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  • PROFESSOR: I'm excited, because I'm going to get the chance

  • to co-teach today with--

  • I would say one of the students, but it's not really

  • one of the students.

  • But Larry Lessig has consented to join us in a few minutes.

  • So I'm going to be breezing through

  • a little faster than usual.

  • And then we'll co-teach this.

  • Blockchain and Money.

  • Here we are.

  • We're at smart contracts.

  • Everybody seems to be coming back,

  • which is a sign of your interest more than it is in my teaching.

  • But I thank you for being here.

  • We made it through the last three classes

  • together on bitcoin and the basics of that technology.

  • And in one class, we're going to try

  • to chew off a bit on smart contracts,

  • both the technology side, a little bit on the markets,

  • and then the law that Larry is going to take us through.

  • And so as I said, I want to start

  • with a little administrative, because we

  • are on the sixth class.

  • I'm going to review a bit about the projects very quickly.

  • We're going to do smart contracts, the design.

  • What design features?

  • Yes, we're going to go back a little bit

  • about hash functions and Merkle trees but not too much.

  • DApps, which are basically decentralized applications,

  • and token sales.

  • Larry's going to take us through legal issues,

  • and then we'll sum it all up.

  • So let me just, real fast on the administrative side again--

  • class participation, 30%.

  • That's why we're all here together.

  • That means, hopefully, reading the assignments

  • and participating.

  • About half of you have participated,

  • so I guess I'm going to go with a little bit more

  • cold calling starting Thursday.

  • I'm not going to do a bunch of it today, because Larry

  • and I are joining.

  • So you can ease off.

  • But really be conscious.

  • If you haven't been participating, try to get in

  • and join the conversation and discussion.

  • The two individual write-ups, I think we have seven.

  • But it's quite possible some of you have submitted already.

  • It's just meant to be critical business reasoning.

  • We are in a business school.

  • To the extent you just summarize some readings,

  • I'm sure we'll give you a pass on that.

  • But that's not what I'm looking for.

  • I'm really looking for critical reasoning

  • and thinking from a business perspective

  • of, why does this matter?

  • What are its strengths or its values

  • in terms of business reasoning and critical reasoning?

  • One by the 10th class, one by the 23rd, always before class.

  • What it likely means is we'll be getting

  • most of these on the 8th, 9th, and 10th class.

  • I know how that works and so forth.

  • And that's OK.

  • That's OK.

  • But I'm just reminding you of that.

  • In terms of the group research paper,

  • again, Sabrina and Thalita stood up a Google App--

  • I think it's in Google, but--

  • where you can go in and team up in teams of three or four.

  • It's not required to do this by the eighth class next Tuesday,

  • but I'm strongly suggesting it to figure out

  • who your teams are and not sort of wait till the second half

  • of the semester.

  • And I'd like to encourage everybody

  • to choose an area for your use case by midway.

  • Again, you're not going to get graded

  • if it takes you another class or two to figure it out.

  • But I just think it's much better if you know your teams,

  • you know what your use case will be.

  • If it's not about finance--

  • one group has already asked me if that's all right.

  • I just want to know more detailed what it's going to be.

  • I'm probably going to say yes, but it

  • needs a little bit of preapproval

  • if it's outside of finance.

  • So any questions about the requirements?

  • I just wanted to--

  • So the study questions.

  • Today's smart contracts and basically how they

  • compare to regular contracts.

  • And what are the tokens that are used within that ecosystem?

  • And what are the platforms?

  • In a very similar sense to the internet, we have the internet.

  • And then above the internet, you have, you might say,

  • applications--

  • Facebook and other applications.

  • Well, this, too, has a series of platforms

  • and then decentralized applications

  • potentially on top of that.

  • And basically, a quick touch on decentralized applications.

  • Later in the semester, we're going

  • to take two sessions on initial coin offerings.

  • And thus, we're going to talk a lot about token economics.

  • So this will be just the first taste test,

  • and then we'll come back to it later.

  • And then the readings, hopefully, everybody

  • read through "Smart Contracts."

  • I thought the Chamber of Digital Commerce,

  • even though this is almost two years ago,

  • this paper was a very helpful sort of flavor

  • for what folks in commerce are thinking

  • and what developers were thinking.

  • And I love that Nick Szabo wrote the introduction to it.

  • And it's interesting to see and question,

  • why is it that it's two years later,

  • and many of those use cases are still being discussed

  • but haven't fully been adopted?

  • And then the "State of the Dapps,"

  • and then who are the competitors to Ethereum?

  • So don't you feel good?

  • I haven't asked anybody a cold question yet.

  • And then the optional readings, I don't know.

  • Did anybody actually go back?

  • They're optional.

  • Did anybody go back and read either Szabo's original piece

  • from 20 years ago on smart contracts?

  • Oh, a few of you are kind of into that rabbit hole

  • of blockchain and ether.

  • Brotish what did you think of-- it's 20 years ago he wrote this

  • thing on--

  • Nick Szabo wrote this thing.

  • AUDIENCE: Actually, I spent more time

  • on the Ethereum white paper.

  • PROFESSOR: All right.

  • So what did you think about the Ethereum white paper one?

  • AUDIENCE: Yeah, I think it was pretty good.

  • It gave me a very good overview of the world potential

  • of the [INAUDIBLE].

  • PROFESSOR: Yeah.

  • And what's interesting is even if you didn't do it

  • for the class and you find yourself more and more

  • interested in this over the next couple of months or even later,

  • going back and reading the Ethereum white paper,

  • it's not highly technical in the first, I don't know,

  • 10 or 15 pages.

  • It really gives a history of bitcoin.

  • It talks about distributed applications

  • and largely written at the time by a 19-year-old, as well.

