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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.

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

POS (Point of Sale)

EDI (Electronic Data Interchange

SWIFT

allocation of public network bandwidth via automated auctions

Smart contracts reference that property in a dynamic, proactively enforced form, and provide much better observation and verification where proactive measures must fall short.

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.

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.

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

It is what I call a reactive form of security.

The need to invoke reactive security can be minimized, but not eliminated, by making contractual arrangements verifiable

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

A proactive form of security is a physical mechanism that makes breach expensive

From common law, economic theory, and contractual conditions often found in practice, we can distill four basic objectives of contract design

observability

The disciplines of auditing and investigation roughly correspond with verification of contract performance

verifiability

The field of accounting is, roughly speaking, primarily concerned with making contracts an organization is involved in more observable

privity

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

The field of security (especially, for smart contracts, computer and network security), roughly corresponds to the goal of privity.

enforceability

Reputation, built-in incentives, "self-enforcing" protocols, and verifiability can all play a strong part in meeting the fourth objective

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)

In smart contract design we want to get the most out of intermediaries and arbitrators, while minimizing exposure to them

Legal barriers are the most severe cost of doing business across many jurisdictions. Smart contracts can cut through this Gordian knot of jurisdictions

Where smart contracts can increase privity, they can decrease vulnerability to capricious jurisdictions

Secret sharing

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

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

There is ample opportunity in smart contracts for "smart fine print": actions taken by the software hidden from a party to the transaction.

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.

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

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

secret key cryptography,

Public key cryptography

digital signatures

blind signature

Where smart contracts can increase observability or verifiability, they can decrease dependence on these obscure local legal codes and enforcement traditions

zero-knowledge interactive proof

digital mix

Keys are not necessarily tied to identities, and the task of doing such binding turns out to be more difficult than at first glance.

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.

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.

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.

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.)?

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.

1) Does the key actually belong to whom it appears to belong? In other words, has it been certified with a trusted signature?

2) Does it belong to an introducers, someone you can trust to certify other keys?

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.

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

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.

"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:

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

A nym may gain reputation within its community.

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

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

As in magick, knowing a true name can confer tremendous power to one's enemies

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

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

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).

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.

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

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).

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

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.

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.

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.

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.

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

One method of implementing smart property is thru operation necessary data (OND): data necessary to the operation of smart property.

A smart lien is the sharing of a smart property between parties, usually two parties called the owner and the lienholder.

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

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".

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

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.

Open Network

If scientific administrators aspire to accelerate innovation by encouraging team science, they must address this issue. Our university system should reward scientists who are honest and fair in their dealings with fellow investigators.  Specific protocols for guiding research and managing disagreements must be designed. Accurate laboratory records should reflect appropriate credit, and websites sponsored by international scientific organizations should be similarly designed to display accurate attribution of preliminary scientific discoveries. In addition, journals could post final drafts of papers before publication, allowing anonymous comments during a probationary period. If a substantive objection arises, the journal should require revisions or even reject the paper.

s. Euclidean space

metric space

topological space

Physical space is the extension surrounding a point

My presentation of a general theory of living systems will employ two sorts of spaces in which they may exist, physical or geographical space and conceptual or abstracted spaces

Physical or geographical space

Euclidean space

distance

moving

maximum speed

objects moving in such space cannot pass through one another

friction

The characteristics and constraints of physical space affect the action of all concrete systems, living and nonliving.

information can flow worldwide almost instantly

Physical space is a common space

Most people learn that physical space exists, which is not true of many spaces

They can give the location of objects in it

Conceptual or abstracted spaces

Peck order

Social class space

Social distance

Political distance

life space

semantic space

Sociometric space

A space of time costs of various modes of transportation

space of frequency of trade relations among nations.

A space of frequency of intermarriage among ethnic groups.

These conceptual and abstracted spaces do not have the same characteristics and are not subject to the same constraints as physical space

Social and some biological scientists find conceptual or abstracted spaces useful because they recognize that physical space is not a major determinant of certain processes in the living systems they study

interpersonal relations

one cannot measure comparable processes at different levels of systems, to confirm or disconfirm cross-level hypotheses, unless one can measure different levels of systems or dimensions in the same spaces or in different spaces with known transformations among them

It must be possible, moreover, to make such measurements precisely enough to demonstrate whether or not there is a formal identity across levels

fundamental "fourth dimension" of the physical space-time continuum

is the particular instant at which a structure exists or a process occurs

or the measured or measurable period over which a structure endures or a process continues.

durations

speeds

rates

accelerations

irreversible unidirectionality of time

thermodynamics

negentropy

"time's arrow."

