Aaron Powell: Welcome to Free Thoughts.
I'm Aaron Powell.
Trevor Burrus: And I'm Trevor Burrus.
Aaron Powell: Joining us news Kate Sills.
She's a software developer and researcher
in the area of smart contracts.
Welcome to Free Thoughts Kate.
Kate Sills: Well, thanks for having me.
Aaron Powell: What's a smart contract?
Kate Sills: Yeah, so that's a really good
question and it's actually a really contentious
issue in the cryptocurrency community.
So, let me start with what a smart contract
is not.
[00:00:30] Despite the name, a smart contract
has nothing to do with artificial intelligence
or machine learning or robotics or anything
like that.
A smart contract is actually just dumb code.
It's also not a legally binding contract,
which I think there's a lot of people off.
But what it is a way that people can create
credible commitments with one another and
you can do this with strangers even across
the globe.
It's really revolutionary but I think the
name itself, [00:01:00] like people have a
tendency to view new technology in terms of
old technology, so I call this the horseless
carriage problem because when cars first came
out, they were known as horseless carriages
and I think people are doing the same thing
with smart contracts.
Just because of the name they're comparing
them to legal contracts but they're not legally
binding and they have a lot of differences
than a legal contract.
Just like how a car solves the same problem
as a carriage, [00:01:30] both legal contracts
and smart contracts solve the problem of commitments.
The original problem going back to like Thomas
Hobbes in 1651 with Leviathan was how do you
get people to actually keep their promises.
How do you enforce that?
Because he said words alone aren't enough
for you to force someone to keep their promises,
you need some kind of coercive power over
them both.
So, it was assumed that [00:02:00] government
was the way to do that but this is a way to
do that without government coercion.
Trevor Burrus: So contracts to a lawyer means
a promise that the government will enforce
basically.
It has to have these characteristics as people
make promises like I promise to pick you up
tomorrow and the distinction is that if I
don't you can get the government to either
compensate or do something to say you reneged
on this promise in a way that is unacceptable.
So you said contract is a wrong word for this.
Do you have a word you prefer, [00:02:30]
because I see this constantly in the blockchain
world where the metaphors might as you said,
if you have a difficulty here, even mining,
that's like a bad metaphor in its own way.
Would there be some better way of calling
them, do you think?
Like are they itemized trustless agreement
systems or something like that?
Kate Sills: Yeah.
I like the word or I like the phrase self-enforcing
commitments because I think that's what they
are.
Once you release the code and it goes out
to the blockchain, [00:03:00] it's automatically
enforced.
And I think the commitment part really puts
into perspective the importance of it.
You're able to make agreements with all of
these different kinds of people even if you
don't personally know them, you don't even
know what the reputation is.
And so, I like the term self-enforcing commitments.
Aaron Powell: What's the relationship between
smart contracts and blockchain?
The notion that we could have contracts or
contract like agreement written [00:03:30]
in code could've existed, I mean as long as
we've had code.
But these always get talked about in the context
of blockchain technology.
So is there something about blockchain technology
that enables these, these possible before?
Kate Sills: Yeah, yeah, that's a really good
point.
Well, we've always had kind of an electronic
version of contract.
So there's like EDI systems where the contract
itself is encoded and businesses will exchange
information that way.
But what is really important about [00:04:00]
smart contracts is that they're enforced on
the blockchain so they're enforced by a consensus
of your peers.
So each computer that's connected to this
network is actually running that code.
And if they don't come to the same conclusion
as all the other computers in the network
then the consensus breaks down.
To me, the really special thing is that having
something enforced by the consensus of your
peers is something that we've never been able
to do before, the opportunity costs have been
too high to try to do that, right?
[00:04:30] In the time of the founding fathers,
if you were doing that you'd have to like
you know send letters to everyone.
It's a technological issue that we've been
able to overcome.
Trevor Burrus: Which I guess, kind of the
letters thing reminds me of, because I read
a lot about the founding, you go to a new
city and someone like George Washington might
give you a letter of introduction to take
to someone that he knew in that city because
you don't have a reputation and that's sort
of the very, very basic way of [00:05:00]
trying to get this kind of reputation economy
as opposed to, all these people sent letters
and said this person as is reputable and they
all agreed on it and they did it very quickly
which is kind of what the blockchain does.
When it comes to the blockchain from what
I know about Bitcoin a cryptocurrencies you
have this other proof of work issue where
you have one computer try to solve a very
difficult problem which makes it rare.
Would that be a part of the smart contract
[00:05:30] in the same way that it is for
Bitcoin or ether as a currency for example?
Kate Sills: Yeah.
So proof of work or proof of stake, they have
multiple different ways of doing it but those
are all ways to secure the system itself and
then smart contracts work on top of that system.
Let's see, you can think of it as like, so
when you're trying to create a ledger that
everyone agrees on, it's almost like internet
voting.
The problem of internet voting is someone
could just create [00:06:00] multiple accounts
and be able to vote multiple times.
Trevor Burrus: Like every IMDB movie page.
Kate Sills: Yes.
