one the second party would prefer to reveal, such as a degree from a prestigious school, while that party would prefer not to reveal a negative credential such as a bad credit rating.
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A Chaumian credential is a cryptographic protocol for proving one possesses claims made about onself by other nyms, without revealing linkages between those nyms. It's based around the is-a-person credential the true name credential, used to prove the linkage of otherwise unlinkable nyms, and to prevent the transfer of nyms between parties.
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Another form of credential is bearer credential, a digital bearer instrument where the object is a credential. Here the second party in the claim refers to any bearer -- the claim is tied only to the reputable name of issuing organization, not to the nym or true name of the party holding the credential.
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Smart Property We can extend the concept of smart contracts to property. Smart property might be created by embedding smart contracts in physical objects. These embedded protocols would automatically give control of the keys for operating the property to the party who rightfully owns that property, based on the terms of the contract. For example, a car might be rendered inoperable unless the proper challenge-response protocol is completed with its rightful owner, preventing theft. If a loan was taken out to buy that car, and the owner failed to make payments, the smart contract could automatically invoke a lien, which returns control of the car keys to the bank. This "smart lien" might be much cheaper and more effective than a repo man. Also needed is a protocol to provably remove the lien when the loan has been paid off, as well as hardship and operational exceptions. For example, it would be rude to revoke operation of the car while it's doing 75 down the freeway.
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Smart property is software or physical devices with the desired characteristics of ownership embedded into them; for example devices that can be rendered of far less value to parties who lack possesion of a key, as demonstrated via a zero knowledge interactive proof
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One method of implementing smart property is thru operation necessary data (OND): data necessary to the operation of smart property.
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A smart lien is the sharing of a smart property between parties, usually two parties called the owner and the lienholder.
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Many parties, especially new entrants, may lack this reputation capital, and will thus need to be able to share their property with the bank via secure liens
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What about extending the concept of contract to cover agreement to a prearranged set of tort laws? These tort laws would be defined by contracts between private arbitration and enforcement agencies, while customers would have a choice of jurisdictions in this system of free-market "governments".
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If these privately practiced law organizations (PPLs for short) bear ultimate responsibility for the criminal activities of their customers, or need to insure lack of defection or future payments on the part of customers, they may in turn ask for liens against their customers, either in with contractual terms allowing arrest of customers under certain conditions
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Other important areas of liability include consumer liability and property damage (including pollution). There need to mechanisms so that, for example, pollution damage to others' persons or property can be assessed, and liens should exist so that the polluter can be properly charged and the victims paid. Where pollution is quantifiable, as with SO2 emissions, markets can be set up to trade emission rights. The PPLs would have liens in place to monitor their customer's emissions and assess fees where emission rights have been exceeded.