Matter and energy

Matter is anything which has mass (m) and occupies physical space.

Energy (E) is defined in physics as the ability to do work.

kinetic energy

potential energy

rest mass energy

Mass and energy are equivalent

Living systems need specific types of matter-energy in adequate amounts

Energy for the processes of living systems is derived from the breakdown of molecules

Any change of state of matter-energy or its movement over space, from one point to another, I shall call action.

It is one form of process.

information (H)

Transmission of Information

Meaning is the significance of information to a system which processes it: it constitutes a change in that system's processes elicited by the information, often resulting from associations made to it on previous experience with it

Information is a simpler concept: the degrees of freedom that exist in a given situation to choose among signals, symbols, messages, or patterns to be transmitted.

The set of all these possible categories (the alphabet) is called the ensemble or repertoire

.) The unit is the binary digit, or bit of information

. The amount of information is measured as the logarithm to the base 2 of the number of alternate patterns

Signals convey information to the receiving system only if they do not duplicate information already in the receiver. As Gabor says:

[The information of a message can] be defined as the 'minimum number of binary decisions which enable the receiver to construct the message, on the basis of the data already available to him.'

meaning cannot be precisely measured

Information is the negative of uncertainty.

information is the amount of formal patterning or complexity in any system.

The term marker was used by von Neumann to refer to those observable bundles, units, or changes of matter-energy whose patterning bears or conveys the informational symbols from the ensemble or repertoire.

If a marker can assume n different states of which only one is present at any given time, it can represent at most log2n bits of information. The marker may be static, as in a book or in a computer's memory

Communication of almost every sort requires that the marker move in space, from the transmitting system to the receiving system, and this movement follows the same physical laws as the movement of any other sort of matter-energy. The advance of communication technology over the years has been in the direction of decreasing the matter-energy costs of storing and transmitting the markers which bear information.

There are, therefore, important practical matter-energy constraints upon the information processing of all living systems exerted by the nature of the matter-energy which composes their markers.

organization is based upon the interrelations among parts.

If two parts are interrelated either quantitatively or qualitatively, knowledge of the state of one must yield some information about the state of the other. Information measures can demonstrate when such relationships exist

The disorder, disorganization, lack of patterning, or randomness of organization of a system is known as its entropy (S)

the statistical measure for the negative of entropy is the same as that for information

entropy becomes a measure of the probability

Increase of entropy was thus interpreted as the passage of a system from less probable to more probable states.

according to the second law, a system tends to increase in entropy over time, it must tend to decrease in negentropy or information.

therefore no principle of the conservation of information

The total information can be decreased in any system without increasing it elsewhere

but it cannot be increased without decreasing it elsewhere

. Making one or more copies of a given informational pattern does not increase information overall, though it may increase the information in the system which receives the copied information.

transforms information into negative entropy

smallest possible amount of energy used in observing one bit of information

calculations of the amount of information accumulated by living systems throughout growth.

the concept of Prigogine that in an open system (that is one in which both matter and energy can be exchanged with the environment) the rate of entropy production within the system, which is always positive, is minimized when the system is in a steady state.

in systems with internal feedbacks, internal entropy production is not always minimized when the system is in a stationary state. In other words, feedback couplings between the system parameters may cause marked changes in the rate of development of entropy. Thus it may be concluded that the "information flow" which is essential for this feedback markedly alters energy utilization and the rate of development of entropy, at least in some such special cases which involve feedback control. While the explanation of this is not clear, it suggests an important relationship between information and entropy

amount of energy actually required to transmit the information in the channel is a minute part of the total energy in the system, the "housekeeping energy" being by far the largest part of it

In recent years systems theorists have been fascinated by the new ways to study and measure information flows, but matter-energy flows are equally important. Systems theory is more than information theory, since it must also deal with energetics - such matters as

the flow of raw materials through societies

Only a minute fraction of the energy used by most living systems is employed for information processing

I have noted above that the movement of matter-energy over space, action, is one form of process. Another form of process is information processing or communication, which is the change of information from one state to another or its movement from one point to another over space

Communications, while being processed, are often shifted from one matter-energy state to another, from one sort of marker to another

transformations go on in living systems

One basic reason why communication is of fundamental importance is that informational patterns can be processed over space and the local matter-energy at the receiving point can be organized to conform to, or comply with, this information

the delivery of "flowers by telegraph."