So you have huge problems with that.
So the way that you cut that down is to make
sure that there's no way that someone can
actually create multiple accounts very easily
and the way to ensure that is to make them
go through all of this work just to be able
to have any say in the process.
The system itself is secured by proof of work
and then smart contracts are built on top
of that.
[00:06:30] So the code is run, so like the
smallest smart contract is just a transaction.
You're just sending money from one account
to another.
But you can add conditions to that.
So you could say, you know, only send this
after a certain time and the money would sit
in that smart contract until that time.
Trevor Burrus: Maybe that gets into more of
the details that it would be upon x, the code
would say upon when x happened then release
the money.
Is that the block, is that [00:07:00] part
of, well the thing that would get into the
blockchain or am I just, see this is, every
time I talk about coding, Aaron knows more
about coding than I do he's just looking at
me like I'm a crazy person because I don't
.... How does that actually become part of
the block?
Kate Sills: So you have to write the code
to the blockchain and that gets put into the
blockchain by a miner or depending on what
platform you're in baker, whatever [00:07:30]
they're calling it.
So one example of a smart contract might be
like an options contract.
That's pretty easy to write in code.
You would just say I am giving someone the
option to buy this thing, maybe, you know,
it's a stock or what have you at a certain
price by a certain time.
So all of that logic can be encoded pretty
simply.
Aaron Powell: So we typically hear about these
[00:08:00] within the context of Ethereum
but the big blockchain crypto thing that has
all the attention is Bitcoin.
Why is this an Ethereum thing and could this
be or is this also a Bitcoin thing?
Kate Sills: So Bitcoin does have smart contracts,
they're just very, very simple.
So like the tools that you can use in Bitcoin
are like checking someone's electronic signature
to make sure that it's [00:08:30] correct
that they have the authority to send something.
You can do what's called a multisig wallet
which is like saying that like two out of
three parties have to sign in order for a
transaction to happen.
But if you want to do more complicated things
which in most cases you do, you need to have
more tools to use.
And so that's what Ethereum and some other
platforms have introduced is just more conditions
that you can use, like you want to do something
conditioned on a timestamp, things [00:09:00]
like that.
Trevor Burrus: When we talk about Ethereum
there's another thing that always kind of
confused me, the term built on, when we say
this is being built on Ethereum.
Does this just mean that the Ethereum coding
platform is sort of the backdrop of this?
Is that all that's really saying because I
hear, they say these smart contacts are being
built on Ethereum or even some websites and
stuff are being built on Ethereum.
Is it just the background coding.
Is that really what we're talking about?
Kate Sills: Yeah, so the code will be [00:09:30]
run on one of these platforms and that just
means that certain computers will choose to
be part of the Ethereum network or the Bitcoin
network or whatever it is and they'll be running
whatever code is pushed up to the blockchain.
So, when people are saying this is built on
the Ethereum platform or this is built on
the Bitcoin platform, what they're saying
is that the code when it's actually run is
going to be run just like any of the regular
transactions and it's going to be confirmed
by all of the computers in the network.
Trevor Burrus: And [00:10:00] if you're one
of the computers that's confirming a smart
contract, would you get ether from doing that,
by doing the computation out of the blockchain,
would you get some ether for that?
Kate Sills: Potentially.
Trevor Burrus: Or why would you do it otherwise?
Kate Sills: One way is that people have interest
in just securing the network and checking
that it's correct.
Trevor Burrus: Like Wikipedia I guess.
Kate Sills: Yeah, yeah.
[00:10:30] If you are the one doing the mining
then you do get a reward for that.
If you're the one adding transactions to the
blockchain and being kind of like the first
one to validate it that way, you do get a
reward for that for sure.
Aaron Powell: The first time I remember hearing
about smart contracts was in a rather negative
light, which was the DAO issue.
So, can you first tell us what that was, what
happened there and then [00:11:00] is that
like the problem for smart contract technology
going forward?
Kate Sills: Yeah, yeah.
So with the DAO what happened was that it
was intended to be a way for people to come
together and invest in different things.
So you would put your money in and then there
was some kind of voting mechanism that would
allow you to choose what it was that the money
would go into.
That is actually a really great use of smart
contracts because once you put the money [00:11:30]
in no one's able to touch it.
If you were to do this without smart contracts
you would have to have an extreme amount of
trust in whoever is holding the money or they'd
have to be closely audited.
That would be a problem, right?
Aaron Powell: So was like kind of crowd sourced
venture capital?
Kate Sills: Yeah, yeah, I think that's a good
description.
But what happened was there was a bug in the
code that allowed someone to take out a whole
bunch of the money.
So, one of the limitations of smart contracts
is that it's only as [00:12:00] secure as
the code that you write and outside of that
there are pretty much no guarantees that there's
any kind of safety.
So you can't go to a court and say, hey, my
smart contract was hacked, please help me
out right.
So they were hacked and a significant amount
of money was taken.
I think it was something like maybe like 15%
of the total Ethereum, ether at the time.