  • It's a remarkable thing.

  • And then one of Larry's colleague, or maybe it's

  • two of them, but De Philippi paper, as well,

  • on the regulatory issues.

  • So let me talk a little bit about smart contracts

  • and laying groundwork before Larry gives us the law.

  • A smart contract is a set of promises

  • specified in a digital form.

  • I'm going to say four things.

  • It's just a set of promises in a digital form.

  • So it's not handwritten out.

  • It includes protocols.

  • What's a protocol?

  • Andrew.

  • AUDIENCE: Standard operating procedure.

  • PROFESSOR: Standard operating procedure.

  • I like that.

  • Anybody else give me another word for it, maybe?

  • An algorithm.

  • So a set of promises in digital form.

  • But it can include math, basically, if you wish

  • or standard operating procedures-- if-then statements

  • and so forth.

  • And the parties then perform against these promises.

  • And guess what?

  • Nick Szabo wrote that in 1996.

  • And I thought it was still probably the best

  • definition of smart contract.

  • He coined the phrase 22 years ago.

  • He might actually be Satoshi Nakamoto.

  • Three of the tables in here, you all

  • voted that it was Nick Szabo.

  • So I thought that's kind of the best definition

  • if you've got to just-- kind of a root.

  • Now, I would also say, however, that smart contracts may not

  • be so smart.

  • A lot of people have come to be calling them

  • dumb contracts that are just algorithms

  • that perform a function.

  • So don't think of them as artificial intelligence.

  • That's another class provided next semester by Simon Johnson.

  • Think of them almost as just dumb contracts.

  • And in a sense, they're mechanizing

  • what might otherwise be done amongst and between humans.

  • And smart contracts may or may not be really contracts.

  • And that's why Larry's going to speak to it.

  • So remember, even though Nick Szabo calls it smart contracts,

  • they may not be smart, and they may not be contracts.

  • So a little bit about the technical features.

  • Remember our three ways we did this.

  • What are the big technical features that we studied?

  • I'm sorry to do this.

  • Anton, what are the three big buckets?

  • Remember, we took three classes and three buckets

  • of information.

  • It can be one to three.

  • AUDIENCE: Cryptography.

  • PROFESSOR: Cryptography.

  • Great.

  • You got one.

  • Two other people will give me the others.

  • So cryptography.

  • Guess what?

  • Bitcoin and Ethereum all have the same cryptography.

  • It's not identical.

  • But for the purposes of design features,

  • it has cryptographic hashes, timestamps, block headers,

  • Merkle trees.

  • Though Ethereum has more than one Merkle tree, and bitcoin

  • has one.

  • And it has digital signatures and addresses.

  • So everything we talked about three

  • lectures ago about cryptography, both forms of blockchains.

  • Anybody want to give me what our second bucket was?

  • Geramo.

  • AUDIENCE: Decentralization.

  • PROFESSOR: Decentralization.

  • What else did we talk about?

  • Eilon.

  • AUDIENCE: Consensus.

  • PROFESSOR: Consensus.

  • So again, decentralized network consensus.

  • Ethereum actually uses proof of work

  • even there's some talk that Ether

  • will move to proof of stake.

  • But it's currently proof of work.

  • There is a native currency.

  • It's ETH, or "eh-th," or E-T-H, or Ether, instead of bitcoin.

  • And it has a network.

  • The third thing that we talked about, Alpha.

  • AUDIENCE: Transaction format.

  • PROFESSOR: Transaction format.

  • So we talked about transactions and script.

  • Well, guess what?

  • Ethereum does not have a transaction script or UTXO.

  • So that's the one place that Vatalik Buterin, who

  • designed all of this, said no, had to go a different way.

  • Instead of transaction inputs and outputs,

  • there's something called state transitions.

  • Isabella, ledgers.

  • What are the two different types of ledgers

  • that we talked about and set a class to?

  • AUDIENCE: Permissioned and public.

  • PROFESSOR: So permissioned and public

  • are two different types of blockchains.

  • Remind me your name again.

  • Stephanie.

  • AUDIENCE: Balance ledgers and transaction ledgers.

  • PROFESSOR: All right.

  • So balance ledger and transaction ledger.

  • You can keep a list of transactions.

  • And this goes back thousands of years.

  • This is not a blockchain.

  • Or you can keep balances.

  • Bitcoin is, in essence, a transaction ledger.

  • Ethereum and many of the other smart contract

  • platforms are balance ledgers.

  • There's a lot of technological and mathematical reasons why,

  • which I'd be glad to do in office hours.

  • But because of that, when you're moving

  • from one set of balances, like--

  • is it Bo?

  • Bo has $100 at Bank of America to Bo having $101.

  • You need to have a transition.

  • It's called a state transition, which would mean add $1.

  • So Ethereum is account based and, in fact, doesn't even

  • have one programming language.

  • There's six or seven programming languages

  • you can write in, for those who are so inclined.

  • So I'm going to go through really quickly my analysis,

  • and many other people's, but my sort

  • of rendition of the difference between Ethereum and bitcoin.

  • But stop me if there's a question.

  • So the founder.

  • There's actually a founder.

  • The mythology around Vatalik Buterin

  • might not be as great as Satoshi Nakamoto.

  • But a 19-year-old journalist who was writing about bitcoin for--

  • was it Bitcoin Magazine, if I remember where he was writing--

  • said, we can build something on top

  • of it using Nick Szabo's thoughts about smart contracts,

  • about six years after bitcoin.

  • He made it Turing complete.

  • Does anyone want to remind the class what Turing complete is?

  • Did I see a hand up?

  • Yes.

  • Bold of you.

