Great+Chain+of+Numbers+A+Guide+to+Smart+Contracts,+Smart+Property+and+Trustless+Asset+Management+-+Tim+Swanson

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Chapter 2: Smart Contracts “Setting something in stone” is a common phrase used to describe permanence of a promise or obligation. While there are numerous historical and sacred texts that deal with justice, tort, and commerce, one example illustrating the confluence of permanence and clearly defined obligations etched in stone comes from Mesopotamia. The Babylonian Code of Hammurabi dates back to roughly 1772 BCE and consists of 282 laws. While the famous “eye for an eye” (lex talionis) is inscribed on surviving clay tablets, roughly half of the code deals with contracts involving payment of wages, rent and liability for damaged property. Other clay tablets from Mesopotamia record interest-bearing loans and debts. While the interpretation and enforcement of these obligations is a matter of speculation and historical restoration, the human endeavor to codify duties and responsibilities is a never-ending story. A more recent example, contrary to common belief, Samuel Goldwyn actually said, “his verbal contract is worth more than the paper it's written on.” 24 Yet either way it is stated, Goldwyn’s oft misquoted catch phrase illustrates one of the core issues that continually impacts property law and rivalrous resources: how to create clearly defined terminology, guidelines and terms of service in a reliable way. In 2006 Nick Szabo, the progenitor of the idea of cryptographic contracts, compared humankind’s current analog spectrum of decision making to a digital system to describe the differences between “wet code,” which is interpreted by human brains and “dry code” which is interpreted by computers. 25 In contrast to the seemingly binary logic of machine language, even though contracts, rules and regulations may be written by ostensibly objective parties, they must still be interpreted and enforced by yet another party or parties of humans. And as a consequence stipulations do not always go as they were originally delineated. This may change however as Szabo also described how computer programs have been and will continue to slowly edge towards mastering different niche domains that reach farther into “wet code” – into the human realm of nebulous obfuscation, fickleness, inconsistency, and abuse. This is the subject of disagreement in this manuscript and will likely continue to be in the near future. What is safe to say is that smart contracts and cryptoledgers are not a silver-bullet panacea solving ambiguity in human interactions beyond the reach of the algorithms. According to its latest biannual arbitration scorecard, The American Lawyer’s 2013 survey highlighted 165 treaty arbitrations and 109 contract arbitrations involving $121 billion in disputes, a record. 26 Similarly, Fulbright & Jaworski publish an annual Litigation Trends and Survey Report in which they survey senior corporate counsel regarding various aspects of litigation and related matters. In the latest survey they found that contract disputes in the US (44%) and UK (57%), remained the largest type of litigation pending against their company, followed by labor and employment disputes. 27 Aside from the famous fabricated contract from Paul Ceglia, few contractual disputes involve tampering of the actual contract in the developed world – more often than not the agreements are certain and the facts, or its meaning, are in dispute. 28 But as discussed below, smart contracts encompass the wider spectrum of formalized agreements, such as financial instruments (synthetic assets) or codified representations of value (e.g., tokens). Automation in commerce is increasing daily. With the advent of NASDAQ in 1971, electronic securities exchanges have traded shares of stocks, bonds, and other instruments on a daily basis and in some cases continuously for twenty-four hours a day. This digital creation was made despite the fact that thencontemporary paper-based exchanges capable of trading similar instruments have been in use at least since the founding of the Dutch East India Company in 1602. 29 While there are numerous reasons for why the NASD built it, the primary motivating force for electronic exchange in general is that it provides 15
users with faster logistical and organizational efficiencies, much like electronic mail does compared with its analog counterpart; while simultaneously removing numerous intermediaries, middle men and 3 rd parties though often they interpose new ones. While there are still hardcopies of securities (e.g., a share register) that in some cases must be maintained and on-file with governmental and corporate entities, in reality the instruments on all modern exchanges are just electronic bits that are representations – abstractions of various contractual obligations, conditions, and terms of service in the real world. A smart contract is a proposed tool to automate human interactions: it is a computer protocol – an algorithm – that can self-execute, self-enforce, self-verify, and self-constrain the performance of a contract. 303132 Whereas Bitcoin and its direct progeny are referred to as the “1.0” generation, as shown below, contracts, on “2.0” platforms – the next generation of cryptocurrency, are able to enforce themselves. 33 They do not have a physical enforcement arm the way legal contracts do. 34 Rather, because they embody complex contractual relationships in computational material, they move certain defined asset(s) automatically under certain conditions. Twenty years ago, Nick Szabo used a specific name for some of these instruments: synthetic assets. Synthetic assets, in his words, “are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways. Very complex term structures for payments (i.e., what payments get made when, the rate of interest, etc.) can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures.” 35 Today, both lawyers and software programmers have the ability to create these types of instruments. Although some may have attempted to build a priori-based arguments against using such digital representations, post 1971, a fortiori, it has become clear that scarcity (a rivalrous asset in the economic sense) and value need not be solely represented by physical phenomena. 