What the Ethereum community decided to do
was to do a hard fork basically to break [00:12:30]
off from that ledger into a new history in
which that hadn't happened.
So, that was the way that they were able to
kind of reclaim that money from the hacker,
which is great that they were able to do that
but unfortunately it does undermine the whole
system of the immutable smart contract where
in a contract if someone is able to be powerful
enough to breach the contract and then get
away with it, that's that undermines your
whole concept of contract.
[00:13:00] It does kind of undermine Ethereum's
goal but I think that was very early in their
history and they've kind of learned from that.
More recently, there have been attacks that
have happened and they haven't done a fork
based on that.
Trevor Burrus: So that's an example of I don't
know if it's a failure so much of smart contracts
because it's an evolving system and you're
looking for holes in evolutionary sense.
What about successes?
Kate Sills: Yeah.
So, I [00:13:30] think there's some really
exciting things being built.
So, one of those things is prediction markets.
So in a prediction market it's like you're
buying a stock but you're betting on the outcome
of an event so it could be whether who gets
elected president, things like that.
The great thing is that it allows everyone
to kind of crowd source their information
the price of that stock is basically an estimation
of what's going [00:14:00] to happen.
So, people, they're putting skin in the game
so it's not just someone going on T.V. able
to state whatever opinions.
These are people who are actually putting
their money into it.
So, the really cool thing is that it's a way
for people to create markets out of pretty
much any kind of information and then an outsider
can go and look at that and see what people
who have insider knowledge on these things
are going to be using that basically.
[00:14:30] So, it's probably the best predictions
that you're going to get.
And there have been studies that have shown
that.
So that's one thing that people are building
right now.
Most things are still in progress and still
being tested in all of that.
So in terms of like clear success cases, I'm
not sure if we have those yet.
I think it's very clear that there's a lot
of potential there.
Aaron Powell: So on the prediction markets,
why would those benefit from smart contracts
and distributed ledger because we have prediction
markets right [00:15:00] now.
We have Betfair and there's that election
betting odds site that aggregates them and
people are doing this through centralized
systems so what's the advantage of doing it
from a smart contract?
Kate Sills: It depends on how much you can
trust that centralized system.
So, in some cases that might be a good idea
and in some cases that might be a bad idea.
And then also one benefit is being able to
create any of your own markets.
If there isn't a market for whatever it is
that they want to bet on they can just create
that.
And then a third thing is eventually [00:15:30]
I think you might be able to package up some
of these bets and take them, you could take
them to a new system.
You can actually take some of these virtualized
commodities and be able to buy and trade those.
Aaron Powell: So it's one thing to say we're
going to write a smart contract that 10 dollars
of mine are going to get held and then on
February 1st are going to get transferred
to Trevor's wallet because February 1st is
[00:16:00] an obvious date.
But for more nebulous things, how do we, what
triggers the smart contract and how do we,
like it can't be, there's a lot of conditionals
that can't be themselves included in the code
because it's like was the average temperature
x higher this year, whatever.
How do you trigger the terms and who gets
to decide?
Kate Sills: So that is a major limitation
of smart contracts is because they run on
the blockchain and anything [00:16:30] that
runs on the blockchain has to be deterministic.
If you have the same inputs, you have to get
the same output.
They can't pull down code from external sources.
So they can't go to a website, let's say a
weather website and pull in the temperature.
But what you can do is you can have people
who push that to the blockchain.
You can't pull it but you can push it to the
botching.
The problem there is that ...
Trevor Burrus: Can you clarify that metaphor
please.
Kate Sills: Yeah, yeah.
So, the [00:17:00] blockchain itself can't
go outside of it but you can always write
data to the blockchain.
Let's say you want to get data about the weather,
you can't go outside and access weather.com
or whatever it is but you could have a trusted
source go to weather.com, look it up and write
it to the blockchain.
The problem there is that you're relying on
these trusted sources and they're called oracles.
There are different ways that people are getting
around [00:17:30] that there are.
These oracles might have certain reputations
and you might be combining like five of them
or something like that so that even if someone
manages to hack a certain website you're not
ruining the consistency of the whole prediction
market system.
So that is definitely a limitation of smart
contracts but I think people are working around
that.
Trevor Burrus: The interesting thing about,
from a legal standpoint is that in contract
law we do talk about [00:18:00] the way that,
you know, it's mutual obligations as a basic
is what a contract is and certain obligations
trigger counter-performance.
And so, let's take a rental contract.
And one of the things I had read about preparing
for this episode is kind of let's say you're
paying rent on February 1st and not that far
in the future, you could do it now, let's
say the house is opened up with a digital
key as opposed to a physical key.
[00:18:30] And so, upon you paying rent and
it gets written and it gets confirmed and
then the digital key opens up the house and
that's how you continue to live in your house.
But there are multiple conditions that go
into like renting a house.
So, the maintenance of the appliances for
example, people kind of [inaudible 00:18:47]
times, like, oh, my fridge doesn't work therefore
I'm not going to pay rent next month and I'm
like, well, the nonexistence of the fridge
obligation does not totally relieve you of
your [00:19:00] obligation to pay rent, In
actuality what we would do is we would negotiate
maybe $200 off your rent but that requires
lawyers and things like that.