  • What's your first name again?

  • AUDIENCE: Alana.

  • PROFESSOR: Alana.

  • AUDIENCE: You could write pretty much any-- well,

  • you can write loops, but you write any kind of program,

  • like any form of logic is expressed.

  • PROFESSOR: So Alana says Turing complete

  • means you can write loops.

  • But what that really means for the business crowd is it

  • means you can write a program to do just about anything.

  • It's highly flexible.

  • I'm sure the technologist in here will say, well, maybe

  • there's something you can't do with it.

  • But the point in what Vatalik said

  • is we shouldn't just limit it to a scripting language that

  • was non-Turing complete that can just

  • move a little bit of peer-to-peer value around,

  • that he wanted to do basically a peer-to-peer virtual computer

  • that could move code and complete code.

  • And over the years, it's being able to be

  • written in a bunch of things.

  • But Solidity is the main program language.

  • And thus, it's account based rather than transaction

  • based because of the loops.

  • If you could loop and be Turing complete with transactions,

  • there is a vulnerability in attack factors

  • that he made it account based.

  • The transactions are stored in Merkle keys.

  • But guess what?

  • If you were really interested and wanted to learn everything

  • about Ethereum, there's at least four key Merkle trees

  • that get summarized up into the block headers.

  • There's the transactions, which, in essence,

  • aren't transactions.

  • They call them state transitions.

  • There's the state itself, something

  • called storage, which is really related to each one

  • of the individual Ethereum accounts, and then,

  • believe it or not, actually, receipts.

  • There's written records of receipts from every state

  • transition.

  • So there's a lot more complexity inside the Ethereum blockchain.

  • They run about 14 seconds a block instead of 10 minutes.

  • And that change is a bunch of the economics.

  • Proof of work, for some reason, which others can study.

  • Vatalik decided to use a different hash function.

  • It's still based on elliptic curves, I think,

  • but a different hash function.

  • What about the economics?

  • Well, it's called ETH or E-T-H. It's programmed in such a way

  • that you can't use ASICs, purposely

  • makes it that mining is more decentralized,

  • and you don't have the big factories.

  • The entire hash community, the entire mining community,

  • is much smaller.

  • In fact, I think it's about--

  • what would that be?

  • 200,000 times smaller.

  • There's 260 terahashes per second as of yesterday.

  • And the bitcoin mining community has 54 exahashes.

  • That means lots more computers, a lot more electricity,

  • a lot more gnashing of teeth about resources.

  • Bitcoin started in January of 2009.

  • And nobody owned any bitcoin, whereas Ethereum started

  • with a presale and an ICO, which we'll be talking about,

  • about 72 million Ethereum.

  • Vatalik wanted to raise money he was maybe 19 years old.

  • He looped in with a venture capitalist

  • from Canada, Joe Lubin, who now runs ConsenSys.

  • Lubin took about 10% or 9 and 1/2% of the offering.

  • They put 9 and 1/2% in a foundation

  • called the Ethereum Foundation.

  • And the other 80% was sold to the public for $18 million.

  • We'll talk later in the semester as

  • to whether that was really a securities offering.

  • I've publicly said I think so, but that was in 2014.

  • And in 2018, the Securities and Exchange Commission

  • has said regardless of why it might have been in '14,

  • it's now sufficiently decentralized

  • that we'll consider it not a security.

  • But in essence, they raised $18 million

  • and were off to the races.

  • Oh, and the 10% that Joe Lubin kept, if he still owned it,

  • would be worth about $2 billion now.

  • But he probably sold some of it along the way.

  • There are block rewards.

  • The monetary policy in Ethereum, if you remember,

  • it splits every four years.

  • There's the block reward splits.

  • Ethereum was set up that it was five Ether per block.

  • And then a year ago, they just announced

  • they were going to change the software

  • to three Ether per block.

  • And a month ago, they announced they're

  • going to change it to two Ether per block.

  • So the monetary policy of bitcoin is said to be immutable

  • and fixed forever.

  • But I would say that because Ethereum supposedly was fixed

  • and now, twice, they've changed the monetary policy,

  • there is a form that if all the miners and all the computer

  • nodes decide, they can change the monetary policy.

  • And Ethereum has shown that.

  • I think Ethereum's a bit more centralized

  • and has more leadership, because Vatalik Buterin

  • is an actual human who is willing to disclose who he is.

  • And he still has the sort of founder following.

  • And Satoshi Nakamoto went--

  • he ghosted all of us, in a sense.

  • And so thus, it's in some ways socially just more

  • decentralized.

  • And then fees are voluntary in bitcoin.

  • They're a necessary part to channel everything.

  • Emily.

  • AUDIENCE: Going back to monetary policy,

  • in practice, what does it actually mean

  • for a difference between bitcoin and Ethereum that it's fixed

  • but changing versus staying at the same rate?

  • PROFESSOR: So Emily asks, what does it mean in practice?

  • In practice, bitcoin has a much slower growth rate or inflation

  • rate, which is currently, if I'm not mistaken, about half.

  • What's that?

  • About 4%.

  • But it's about half of the inflation rate at Ethereum,

  • which is running in the 7% range.

  • Every one of the 1,600 live tokens

  • that are right now Ott coins have

  • separate monetary policies.

  • And one could do a complete economic study

  • about what it means.

  • But in terms of Ethereum versus bitcoin,

  • Ethereum has a higher inflation rate.

  • And secondly, because they've shown

  • that they can form some consensus and change it,

  • I think it sends an interesting question

  • into that ecosystem as to how hard a monetary policy versus

  • a more human-based, flexible monetary policy.

  • Hugo.

  • AUDIENCE: So is it that the core developers of the Ethereum

  • blockchain decide?