Matter-energy and information always flow together

Information is always borne on a marker

. Conversely there is no regular movement in a system unless there is a difference in potential between two points, which is negative entropy or information

If the receiver responds primarily to the material or energic aspect, I shall call it, for brevity, a matter-energy transmission; if the response is primarily to the information, I shall call it an information transmission

Moreover, just as living systems must have specific forms of matter-energy, so they must have specific patterns of information

example

example

develop normally

have appropriate information inputs in infancy

pairs of antonyms

one member of which is associated with the concept of information (H)

the other member of which is associated with its negative, entropy (S)

System

A system is a set of interacting units with relationships among them

.The word "set" implies that the units have some common properties. These common properties are essential if the units are to interact or have relationships. The state of each unit is constrained by, conditioned by, or dependent on the state of other units. The units are coupled. Moreover, there is at least one measure of the sum of its units which is larger than the sum of that measure of its units.

Conceptual system

Units

terms

Relationships

a set of pairs of units, each pair being ordered in a similar way

expressed by words

or by logical or mathematical symbols

operations

The conceptual systems of science

observer

selects

particular sets to study

Variable

Each member of such a set becomes a variable of the observer's conceptual system

conceptual system may be loose or precise, simple or elaborate

Indicator

an instrument or technique used to measure fluctuations of variables in concrete systems

Function

a correspondence between two variables, x and y, such that for each value of x there is a definite value of y, and no two y's have the same x, and this correspondence is: determined by some rule

Any function is a simple conceptual system

Parameter

An independent variable through functions of which other functions may be expressed

The state of a conceptual system

the set of values on some scale, numerical or otherwise, which its variables have at a given instant

Formal identity

variables

varies comparably to a variable in another system

If these comparable variations are so similar that they can be expressed by the same function, a formal identity exists between the two systems

Relationships between conceptual and other sorts of systems

Science advances as the formal identity or isomorphism increases between a theoretical conceptual system and objective findings about concrete or abstracted systems

A conceptual system may be purely logical or mathematical, or its terms and relationships may be intended to have some sort of formal identity or isomorphism with units and relationships empirically determinable by some operation carried out by an observer

Concrete system

a nonrandom accumulation of matter-energy, in a region in physical space-time, which is organized into interacting interrelated subsystems or components.

Units

are also concrete systems

Relationships

spatial

temporal

spatiotemporal

causal

Both units and relationships in concrete systems are empirically determinable by some operation carried out by an observer

patterns of relationships or processes

The observer of a concrete system

distinguishes a concrete system from unorganized entities in its environment by the following criteria

physical proximity of its units

similarity of its units

common fate of its units

distinct or recognizable patterning of its units.

Their boundaries are discovered by empirical operations available to the general scientific community rather than set conceptually by a single observer

Variable of a concrete system

Any property of a unit or relationship within a system which can be recognized by an observer

which can potentially change over time, and whose change can potentially be measured by specific operations, is a variable of a concrete system

Examples

number of its subsystems or components, its size, its rate of movement in space, its rate of growth, the number of bits of information it can process per second, or the intensity of a sound to which it responds

A variable is intrasystemic

not to be confused with intersystemic variations which may be observed among individual systems, types, or levels.

The state of a concrete system

its structure

represented by the set of values on some scale which its variables have at that instant

Open system

Most concrete systems have boundaries which are at least partially permeable, permitting sizable magnitudes of at least certain sorts of matter-energy or information transmissions to pass them. Such a system is an open system. In open systems entropy may increase, remain in steady state, or decrease.