That all seems really complex and while you
could just say open the door I paid rent,
that's a smart contract.
But most disputes and rental disputes for
example are not that, they're how much performance
did they give and how much performance do
I have to give and that's not, that's not
code.
It doesn't seem codeable to me [00:19:30]
or maybe it is, I don't know.
Kate Sills: I think that's a really good point.
The way that I see smart contracts is that
they are only useful in certain cases.
They probably wouldn't replace all legal contracts
because you do have that like what is it exposed
negotiation phase where you would want to,
maybe the real world isn't exactly how you
expected and you need to renegotiate.
I think smart contracts are really useful
for when you want a very [00:20:00] severely
binding commitment and like for instance maybe
you want to be able to make a deal with someone
that you don't think would have your best
interest in heart in that kind of negotiation
and you don't want them to be able to back
out of it.
It goes back to kind of like what contract
was for in the first place.
I'd had mentioned Thomas Hobbes in Leviathan
way back in 1651 or whatever.
When [00:20:30] the words aren't enough to
bind men, Thomas Hobbes argued you need some
kind of course of power over them both.
Smart contracts are used for that circumstance
where you don't think that this person will
be able to work things out for you or you
don't think the courts will actually be able
to rule in your favor.
So, maybe you're not in the U.S., maybe you're
in some other country where this person that
you're dealing with is a powerful figure who
might [00:21:00] be able to bribe officials
or the courts won't necessarily rule in your
favor.
Trevor Burrus: Or just have more money for
lawyers.
Kate Sills: Right.
Yeah, yeah, that's a really good point.
So Nobel Prize winning economist Oliver Williamson
has this term legal centralism for the belief
that courts are the best way to enforce contracts
and they're cheap and easy and none of those
things are actually true.
It's not that smart contracts are cheap and
easy either but I think there may be certain
[00:21:30] circumstances in which they're
more valuable than taking it to a court.
It might depend on what country you're in.
There's also the possibility for a private
arbitration on the blockchain so you can write
and read things to the blockchain.
And some of those could be the judgments of
private arbitration.
You can encode things that you want to keep
absolutely immutable and make sure that they
are enforced.
And then you can [00:22:00] also outside of
maybe like the 95% of cases that you think
you can encode.
You could send that out for private arbitration,
like take that judgment as an input to this
function.
And so, there's actually a lot of historical
precedent for this.
So, back in medieval times, the merchant class
when they were going through all of the different
countries and they would have disputes with
people from different countries, there was
no clear legal jurisdiction for them oftentimes.
Even if they were able to [00:22:30] take
it to court, the judge wouldn't necessarily
know anything about what they were doing because
they had all these specialized agreements
and things.
So they kind of created their own judges and
their own private arbitration where they could
just settle things right then and there.
And so, I think this law of merchant can be
used as an example for what could be possible
with private arbitration and blockchain.
Private arbitration is used all the time in
commercial.
Aaron Powell: Just have a technical [00:23:00]
question about these then.
When you were first telling us how they worked
you mentioned so if we're doing a payment
thing that trigger on a certain date, that
if I were going to pay Trevor on a certain
date, this contract would basically take a
set of funds and lock them up within the contract
and then release them to Trevor.
But there's a lot of instances where payment
on a future date or payment on some condition,
we don't want that to take the funds away
from me right now.
[00:23:30] So like a loan or something where
we need to use the funds or I expect to have
enough like rent.
You wouldn't want me to constantly, my rent
to be, all the rent I'm going to pay going
on the future is taken out of my paycheck
now.
Is it possible to do that too or do you always
have to take the funds and lock them up in
this thing before you can even get started?
Kate Sills: For the most part, that is a major
limitation.
You do actually have to take the funds and
lock them up because there is [00:24:00] no
way for and this is kind of a personal protection
is that there's no way for the box chain to
take money out of your account.
There's no like taking money out of your paycheck
or whatever it is that we would use in the
real world to enforce someone to pay their
debts.
So that money actually has to be put away
and there's an opportunity cost for that,
you can't use that money for anything else.
So that is a major limitation of smart contracts
[00:24:30] right now but I think there are
instances in which you might want to put up
a bond or put money into a contract and have
it be secure and that would outweigh whatever
opportunity cost there might be.
Aaron Powell: I wanted to ask about, we talked
about smart contracts within the context of
Bitcoin where they're extremely limited and
within the context of Ethereum where they
weren't more versatile but are there other
technologies out there now or emerging that
are even better and might [00:25:00] enable
us to get around some of these limitations?
Kate Sills: A lot is being done on Ethereum.
There are other platforms like Tezos or Cardano
or DFINIITY, things like that.
Even with the limitations I think there's
still a lot that you can do.
So we had mentioned prediction markets.
A lot of things where it's like you can encode
all of the potential possibilities.
So like financial derivatives.