  • I'm not familiar with how they make that decision to change

  • the monetary policy.

  • PROFESSOR: So the core developers of any coin

  • can propose to the various mining and nodes

  • to make a change, including the monetary policy.

  • Even in bitcoin, the monetary policy

  • could change if there was a proposal

  • from the core developers.

  • In the Ethereum case, they have done that twice.

  • The core development of Ethereum is

  • highly concentrated around the Ethereum Foundation.

  • ConsenSys, the company that Joe Lubin runs,

  • has some normative social standing in the community,

  • as well.

  • But it's been part of proposals.

  • And in reading the proposals, it goes back to Emily's question.

  • The core developers have said we should bring down the inflation

  • rate.

  • There's an active advocacy to bring down the inflation rate.

  • AUDIENCE: So you go by updating your node software?

  • PROFESSOR: Yes, in essence.

  • And it could lead to a hard fork, I believe.

  • So that's the background.

  • Let me just talk about the platforms.

  • We know about Ethereum.

  • We've just chatted about it.

  • Its actual current market value is $22 billion.

  • While we're not going to spend a lot of time in this class

  • this semester about market values,

  • I thought it would give you a sense

  • of how people think about it.

  • The other five that you did some reading about.

  • EOS, whose market value is about $5 billion,

  • is so new, because they just finished an initial coin

  • offering in July.

  • And they just went live in July.

  • But they raised $4.2 billion.

  • So my estimate, my prediction, is EOS is going to be real

  • and going to be around.

  • They've taken $1 billion of that $4.2 billion

  • and set up a Kickstarter sort of venture firm

  • literally so that they could maybe support some of you.

  • You could be knocking on the EOS venture firm's door

  • and saying fund me.

  • I've got a great idea.

  • And they'd have one condition, amongst others.

  • You'd have to use EOS as the platform.

  • So it's a self-reinforcing business model.

  • NEO is the other big one that I'd mention,

  • which was started two years ago out of China, a lot of people

  • think with the backing of the Chinese government.

  • Even if not officially, certainly with the verbal

  • and help of there.

  • Some people think of it as the Ethereum of China,

  • but it does use a different proof of work.

  • And those are the main ones.

  • Ethereum Classic is there because there

  • was a hard fork off of Ethereum after the DAO circumstance.

  • Any quick questions about the platforms?

  • And NEO and EOS are thought to be

  • a little bit higher throughput and faster because

  • of the different proof of work that each of them have.

  • So maybe they're more scalable than Ethereum long term.

  • AUDIENCE: [INAUDIBLE]

  • PROFESSOR: What's that?

  • AUDIENCE: [INAUDIBLE]

  • PROFESSOR: So Hugo is pointing out that neither one truly

  • use--

  • NEO and EOS truly use decentralized proof of work.

  • They use a delegated Byzantine fault tolerance.

  • This was from the reading.

  • We're not going to spend time on it.

  • But there was 12 use cases that the Digital Chamber of Commerce

  • came up with.

  • And we're going to study most of these, not all

  • of these, later in the semester.

  • Please tell me, Sean.

  • AUDIENCE: So from the growth perspective

  • across different platforms, do you

  • support multi programming language platforms as opposed

  • to single-language programming platforms?

  • Which one do you think has more potential?

  • PROFESSOR: The question is, do multi-language platforms

  • have more potential or less than single-language platforms?

  • I haven't done a real study.

  • My gut tells me that there's some trade-offs.

  • So a multi-language platform probably

  • allows for more development of apps,

  • just like on the internet, if you

  • can have more app development.

  • Though if you have only one single language,

  • you might have fewer vulnerabilities,

  • vulnerabilities either to attack or coming down.

  • So there's probably some trade-offs.

  • And I'm more into democratizing capital markets,

  • so probably my biases would be to the ones that

  • have multi-language potential.

  • But I can't say for sure whether it will necessarily

  • win, because there are some trade-offs, if that helps.

  • So we'll take a view of all of these later in the semester.

  • But what's interesting is none of them have yet taken off.

  • And in fact, if you look at the dApps today,

  • the decentralized applications which

  • run on a decentralized blockchain,

  • they generally have native tokens.

  • They don't have to have a native token, by the way.

  • You can run a dApp based on Ether.

  • You could run a dApp on an underlying token.

  • But they almost always have their own native token.

  • This is a list that I pulled off the internet yesterday

  • similar to your reading.

  • These are the actual dApps that are working the highest--

  • gaming, gambling, exchanges, and finance.

  • The most active dApp is a gambling site that

  • only has 1,500 users a day.

  • In the last 24 hours--

  • I pulled this down yesterday, so that was a Monday.

  • So this would have been Sunday night to Monday night.

  • There was only 1,500 users to the most active gambling site.

  • CryptoKitties that some of you might know

  • had 418 users in those 24 hours.

  • These are not economy wise use cases.

  • You would see numbers that were hundreds of thousands.

  • Or if it's like Facebook, there's two billion members.

  • And probably in any 24 hours, there's a half a billion

  • to a billion people that check in on Facebook.

  • So these are pretty limited at this stage.

  • But it has led to something called initial coin

  • offerings, which we're going to study

  • a bunch later in the semester.

  • Initial coin offerings raise money to build a network.

  • But the tokens are usually issued before they're usable.

  • And a token is some native currency

  • to be used on a network.

  • The development is open but highly centralized.

  • The promoters usually give themselves some skin

  • in the game or some vig.

  • In the Ethereum initial coin offering,

  • the Foundation kept 10%.

  • Joe Lubin kept 10%.

  • And the other 80% was sold to the public.

  • But some keep 60% or 80% for themselves.

