Ethereum: Towards A New BitSociety. What is Ethereum.

Ethereum: Towards A New BitSociety. What is Ethereum.

We have been thinking of Bitcoin  as a new currency and/or a new class of asset, and its underpinning technology – the blockchain – as a shiny new type of payments system that will eventually eliminate the need for intermediaries such as central banks. But the technology potentially takes us much, much further than that. Recent developments take us towards new forms of law, new types of democracy, even – perhaps – the redefinition of what we mean by a “nation”. It may sound extreme to say this, but some blockchain aficionados are even talking about complete reordering of society. Welcome to the Brave New BitWorld.

Or rather, the EtherWorld. For in this piece, I am not talking about Bitcoin, but its rival Ethereum.

 

LONDON, ENGLAND – DECEMBER 08: Founder of Ethereum Vitalik Buterin during TechCrunch Disrupt London 2015 – Day 2 at Copper Box Arena on December 8, 2015 in London, England. (Photo by John Phillips/Getty Images for TechCrunch)

 

The opening paragraph of Vitalik Buterin’s White Paper about Ethereum says this (my emphasis):

 

There has been a great amount of interest into the area of using Bitcoin-like blockchains, the mechanism that allows for the entire world to agree on the state of a public ownership database, for more than just money. Commonly cited applications include “colored coins”, the idea of using on-blockchain digital assets to represent custom currencies and financial instruments, “smart property”, physical objects such as cars which track a colored coin on a blockchain to determine their present legitimate owner, as well as more advanced applications such as decentralized exchange, financial derivatives, peer-to-peer gambling and on-blockchain identity and reputation systems. Perhaps the most ambitious of all is the concept of “autonomous agents” or “decentralized autonomous corporations” – autonomous entities that operate on the blockchain without any central control whatsoever, eschewing all dependence on legal contracts and organizational bylaws in favor of having resources and funds autonomously managed by a self-enforcing smart contract on a cryptographic blockchain.

 

Buterin announces the death of lawyers. Who needs lawyers when the terms of your contract, or the evidence of your ownership of an asset, or even your own identity, are securely encoded within the blockchain and verified by the entire network?

This may come as considerable relief. Lawyers earn a huge amount of money exploiting the idiosyncrasies and inadequacies of legislation. If law can be encoded so it is unambiguous and automatically executed, much time, money and aggravation could be saved.

The range of potential applications for Ethereum’s smart contracts is staggering:

 

The first category is financial applications, providing users with more powerful ways of managing and entering into contracts using their money. This includes sub-currencies, financial derivatives, hedging contracts, savings wallets, wills, and ultimately even some classes of full-scale employment contracts. The second category is semi-financial applications, where money is involved but there is also a heavy non-monetary side to what is being done; a perfect example is self-enforcing bounties for solutions to computational problems. Finally, there are applications such as online voting and decentralized governance that are not financial at all.

 

Now, the first of these immediately interests me. As we have painfully discovered in recent years, financial derivatives, hedging contracts and savings schemes are all notorious vehicles for fraud, sometimes on a massive scale. Financial fraud exploits power and information asymmetries between seller and buyer, lender and borrower, investor and asset manager.

It was not immediately clear to me how Ethereum’s smart contract facility would deal with this, so I had a good look through all the literature. And I am still none the wiser. It seems to rest on the assumption that everyone entering into a smart contract would be a) fully informed b) have the purest of motives. I don’t believe either of these.

Smart contracts are fine as long as they represent the truth, the whole truth and nothing but the truth. Where they represent only a partial truth, they are corrupt even though the coding itself is secure and fairly executed. Technology is only as good as the motives of the people who use it, and even blockchain cannot compensate for all malicious intent. Power and information asymmetries inevitably remain in situations such as these, to the detriment of those who are weaker and less knowledgeable. Perpetuating this in a virtual environment does not strike me as progress.