Like actually Hernando de Soto, the Peruvian
economist who wrote the Mystery of Capital
[00:25:30] he's working right now on a blockchain
solution for a property title.
And the smart contract in that case would
be the exchange, the buying and selling of
property title.
So I think there are cases in which you can
kind of try to encode all of that or at least
like 95% of it, you want that to be enforced.
So, going back to what you said Trevor about
that kind of negotiation after [00:26:00]
the fact, there are lot of cases like Alaska
Packers or whatever that is where you've made
the contract but then once you actually go
into performing on that contract, someone
might realize that you've made that commitment
already and try to take advantage of that.
So if that's something that you're really
worried about, a smart contract might be the
way to ensure that there is no way that you
can renegotiate that once you've already committed.
Aaron Powell: You mentioned Tezos which I
know from your Twitter [00:26:30] feed is
something that you talk a lot about.
So what is Tezos and how does it fit into
all of this?
Kate Sills: Sure.
So Tezos is kind of an Ethereum competitor.
They started around the same time.
Tezos put out a white paper in 2014.
Their focus is trying to make business contracts.
So, the co-founders Kathleen and Arthur Breitman
are kind of from the finance area.
So, they're hoping instead of Ethereum [00:27:00]
which is kind of like smart contracts can
do anything.
Ethereum has this, right now one of their
major apps is this thing called cryptokitties,
which is like virtual trading cards basically
that have like a little cat on them and you
can buy and sell those and like breed them
together and get a new cat.
They've like very much embraced, like, you
know, you can do anything with this but I
think Tezos is interested in using it first
more of these like business use [00:27:30]
cases where you might just want a very simple
contract just to make sure that whatever it
is that you're trying to promise each other
is actually enforced.
Trevor Burrus: When it comes to the writing
the terms the blockchain, how much of a problem
is it getting them, it's hard to take things
off the blockchain if not impossible where
you make a contract, in PayPal, like let's
say I did [00:28:00] a contract with someone,
an eBay and it was upon shipment of this thing
and then the funds are released and given
to them and written to the blockchain and
then when I get it, it's either defective
or maybe it's a counterfeit or something like
that, how can you go back and be like, no,
no, no, no, I want my money back because it's
written into the chain now?
Kate Sills: That's something that people are
working on but part of the security of the
whole system is that [00:28:30] you can't
go back and rewrite things.
So people definitely don't want to undermine
that.
But what you could do is you could have a
what we are talking about a multisig wallet
where if everything goes well, the seller
approves it, you the buyer, you approve the
transaction, you've gotten your good and the
transaction happens.
But if something doesn't go right then there
might be some kind of third party that would
be able to kind of adjudicate that and decide
[00:29:00] where the money should go.
So, there are ways to get around that but
the security of the system is based on ensuring
that you can't actually change anything that's
happened previously in the ledger.
Trevor Burrus: But does that mean that maybe
people, for something like that, the blockchain
is not the optimal.
Maybe people if you told them okay, well,
this is really hard to take back and we have
a way around it but it might take all these
different things but actually one of [00:29:30]
the services that PayPal offers is you can
say stop, stop this right now and people say
okay.
So maybe for eBay transaction the blockchain
just won't actually be something people want
to use, it's smart contracts and the blockchain.
Kate Sills: I think it really all depends
on what your use case is.
If you're use case is like ease of use then
the blockchain probably isn't for you.
It's kind of like, you know, if you don't
care about who's looking at your email [00:30:00]
right you could just use Gmail or whatever
it is and that's probably the best option.
If you have a specialized case where you don't
necessarily want to trust someone like PayPal,
you are able to make those exchanges with
other people and right now it is a little
bit more complicated but I think we'll see
a lot more of the kind of like user friendly
apps.
There are decentralized marketplaces right
now that have been [00:30:30] working on that
sort of thing and so I think once that becomes
more popular, it'll probably become more easier
to use.
Aaron Powell: A lot of libertarians like this
tech, blockchain and cryptocurrencies and
smart contract because it fits into grand
utopian crypto anarchist visions of, you have
a presentation you did on smart contract in
order and anarchy, this is how we can [00:31:00]
make it so we don't need the state.
There's things that we thought we needed the
state for but we can replace them with technology.
And I admit that's a really, I mean for me
a really exciting vision but one concern or
question I have about it is we talk about
these things as if this is just kind of technology
exists out there, we can use it.
But this is technology being created by people.
It's overseen by people or organizations.
Because [00:31:30] it's tech it needs to be
updated, it needs to have bugs fixed.
As with any you know large software open source
project there's like a governance issue at
play and one thing that's become apparent
especially over maybe the last year is that
a lot of the times in the space the government
seems pretty broken or dysfunctional.
The people who are in it are [00:32:00] either
too ideologically hardcore to function, to
actually make the technology change in ways
it needs to or are simply dysfunctional.
And so, is there a problem there with shifting
from essentially entrusting this highly troublesome
government that we have that has all sorts
of problems and has incompetent people in
it, it has bad people in addition to competent
good people [00:32:30] but is at least we
have mechanisms in place where we can correct,
it's like answerable in a sometimes superficial
way but it's answerable to us.