  • I mean, it's a whole wide range of economic incentives

  • and models.

  • And the tokens are usually fungible and transferable.

  • And thus, you can sort put them on an exchange

  • and try to sell them and promote them.

  • And again, we're going to come back.

  • But I thought if we're talking about smart contracts,

  • they tie into initial coin offerings.

  • Daniel.

  • AUDIENCE: If the tokens aren't functional,

  • what goes into their evaluation?

  • PROFESSOR: That is an excellent question.

  • Daniel says, what goes into the valuation of something

  • that is not functional?

  • And there are many things that go in.

  • Ultimately, it's in the anticipation

  • of the potential profit and appreciation in the future.

  • So if you were just to have a laundromat,

  • a corner laundromat here in Cambridge,

  • you probably would only pay for the laundromat token what

  • you thought the value was to do your laundry, $0.75 or whatever

  • the--

  • frankly, I don't know what the tokens go for in Cambridge.

  • You're going to tell me what a laundromat token goes for?

  • But if it's prefunctional and the laundromat has not

  • been built yet and you have confidence it will be built,

  • you'll probably discount back.

  • You might pay $0.50 instead of the $0.75, ultimately.

  • If you think it's going to be a really popular laundromat

  • and it's going to be the place to be seen by all MIT students

  • and you think that token might one day be worth $5,

  • then you're starting to speculate

  • on the community's interest.

  • So these tokens, if you really believe in them,

  • you're trying to pay for what others will

  • pay for them in the future.

  • And the economic equilibrium would be discounted.

  • So thus, you're buying it because you think

  • they'll appreciate in value.

  • AUDIENCE: Couldn't you make an argument sort

  • of following numismatics, how people

  • assign some aesthetic value to physical coins?

  • So, too, you could have an impulse

  • beyond speculation [INAUDIBLE].

  • PROFESSOR: Your first name is?

  • AUDIENCE: Isaac.

  • PROFESSOR: Isaac.

  • Isaac says maybe there could be a numismatic or other value

  • to it.

  • It's possible.

  • I mean, certainly, CryptoKitties caught

  • into the whole collectibles wave.

  • Let me try to wrap up so that I can hand it off to Larry.

  • So there's been $28 billion raised

  • per one website, Elementis.

  • Others that track it think it's only

  • between $20 and $25 billion.

  • There are no official arithmetic and no official records.

  • But the $28 billion raised in initial coin offerings,

  • this is a cut of a neat video that I just

  • took the last slide of from Elementis.

  • You can watch it in a minute and a half.

  • And over the years, it's geographically

  • dispersed with blue being Oceana, Australia,

  • and so forth, green being Asia, North America being orange.

  • But the biggest ones, EOS raised $4.2 billion.

  • Telegram, $1.7 billion and the like.

  • These are not small figures.

  • There's been at least 4,500 proposed initial coin

  • offerings.

  • Many of them didn't raise any money, but over 2,000 to 3,000

  • have raised money.

  • I'm going to use the 3,000 figure.

  • Less than half of them are even live today.

  • There's one study that shows that 59% fail

  • within the first nine months.

  • There are other studies that say between 1/4 and 3/4 are scams.

  • Christian Catalina here has a study

  • which I think is probably the most valid and reliable,

  • which says 25% are scams or frauds.

  • Statis has one that says 80% might be.

  • AUDIENCE: You said 59% fail.

  • Can you talk more about what "failure" means here?

  • Does that mean it just goes to 0 or there's

  • a technological deficiency?

  • PROFESSOR: Can I hold that until later

  • when we're going to dig into these in the class?

  • But broad definition of fail, so it's not just technology.

  • It means that you can't even find the website anymore.

  • They took your money, and they ran.

  • Or they still have a website, but it's not live.

  • It doesn't seem like there's a development team any longer.

  • So multiple definitions of failure.

  • So that brings us to legal issues.

  • And as Larry brings up his computer,

  • let me just introduce our guest lecturer, Larry Lessig, who's

  • an esteemed Harvard professor of law.

  • He was at Stanford.

  • He started something called the Center

  • for Internet and Society.

  • You clerked for Justice Scalia, so you

  • must have some real views on what's going on this week,

  • then.

  • And this incredible appellate court judge, Posner.

  • And Larry also-- his first of--

  • whatever you're up to, 9 or 10 books now?

  • LARRY LESSIG: It's something.

  • I don't know.

  • PROFESSOR: But his first was code and the law

  • that I referenced in our first lecture.

  • Larry is going to take it away.

  • LARRY LESSIG: OK, great.

  • So I'm really happy to be able to say

  • that I've taught business school students at MIT.

  • I mean, I'm a tech wannabe.

  • But I have never been allowed to be officially here,

  • so this is exciting.

  • But what I want to do is really address

  • what I've experienced as misperceptions

  • about the nature of the law as it

  • might interact with the issues around digital contracts.

  • So I teach contracts.

  • Contract law is one of the subjects which I've taught

  • since I started teaching.

  • And so I want to frame four points for you

  • about how to think about contract law

  • as it relates to these potential digital contracts.

  • But the first thing to do is just

  • to make sure we understand we're all

  • talking about the same thing.

  • OK.

  • So here's what the core of contract law

  • teaches us contracts are.

  • Contract is a promise or performance

  • given in exchange for a promise or performance.

  • "Given in exchange for" is really critical.

  • That's the quid pro quo that's sometimes

  • referred to as the consideration for the promise.

  • But notice here, this is mapping out

  • four different possibilities.

  • You can have a promise in exchange for a promise.

  • I promise to pay you $10,000 if you promise to sing

  • an opera for me tomorrow.

  • Or it can be a promise for a performance.