36 And while each individual has his or her own subjective valuation, some currently see that there is potential utility or even speculative value in holding, using, and trading these electronic financial instruments. In Cryptoledgers We Trust Decentralized cryptoledgers are another refinement and evolution of Szabo’s ‘wet-to-dry’ system. 37 Paper-based ledgers and electronic ledgers are typically held and maintained by 3 rd parties such as banks or clearing systems; these entities create a "trusted" environment that, the argument goes, could be abused and manipulated by human elements (e.g., changing content, destroying records, double-spending) and imposes considerable cost. When you trust a 3 rd party, you are exposing yourself to the malfeasance of that 3 rd party. In November 2008, Satoshi Nakamoto – a pseudonym for one or several individuals – released a white paper that, for the first time, detailed a method for using a decentralized, encrypted software-based ledger that solves these 3 rd party abuse and vulnerability issues. That white paper gave rise to Bitcoin. 38 In contrast to the existing methods, argued Nakamoto, a decentralized cryptoledger called the Bitcoin protocol can serve as the sole middleman. As an algorithm the protocol is unbiased and capable of auditing, authenticating, validating, approving, and transferring integer values along a ledger that is distributed to tens of thousands of computers (called mining machines) that are located around the world. These computers run an open-source program that provides all of these aforementioned functions and they are rewarded for their work (seigniorage), by the provision of an integer value, a virtual-only token called a bitcoin (sometimes referred to as a “cryptocoin”). 39 The Bitcoin ledger also 16
Page 2 and 3: Great Chain of Numbers: A Guide to
Page 4 and 5: Contents Foreword .................
Page 6 and 7: Cost benefit analysis of decentrali
Page 8 and 9: But then, neither is anybody else.
Page 10 and 11: years ago and the PC did 35 years a
Page 12 and 13: Glossary Because of the dynamic nat
Page 14 and 15: Economists and legal experts have s
Page 18 and 19: has other potential uses that have
Page 20 and 21: valueless transaction costs all whi
Page 22 and 23: While there are several other proje
Page 24 and 25: Implementation of DACs, however, is
Page 26 and 27: Such a system, if implemented, woul
Page 28 and 29: “In a similar fashion,” Byrne a
Page 30 and 31: While his proposal will likely rece
Page 32 and 33: Chapter 3: Next Generation Platform
Page 34 and 35: ather a Decentralized Autonomous Ap
Page 36 and 37: Ethereum Another “2.0” project
Page 38 and 39: wallet balance as shares rather tha
Page 40 and 41: and its launch was entirely decentr
Page 42 and 43: Open-Transactions Chris Odom is a c
Page 44 and 45: Yet as noted above, Ripple’s plat
Page 46 and 47: This Euler diagram shows two main s
Page 48 and 49: Chapter 4: Smart Property Since the
Page 50 and 51: e done with existing technology. Ho
Page 52 and 53: vulnerable systems authorized to in
Page 54 and 55: system to the same mechanism mentio
Page 56 and 57: those participating further down th
Page 58 and 59: (DAC). Furthermore, one of our curr
Page 60 and 61: Where the Rubber Meets the Road Cur
Page 62 and 63: several choices. He can immediately
Page 64 and 65: four years has been for one particu
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Chapter 6: Fundraising Landscape Ac
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Chart 3 illustrates that as a perce
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Ultimately he sees significantly gr
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What was unique about the conversat
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perspective like China and India wi
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While many users and commentators h
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Remittances, Value-Added Services,
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For example, since at least 1991 th
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financially was the miners themselv
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According to its 2013 report, Lexis
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Sean Percival, a tech-industry vete
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continuously builds the entire netw
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to secure a wallet. As a consequenc
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Chapter 8: Jack-of-All-Trades? Can
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It should be noted that the direct
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etter or easier? Just because you c
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NGO use-cases In an exchange with P
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independently run DAO these same in
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Chapter 9: Conclusions Even with so
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Synthesis If you, the reader, are n
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Instead of having to stand in one l
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Endnotes 1 Guanxi ( 关系 ) is a
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36 This issue can involve entire pa
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with the sole intention of building
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107 Chroma Wallet 108 Losing the pr
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Audit Report: Transparency and Acco
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184 Kevin Mitnick is perhaps the mo
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218 Compliance Program Design Prese
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270 Skype calls now equivalent to o
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315 One of the topics discussed at
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357 BitPay Exceeds $100,000,000 in
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maximum transactions per second fro
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446 Point-of-Sale Terminals Should
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Great+Chain+of+Numbers+A+Guide+to+Smart+Contracts,+Smart+Property+and+Trustless+Asset+Management+-+Tim+Swanson

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