Let me take a simple example. This infographic (h/t David Andolfatto) explains how a smart will eliminates the need for an intermediary (a lawyer, of course):

Ethereum smart will

 

Sounds absolutely wonderful. Wills are such contentious things: if the distribution of assets to beneficiaries is securely coded and automatically executed on proof of death, how can it be challenged?

It not only can be challenged, but it inevitably would be. The principal challenges to wills come from people who think they have been unfairly bypassed, usually close relatives. They appeal to national inheritance laws to override the specific terms of the will. Securely coding specific terms of a will would not necessarily eliminate such challenge, especially since the person excluded would be unlikely to know about the smart contract. The problem is that since the will would be automatically executed, challenge could come too late. It is much harder to recover assets once distributed than to prevent their distribution in the first place.

And there is a further problem. Under which national system of law would such a “smart will” be challenged? If “smart wills” are disconnected from national law, then it creates the possibility for some people to be unfairly disinherited without recourse. It also creates wonderful opportunities for tax avoidance. If my assets are in a virtual escrow account, they aren’t subject to tax in any jurisdiction, are they?

This is just one example. I could go on, and on. Internet law is already a minefield, precisely because it is not clear which jurisdiction’s legislation applies to – for example – intellectual property distributed on Twitter. Smart contracts could make matters much worse. It could even create an underclass of people who are effectively denied the protection of the law.

Currently, national (and to some extent international) law protects people’s property rights, and ensures that people contribute through taxation to the society in which they choose to live. But Ethereum’s smart contracts create the possibility that these legal systems could be completely bypassed. What would replace them?

Ethereum has the answer. A new, global, virtual legal system.  In fact a new, global, virtual country. Welcome to the Decentralized Voluntary Borderless Nation!

Ethereum bitnation

 

Here is what BitNation says about itself:

BITNATION provides the same services traditional governments provides, from dispute resolution and insurance to security and much more – but in a geographically unbound, decentralized, and voluntary way. BITNATION is powered by Bitcoin 2.0 blockchain technology – a cryptographically secured public ledger distributed amongst all of its users. As we like to say – BITNATION: Blockchains, Not Borders.

And it offers many of the same services as government, even including insurance-based healthcare, pensions, education and basic income. It’s Galt’s Gulch.

Except that it isn’t. Galt’s Gulch at least had a physical location, and its members did productive physical work to earn their gold dollars. BitNation is entirely virtual. It is perhaps more like Jonathan Swift’s island of Laputa, completely disconnected from the real world but extracting resources from it.

But its members are not disconnected. They have to live somewhere. Do they abide by the laws and customs of the country in which they choose to live? Do they “render taxes unto Caesar”? Or do they see themselves as being bound only by the laws and customs of their chosen DBVN?

Throughout history, there have always been “virtual nations”. This is what religions are, especially in their most extreme “cult” forms. At times, they come into conflict with physical (“temporal”) nations. Ethereum is not a religion, but BitNation, in trying to create an alternative society with no physical reality, shares some characteristics of an idealised “heaven on earth”. Is faith in blockchain really an improvement on faith in God?

To be sure, such an extreme application of blockchain technology may remain the province of the weird fringe. And smart contracting no doubt will have many uses in mainstream business and finance. But blockchain is a rule-based system, and rules have their limitations. Automatic application of rules may be just, but it is not necessarily fair, and it leaves no room for the human traits of compassion and mercy. In my native UK, applying the contractual terms of mortgages strictly in the 2008 financial crisis would have led to thousands more people losing their homes than actually did so. Do we really wish to have so little control over contractual obligations that we cannot choose to forbear or renegotiate?

I do not wish to derail the creation and adoption of new technologies. But just as in medical science, technological advances can outpace ethical considerations regarding their use, so they can in finance, economics and law. Blockchain has great potential: but we should not be blind to its dangers, nor casual about its implications for human social organisation in the future.

 

[Forbes]

June 14, 2016 / by / in , , , , , , , , , ,

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