  • I promise to pay you, Andy, $5 if you sing a song for us now.

  • So it's the performance I want.

  • I don't want a promise from him, because we know

  • what Andy's promises are worth.

  • Or it could be a performance for a promise.

  • I'll sing if you promise to pay me after I'm done.

  • Or the really interesting one for our purposes

  • is a performance for a performance.

  • I'll sing if you pay me $5,000.

  • I didn't want a promise from you, because I don't trust you.

  • You're business school students.

  • So I just want the money.

  • But I'm not promising to do anything.

  • I'm actually going to do something for you.

  • Now, that's the one that we're going

  • to think about in the context of digital contracts.

  • Oh, I'm sorry.

  • Let me just fix one thing here.

  • Actually, I was going to make three points,

  • but then I decided I was going to make four.

  • So let me fix that.

  • Four points about contracts.

  • So the first point about contracts,

  • so think about this case.

  • All right.

  • It's not quite digital, but it's a physical contract

  • machine in the sense that it's a performance for a performance.

  • If you drop a dime into this machine,

  • then out will come Dr. Pepper or something else.

  • OK.

  • So there's no promises involved.

  • And we understand there's a mechanism that's

  • to produce this result. And obviously, these

  • have been here for a long time.

  • And these mechanisms provide real value,

  • because to the extent you don't have to hire somebody

  • to stand there handing out Dr. Peppers,

  • you can lower the cost of delivering Dr. Peppers

  • and increase the market for Dr. Pepper.

  • So this is the motivation-- lower

  • the transaction costs of engaging

  • in a particular kind of contract, which

  • is performance for performance.

  • Now, when you look at that contract,

  • you should ask yourself, what are the terms of this contract?

  • All right.

  • So some of them are express, and they're pretty obvious.

  • So this says $0.10.

  • It says if you pay $0.10, you will get the Dr. Pepper.

  • Or that's what you kind of expect.

  • There's a great cartoon I couldn't find where you come

  • to a machine that says deposit $0.50.

  • Deposits $0.50, and the light comes on.

  • It says, thank you very much.

  • Right.

  • So you think you know what this contract is,

  • but that joke hints that maybe you don't

  • know what that contract is.

  • But the express terms of the one we expect

  • go with a statement, the machine.

  • But then there's a whole bunch of implied terms.

  • So one implied term if this machine is in the United States

  • is that when you take the Dr. Pepper out and you drink it,

  • it's actually going to be safe to drink.

  • It's actually going to be Dr. Pepper.

  • It's actually not going to make you sick.

  • And none of that is written on the Dr. Pepper machine.

  • That's instead a term, a contract term,

  • that gets created by the law and gets imposed or wrapped

  • around the delivery of that drink.

  • OK.

  • That's their first point.

  • The second point is to think more

  • about what these implied terms imply.

  • Because if these implied terms are implied by a legal system,

  • then that means the legal system has

  • an interest in your contract.

  • Legal system is not undisinterested

  • in your contract.

  • So we should always think that our contract

  • is going to have two parties.

  • We call them the promisor and the promisee.

  • I've told you we've had contracts

  • that can be performance.

  • "The performancer" isn't really a word.

  • But let's just say promisor and promisee.

  • But there's always a third party,

  • which is the state, who is in the middle of the contract

  • in the sense that the state will police many contracts

  • and decide whether the state likes the contract or not.

  • And if the state doesn't like the contract,

  • then the state won't enforce the contract.

  • Or the state might actually punish you

  • because of the contract.

  • So for example, the state cares about the kinds of contracts.

  • You can have contracts for the sale of tables.

  • You can't have contracts for the sale of people.

  • But you can sell dogs for reasons I can't understand.

  • But the point is we are deciding which type of things

  • can be sold and which kind of things can't be sold.

  • The state cares about the effect of the contract.

  • If the contract is to render your corporation

  • vulnerable to bankruptcy, the state

  • might have an interest in deciding

  • whether that contract will be enforced

  • or not or whether it'll be allowed or not,

  • whether it's permissible under bankruptcy laws

  • to engage in that contract because of the risk

  • that it's going to create.

  • The state's going to care about the terms of the contract.

  • So if you're selling your labor in a state with a minimum wage

  • law, the state's going to care.

  • Does the term that specifies your wage equal

  • or exceed the minimum wage?

  • And states can obviously care-- the most important thing

  • for the state is whether and how the state

  • taxes the transaction in the contract.

  • So when does it tax the transaction?

  • What is the event that's going to manifest it?

  • And of course, the contract can try

  • to play with that sort of deal with whether it will be taxed.

  • And the state will care about how the contract deals with it.

  • OK.

  • So the point is to fight against the first real bias

  • that especially, let's say, tech people

  • and maybe business tech people bring

  • to the idea of contract law, which is that contracts are not

  • about the state.

  • They're about private parties.

  • That's not true.

  • They're about private parties and the state.

  • And the state is always going to be there.

  • Now, so if I say to you, I'm trying

  • to sell my parents' house.

  • I can't sell it.

  • So if I say to you, I'll offer you

  • $10,000 to anyone who will burn down my parents' house.

  • You're trying to accept that contract.

  • You're raising your hand, so you're trying to accept.

  • I want to say officially it's a joke so nobody gets

  • any uncertainty about this.

  • Now, you're going to ask a question, because I

  • didn't want you to accept.

  • Because if you accepted my offer, then that's it.

  • I'm stuck.

  • So now it's clear it's not really an offer,

  • and I can ask you a question.

  • AUDIENCE: So you said contracts cannot be between two parties.

  • They have to be between two parties and the state.

  • LARRY LESSIG: No.

  • So let me say it more clearly.