From shifting from that to relying on technology
and ultimately code as law that's being overseen
by some random hacker somewhere, often anonymous
people, organizations that don't even really
exist on paper, there [00:33:00] isn't a thing
there and there aren't institutions in place.
Kate Sills: Well, I think anytime you have
any sort of collective action, you have a
governance problem.
Even if you're deciding where to go to lunch
with your coworkers that's still a governance
problem.
How do you decide that, how do you decide
that fairly?
What if there is one minority voice that really
loves a certain restaurant and you never ever
go there.
So, any time you have some kind of collective
action problem where you're trying to make
a group decision, [00:33:30] I think you're
going to have a governance problem.
And then the question is how do fairly resolve
it.
In a lot of the cryptocurrency platforms right
now like Bitcoin and Ethereum, it's kind of
ad hoc thing.
And so that means that there's a lot of vicious
Twitter fights basically especially in the
Bitcoin community.
Some people are trying to formalize that,
so Tezos for example is really trying to formalize
that and put the governance itself on the
blockchain.
As libertarians I think we [00:34:00] often
get told by other people like government is
just us working together and then our reaction
is well, usually people working together don't
force you to do things or like we didn't consent
to this.
I think the special thing about blockchain
is that because you can exit, right, so unlike
a geographic territory where like the government
there is, it's harder to exit.
You have to actually move and [00:34:30] go
away from all of your friends and family and
move all of your stuff.
On the blockchain you could just sell out
and move to something else or you could do
a fork which is kind of like a political revolution
in a way and try to convince people to go
your direction.
Even though there's not necessarily the accountability,
there's not a way in which you can voice your
opinions very easy except on Twitter or something
like that, [00:35:00] you do always have the
exit option in a way that's easier than the
kind of governance that we're used to seeing
in the real world.
I think we will see in the next couple of
years people really trying out different governance
systems.
Different ways of trying to make collective
action decisions and make group decisions
and I think that's something that's going
to be really cool to see especially with smart
contracts because you can use smart contracts
[00:35:30] to bind yourself to whatever decisions
it is.
So, you might put up a bond or something like
that that might be slashed if you don't adhere
to whatever rules you agreed to.
But I think that it's still an open area of
study definitely in its infancy and I'm excited
to see where it goes.
Trevor Burrus: For a very long time we studied
government and James Madison before the Constitution
sits down and reads all these books about
government and how doe we make it better,
it's always [00:36:00] a work in progress
so with this new technology I guess we're
trying to figure some of these things out
too.
There was an article in December that got
some amount of attention at least in my news
feed by a guy named Kai Stinchcombe called
Ten years in, nobody has come up with a use
for blockchain, criticizing many of the purported
applications.
And on smart contracts he writes, "The investors
and startups in the smart contract space promise
that the blockchain will enable super fast
execution and payment.
For example [00:36:30] that in healthcare
applications instead of waiting 90 to 180
days for a claim to be processed or spending
hours on the phone trying to get your bill
paid it can in theory be process on the spot.
But that's true of any software enabled purchasing
system.
My company's Amazon server scale automatically
based on the website traffic and bill us for
how much we use.
The idea the smart contacts would change this
is a fallacy.
It conflates a legal arrangement being put
into effect with the software in the legal
range itself being coded as software.
Amazon's terms of service are not a smart
contract [00:37:00] but the billing system
that implements those terms is automated.
To the extent that health insurance billing
for example is not automated, the problem
isn't that existing software isn't smart enough
to handle submitting claims and paying them
electronically, it's that the insurance company
is slow moving either by accident or because
on purpose they prefer a human review."
How do you respond to that critique?
Kate Sills: Yeah, well, I don't disagree with
it.
I think blockchains are very slow.
[00:37:30] Their advantage is not that they're
faster.
I think a lot of that comes from this idea
that smart contracts have something to do
with AI that they're smarter.
Actually in a lot of ways they're dumber.
They can only do certain things in certain
ways.
So, I don't disagree with that necessarily
but I do think the use case for blockchain
and smart contracts in particular has to do
with the collective action problems that I
was talking about and the social consensus.
So, [00:38:00] money is a social consensus.
Property title is also a social consensus.
It's the agreement of everyone else to not
violate the rights that have been defined
that you have ownership of.
And so, all of those things when you look
at the system, the machine that that runs
on right now it is incredibly slow, right,
that's government.
I have a friend who's been trying to get the
title for his car for like almost a year now
and he's been driving the car around [00:38:30]
but he can't get the title for it so he can't
sell it and all of those things.
So Hernando de Soto in the Mystery of Capital,
his thesis was that people in third world
countries it's not that they are poor because
they don't have possessions, it's that they
don't have the title to all of these things.
They're missing the institutions so they're
missing the rule of law that would allow them
to use their property as collateral or to
leverage [00:39:00] it in all of these different
ways.
It's the mental representation of their property
that they're missing.
The strength of blockchain is that you're
able to create that kind of social consensus
and put it in a ledger and make it immutable
and allow you to buy and sell and trade that.