Closed system

impermeable boundaries through which no matter-energy or information transmissions of any sort can occur is a closed system

special case

No actual concrete system is completely closed

In closed systems, entropy generally increases, exceptions being when certain reversible processes are carried on which do not increase it. It can never decrease.

Nonliving system

the general case of concrete systems, of which living systems are a very special case. Nonliving systems need not have the same critical subsystems as living systems, though they often have some of them

Living system

a special subset of the set of all possible concrete systems

They all have the following characteristics:

open systems

inputs

throughputs

outputs

of various sorts of matter-energy and information.

maintain a steady state of negentropy even though entropic changes occur in them as they do everywhere else

by taking in inputs

higher in complexity or organization or negentropy

than their outputs

The difference permits them to restore their own energy and repair breakdowns in their own organized structure.

In living systems many substances are produced as well as broken down

To do this such systems must be open and have continual inputs of matter-energy and information

entropy will always increase in walled-off living systems

They have more than a certain minimum degree of complexity

They either contain genetic material composed of deoxyribonucleic acid (DNA)

or have a charter

blueprint

program

of their structure and process from the moment of their origin

may also include nonliving components.

They have a decider, the essential critical sub-system which controls the entire system, causing its subsystems and components to interact. Without such interaction under decider control there is no system.

other specific critical sub-systems or they have symbiotic or parasitic relationships with other living or nonliving systems

Their subsystems are integrated together to form actively self-regulating, developing, unitary systems with purposes and goals

They can exist only in a certain environment

change in their environment

produces stresses

Totipotential system

capable of carrying out all critical subsystem processes necessary for life is totipotential

Partipotential system

does not itself carry out all critical subsystem processes is partipotential

A partipotential system must interact with other systems that can carry out the processes which it does not, or it will not survive

parasitic

symbiotic

Fully functioning system

when it

Partially functioning system

it must do its own deciding, or it is not a system

Abstracted system

Units

relationships abstracted or selected by an observer in the light of his interests, theoretical viewpoint, or philosophical bias.

Some relationships may be empirically determinable by some operation carried out by the observer, but others are not, being only his concepts

Relationships

The relationships mentioned above are observed to inhere and interact in concrete, usually living, systems

these concrete systems are the relationships of abstracted systems.

The verbal usages of theoretical statements concerning abstracted systems are often the reverse of those concerning concrete systems

An abstracted system differs from an abstraction, which is a concept

representing a class of phenomena all of which are considered to have some similar "class characteristic." The members of such a class are not thought to interact or be interrelated, as are the relationships in an abstracted system

Abstracted systems are much more common in social science theory than in natural science.

are oriented toward relationships rather than toward the concrete systems

spatial arrangements are not usually emphasized

their physical limits often do not coincide spatially with the boundaries of any concrete system, although they may.

important difference between the physical and biological hierarchies, on the one hand, and social hierarchies, on the other

Most physical and biological hierarchies are described in spatial terms

we propose to identify social hierarchies not by observing who lives close to whom but by observing who interacts with whom

intensity of interaction

in most biological and physical systems relatively intense interaction implies relative spatial propinquity

To the extent that interactions are channeled through specialized communications and transportation systems, spatial propinquity becomes less determinative of structure.

PARSONS

the unit of a partial social system is a role and not the individual.

culture

cumulative body of knowledge of the past, contained in memories and assumptions of people who express this knowledge in definite ways

The social system is the actual habitual network of communication between people.

RUESCH

A social system is a behavioral system

It is an organized set of behaviors of persons interacting with each other: a pattern of roles.

The roles are the units of a social system

On the other hand, the society is an aggregate of social subsystems, and as a limiting case it is that social system which comprises all the roles of all the individuals who participate.

What Ruesch calls the social system is something concrete in space-time, observable and presumably measurable by techniques like those of natural science

To Parsons the system is abstracted from this, being the set of relationships which are the form of organization. To him the important units are classes of input-output relationships of subsystems rather than the subsystems themselves

system is a system of relationship in action, it is neither a physical organism nor an object of physical perception

evolution

differentiation

growth

from earlier and simpler forms and functions

capacities for specializations and gradients

[action] is not concerned with the internal structure of processes of the organism, but is concerned with the organism as a unit in a set of relationships and the other terms of that relationship, which he calls situation

Abstracted versus concrete systems