  • Contracts always have the state present,

  • so it's always between two parties

  • or three parties or four.

  • So you and I enter into a contract.

  • Not this one, but another one.

  • But the state is in the room and deciding

  • whether the state's going to allow the contract to happen.

  • So most contracts, the state doesn't care about.

  • But some contracts, the state's going to say,

  • hell no, we're not going to allow it, like this one.

  • If you didn't get that notice it was a joke

  • and you thought I was serious and you went and you

  • burned down my parents' house so that we could get the insurance

  • and not have to worry about selling the house,

  • and then you came to me, and you said, OK, pay the $10,000.

  • And I said, it was an obvious joke.

  • And you went to a court, and you said, force Lessig

  • to pay the $10,000.

  • The court will say this is an illegal contract.

  • I'm not going to enforce this contract.

  • So my point is the state, in a certain sense,

  • is the censor of this contract.

  • The state is in the room when we make this contract.

  • And the state's judgment about it

  • will decide whether we enforce it or not.

  • Is that clearer?

  • AUDIENCE: So you're not saying the state has to be there.

  • LARRY LESSIG: I'm not saying the state is technically

  • signing the document.

  • But I'm getting you to recognize the fact

  • that the contract is valuable to the extent it's enforceable.

  • And the state is the essential agent in enforcement

  • in the real world.

  • AUDIENCE: So I guess that's my question, because it seems

  • like nowadays, we can have contracts where the enforcement

  • is not the state.

  • I can put a contract out there that says,

  • hey, if you can factor this number,

  • give me the prime factors of it, I'll give you 10 Ether.

  • LARRY LESSIG: Yeah.

  • And what I started with when I was showing you

  • this picture was to say, actually, that's

  • been true for a while, right?

  • So in what sense is the state here?

  • Well, the state is here if when you put the dime in

  • and you get the drink out and the drink doesn't have Dr.

  • Pepper but it has gasoline in it,

  • the state would come in and say, whoa, wait.

  • You've breached the implied term that said

  • that this was safe to consume.

  • So the state is in this contract, too.

  • And so what I'm trying to lead to or get to the place

  • where we say, is there ever a place where the state is not

  • there, which is what I think your blockchain-like invocation

  • is.

  • So that's a question we're going to get to in a second.

  • Here's another contract.

  • We'll offer you $50,000 to lobby Congress to pass HR102.

  • This contract looks pretty normal to us.

  • You can imagine lobbyists have a contract like this

  • all the time.

  • In fact, in the middle of the 19th century,

  • the Supreme Court ruled this contract

  • was an illegal contract.

  • You weren't allowed to hire people to lobby Congress,

  • right?

  • So again, the background norm of what

  • is appropriate or not for the contract controlled what type

  • of contracting was allowed.

  • OK.

  • So that's about the type of contract.

  • But then think about the terms of the contract.

  • And so now, I want to get you to recognize

  • the way in which the terms that the law wants a contract

  • to have can be defeated or not by technology.

  • And the way I'm going to get you to think about that

  • is to think about not contract law but something that

  • will create the intuitions I want you to have.

  • Think about copyright law.

  • Everybody knows copyright law, right?

  • I hope you know something about copyright law.

  • So copyright law is a basic contract with the state.

  • But the state says, if you create something,

  • then you're going to get an exclusive right to it

  • or exclusive rights, a set of rights--

  • an inclusive right to copy, an exclusive right to sell it,

  • exclusive right to make derivative works of it--

  • for a period of time--

  • and in America right now, that's your life plus 70 years--

  • subject to fair use, meaning the law

  • says you can't control every use of my copyrighted work.

  • If you want to take a book of mine and quote a section

  • and write a review that says, see how idiotic Lessig is?

  • You can do that.

  • And I can't wrap the book in a contract that

  • says you're not allowed to quote it for purposes of criticizing.

  • I'm just not allowed to do that.

  • So copyright law, imagine this bundle of rights

  • that it was offering.

  • But now imagine something called DRM, Digital Rights Management.

  • All right.

  • So DRM is a set of code that we can wrap copyrighted material

  • in in the process of making it available to others

  • across networks and whatever else.

  • It's pretty trivial to see the way

  • DRM could, in effect, destroy the limitations on the term.

  • You can wrap it, encrypt it, make it

  • so that my ability to control it will be my ability

  • to control it, conceivably, as long as machines are running.

  • If it's a Microsoft-based system,

  • four years later, it won't be workable.

  • But the point is, in principle, it could be forever.

  • Same thing with fair use.

  • You can imagine it being wrapped in a way that

  • disables the capacity to engage in fair use.

  • So I make tons of presentations all the time

  • where I need to capture video.

  • And I was astonished to discover the latest

  • round of this operating system basically

  • makes it incredibly difficult to rip

  • video for the purpose of capturing even two

  • seconds of it.

  • So if you have a video program that is capturing your screen,

  • this operating system will now disable it

  • for any period of time that you're

  • trying to capture the screen.

  • They've built the technology so that, now, there

  • is no capacity, technical capacity,

  • to engage in fair use of copyrighted

  • material on the Apple platform.

  • Now, you might say, why should they

  • be allowed to do that if the law intended

  • that the contract gives you the free use of fair use?

  • Why should they be allowed to do that?

  • But that's the battle that's been going on about DRM

  • ever since the beginning of the beginning of copyrighted

  • work on the internet.

  • So my point is to get you to realize

  • the way the code becomes part of the law of this contract.

  • And you have to ask yourself the question

  • whether that law is respecting the law of the sovereign,

  • the law of the jurisdiction.

  • So when Apple and Disney get together

  • and they sell this technology and they

  • sell movies across the iTunes platform

  • that make it practically impossible--

  • there's not even code.