So I think the use case for smart contracts
isn't necessarily that you would be paying
an insurance company or trying [00:39:30]
to bypass an insurance company or anything
like that ...
Trevor Burrus: Using that as like your new
payment system.
Kate Sills: Right.
I think digital currencies themselves are
really, really important because it makes
it much easier to cross borders and interact
with people throughout the whole world much
easier.
For smart contracts I think there's a couple
of things that the situation has to have to
make smart contracts useful.
And one of those is opportunism.
So, if you have a use case in which you think
[00:40:00] someone is going to take advantage
of you, Oliver Williamson defines this as
self-interest with guile.
And a lot of contracts that happen, so like
we can imagine back in Hobbes time like in
the 1600's, let's say I have a pig that I
want to sell at the market and a farmer wants
to buy it and he agrees to give me his harvest
next fall and we make that agreement and I
give him the pig and the next fall rolls around
and he might say, hey, I didn't have any kind
of deal.
[00:40:30] So that kind of opportunism, right,
when the opportunity arises using it for your
own self interest, I think that usually indicates
that you need some kind of outside enforcement.
So either that's a legal contract or a smart
contract.
But you need some way to enforce it.
So I think when you have cases of opportunism
that involve some kind of social consensus
that's needed.
So like things to do with property title or
...
Trevor Burrus: [00:41:00] Long term contracts
and things like that where someone can run
away.
Kate Sills: Right, right, right.
Maybe your situation, you live in a country
that doesn't have secure institutions and
you don't trust them, I think that's where
the blockchain really shines is that, the
blockchain is not trying to replace our programming
and our Amazon servers and all that.
It's trying to replace how we interact with
[00:41:30] each other and how we try to get
each other to cooperate.
So it's trying to replace that collective
action layer which has for the most part been
a service provided by government.
I think if you look in most cases that is
incredibly slow if it functions at all.
Trevor Burrus: Are you familiar with the verification
system for indentures?
Hanging on my office wall is an indenture,
a contract written for someone to be indentured
servitude for [00:42:00] seven years coming
over the standard story.
The term indenture actually means the scroll
at the top of the contract.
So when you are indentured and then someone
held the indenture for you, it was a big piece
of paper and you each had a copy and then
you cut it in a scroll.
And the way you verified it was to match them
up against each other and seven years later
you come back and like, or 20 years [00:42:30]
where you might look really different and
you have to prove the same person so you put
the two scrolls up against each other and
again it says I'm the original holder of this,
this is the indenture.
It kind of is one of these technologies they
try to invent to verify a transaction and
keep it over a long period of time as opposed
to just a handshake deal, like right now you
want these chickens, yeah, here's some money
I'll buy them later.
But if you have a 20 year thing you might
need something a little bit more for that.
Kate Sills: There are a whole bunch [00:43:00]
of ways that people have tried to come up
with to make it more probable that someone's
going to keep their promise.
Like Oliver Williamson and other people in
kind of the law and economics subfield call
this private ordering.
So you might rely on like personal ethics,
you might only make deals with someone that
you think is a good person but that kind of
information is hard to come by.
Trevor Burrus: It makes you probably pretty
poor.
Kate Sills: Yeah.
It really [00:43:30] limits all of your transactions.
You might rely on like reputations.
You might ask other people what their previous
transactions with this person have been.
And so, in game theory that's taking like
a single instance game and turning it into
a repeated game because people have an incentive
to cooperate in order to ensure that they
have an opportunity to take that next deal.
So I think what smart contracts provide is
not necessarily this [00:44:00] is the way
that you must do things, you must make this
binding contract, it's a way to allow people
in code to use whatever level of mechanism
that they need to use in order to try to ensure
that someone will keep their promise.
And a lot of these systems, they're using
things like reputation in order to try to
ensure that.
That gives you a little bit more leeway in
negotiations while still trying to secure
that promise.
The idea of it is that there is no one [00:44:30]
particular way that is above and beyond the
way that you should do things, different use
cases need different types of tools and this
is a new tool that we have.
Aaron Powell: You mentioned immutability and
trust a fair amount and that this is a way
for people who might not otherwise have access
to the rule of law effectively to use a trusted
system that can't be changed.
But at the beginning of our conversation we
talked about the DAO and hard forks which
was [00:45:00] basically up and changing and
it's not just ... If you and I make a contract
and then a corrupt state court decides not
to enforce it or rewrites the terms or something
like that, our contract has been screwed up
but a contract that I have with Trevor still
is around.
But if these are all written to the same blockchain
and then the [00:45:30] guys at Ethereum decide
that they want a hard fork it in order to
save the 15% of Ethereum that was caught up
in this thing, that also rewrote or went back
on every single other contract that was in
existence at the time or that had happened
between when the point that they decide to
hard fork and everything that happened after
that.
And so, that's like an extraordinarily huge
level of mutability.
Is that a concern that these [00:46:00] people
in poor countries that you could just buy,
say 51% miners deciding they could wipe out
every single contract and every single claim
to property across the whole world?
Kate Sills: So I think it's important to view
it in layers because I think in any institution,
let's say in the U.S. we have the constitution,
we have the rule of law and we can we can
make contracts.
But if someone [00:46:30] invaded the U.S.
or somehow the government got overthrown,
all of those might be in question.
So, I think you have to view it in layers
and say like, as long as the system itself
is secure, then your contract is secure.
I think you're right, that is something that
is concerning.
You definitely don't want people to be able
to up end the whole system.
Like it takes a ton of computing power to
actually be able [00:47:00] to change the
system and you have to convince everyone to
go along with your hard fork if that's the
case.
Otherwise you might find yourself in a very
minority fork where your value goes way down.
Really only in very worrying cases that this
hard fork scenario might actually happen.
I don't think that the example that you gave
of a contract just between you and another
person would not be a case in which that would
happen.
So, the good thing is is that [00:47:30] unlike
court that we might experience in real life
where we might have fickle decision or a biased
court or in a different country maybe someone
might have been bribed or something like that,
on a, instance per instance level it's probably
very, very unlikely that it's actually going
to be changed or that it's going to be undermined
unless it's something that you're making a
deal that is so big that it's like 20% or
30% of the money in the system, that [00:48:00]
might be something that people will try to
mess with.
But I think for the ordinary people for the
little guys, you can count on the system.
Trevor Burrus: Going forward, what do you
see as are like the things we should look
for smart contract maybe in the near term
and then in the long term as someone who's
actually working on this.
Where do you think in the next 10 years will
we start seeing these things maybe pop up?
Kate Sills: So, one thing that's really interesting
is that some people are [00:48:30] starting
to use smart contracts for debt.
So, being able to buy and sell debt and do
so in a way that crosses borders.
That's one thing that's really interesting.
And connected to that is the idea that if
we did have property title on the blockchain
in a certain country or something like that,
investors worldwide would be able to buy and
sell that.
Basically, it's unleashing all of this [00:49:00]
captured economic activity that has kind of
been siloed into each geographic jurisdiction
and allowing people to connect worldwide.
You're not only just allowed to invest in
your own country stuff, you can exchange those
things with anyone in the world.
Those are the kinds of use cases that I'm
really excited about.
I think also one use case that has been really
undervalued is the ability to create commitments
[00:49:30] outside of something that the court
might enforce.
Thomas Schelling talked about this way back
in the 1950's.
He wrote a paper on bargaining.
And his argument was that it was counterintuitively.
If you're able to bind yourself in certain
circumstances, it actually gives you a lot
more power in bargaining.
Correct me if I'm wrong, I'm not a legal scholar
but the courts did not enforce one party contracts
with yourself for the most part.
It doesn't make sense.
Trevor Burrus: It doesn't make any sense.
It's incoherent, yes.
There's no meeting of the minds.
Kate Sills: [00:50:00] Right, right, right.
This is still an area that I'm hoping to do
more research on but I think we haven't seen
what will happen when people can actually
create commitments that don't have to be evaluated
by a third party, right, that you can ...
One example of this that Thomas Schelling
talks about is like nuclear deterrence.
The whole point of having [00:50:30] someone,
like if someone's going to attack you, you
have you know a switch that it will automatically
attack them.
Not that you would be using this in terms
of nuclear weapons but you can think of like
maybe you want to put up some kind of a bonds
that will be slashed if you act in a certain
way or maybe you're in negotiations with someone
and you want to be able to credibly commit
to something and convince them that no, sorry,
I can't actually do that.
[00:51:00] For instance, let's say you're
an employer negotiating with the union or
something like that and they would like to
raise wages and if you're able to say sorry,
it's literally not possible for me to do,
that actually gives you a lot more bargaining
power.
Trevor Burrus: As opposed to just say it,
like actually commit yourself.
Kate Sills: Right.
Yeah.
So there's ways that we just have not explored
because we haven't had the tools to do that
and in this paper Thomas Schelling says it's
actually astounding [00:51:30] that there's
been no way to actually have these kinds of
commitment devices.
With that and with private arbitration on
the blockchain and being able to do this outside
of all of these geographic jurisdictions,
I think there's a lot of potential that still
is left to be explored and I'm hoping people
who are experts in law and economics get really
interested and start exploring because it
is kind of a sandbox for exploration.
If you admire [00:52:00] James Madison and
you're interested in like [inaudible 00:52:04]
like three branches of government and you
want to, you're like, well what would happen
if you didn't have that or if you had other
ways of formatting this.
It's an open question but you can actually
start implementing now and people need it
because a lot of the people who are working
on blockchain stuff do come from like a computer
science background or finance background and
they don't have necessarily the [00:52:30]
legal or economic background that you would
need to be able to build the governance system
or try out some of these contract forms or
things like that.
Trevor Burrus: Free Thoughts is produced by
Tess Terrible.
If you enjoyed today's show, please rate and
review us on iTunes and if you'd like to learn
more about libertarianism, find us on the
web at www.libertarianism.org.