  • I mean, if you go out there and you look,

  • you can find everybody who says, yeah, with this version,

  • nobody's yet found a way to break it.

  • So right now, we're in a world where, right now, it's

  • not possible for me to capture three seconds to put

  • into a presentation.

  • And the issue that raises is, to what extent

  • is that consistent with copyright law

  • if the technology now disables you

  • from doing exactly what copyright law wants?

  • So this is the trade-off to think about,

  • the relationship between the policy that the law wants

  • and the policy of the technology.

  • And there's no reason to believe the policy of the technology

  • will always be consistent with the law.

  • And to the extent it's not consistent with the law,

  • it challenges the law.

  • It says to the law, OK, come out and get me.

  • Now, that obviously is implicated

  • in the context of smart contracts,

  • because the biggest fear about smart contracts

  • is that they enable a kind of transaction that can hide

  • from the policy of the law.

  • So the question for the law is, what will you do to step in?

  • And this is, I think, where your question was going.

  • How does the state appear in the middle of that contract?

  • But let's take one more step before we get to that.

  • OK.

  • That's the second point.

  • Here's the third point.

  • There's often this intuition that, especially technologists,

  • people have about what the particular aim of contract law

  • is.

  • So in the very beginning of me writing

  • about the law of cyberspace, somebody from MIT--

  • I won't name any names-- it wasn't Andy--

  • showed up at the Harvard Law School and said,

  • I've solved the problem of contract law.

  • I said, what do you mean?

  • He said, I have a system that will eliminate risks

  • in contracts.

  • And he was really disappointed when I said, you know,

  • the objective of contract law is not to eliminate risks.

  • The objective of contract law is just to allocate risk,

  • to figure out who has the risk, so each of us

  • can figure out what to do in light of the risk.

  • So if I say I will buy 10,000 bushels of corn

  • from you at $350 a bushel--

  • turns out that is the price of corn right now.

  • He always looks up things on the internet.

  • I figure I should look it up before I present it.

  • So $350 is the price of a bushel of corn right now delivered

  • September 1.

  • What that's basically doing is it's allocating

  • the risk of the price of corn.

  • So if you're a farmer and you don't

  • want to face the risk the price of corn is going to fall to $3,

  • you enter into this contract.

  • If you're a buyer, you accept this contract.

  • But if the price of corn falls to $3,

  • well, you're out of luck.

  • So the point is it relocates the price change,

  • reallocates the risk of price change,

  • also reallocates the risk of delivery.

  • So if I've got all this corn, I can place it in a certain place

  • to shift the risk of delivery so that, once again, I

  • use the contract to shift my risk of storage

  • or my risk of delivery and you on the other side.

  • So the objective of contract law, number one,

  • is risk allocation.

  • Number one.

  • But allocation matters only if--

  • trying to say only if for me--

  • only if there is a system to process

  • the breach of a contract, only if you've got a technology,

  • let's say, for processing the breach.

  • So if I have a contract with you--

  • 10,000 bushels of corn, $3.50, on September 1--

  • and you don't deliver, that's a breach.

  • My risk has only been reallocated

  • if there's some way for me to enforce

  • the contract at that point.

  • So it requires the system.

  • And the system we ordinarily take for granted

  • is a legal system.

  • And I say we take it for granted,

  • meaning some people can take it for granted,

  • like people in well-developed legal contexts.

  • But that's also to emphasized other people can't take it

  • for granted--

  • so for example, people in developing worlds.

  • They can't take the legal system for granted.

  • They can't assume that if the contract is breached,

  • they go into a court and say, enforce the contract

  • or give me damages.

  • Or if you've got a contract between somebody

  • in Rwanda and somebody in Alaska,

  • then there, too, there's a question

  • of whether we've got sufficient infrastructure to develop.

  • So the point I want to emphasize at the end

  • of this little intervention is to suggest

  • that this fact that it takes for granted the system

  • of enforcement shows the real potential benefit of this class

  • of contracting devices.

  • Because if we think about this as a representation

  • of a well-developed legal system and we

  • think of first-world countries as having those

  • and we compare third-world or developing world

  • countries, which don't have these well-developed legal

  • systems, you might say that first-world countries are

  • better off relative to third-world countries,

  • because they have the legal infrastructure

  • to enable this risk allocation that will enable

  • all sorts of market transactions to happen which otherwise

  • wouldn't happen.

  • But if we imagine infrastructure like

  • blockchain-like infrastructures or Ethereum

  • infrastructures to enter the mix,

  • providing a technical infrastructure that

  • doesn't require judges and lawyers but just requires code,

  • then that can substitute for the legal infrastructure,

  • provide the infrastructure the contract needs

  • at a much lower cost, and thereby enable

  • people to contract who otherwise wouldn't rationally contract,

  • because they could never count on the infrastructure

  • of the legal system to deliver what they need.

  • OK.

  • So the point is this picture is trying

  • to say that one key value of these technologies

  • is that they will be a substitute for a failed

  • legal system or a legal system that's not yet developed.

  • They will provide the infrastructure

  • of a legal system or the legal systems.

  • AUDIENCE: How can they really do anything?

  • Because you can't make that contract like,

  • I will pay you $3.50 per bushel on September 1 in Ethereum,

  • because you're making a statement about the real world.

  • The Ethereum blockchain cannot verify that I gave you

  • the bushels.

  • LARRY LESSIG: OK.

  • So I've got two slides to get to your example [INAUDIBLE]..

  • OK.

  • AUDIENCE: There's ways to do it, but they're very risky,

  • I should say.

  • LARRY LESSIG: Right.

  • But let's bracket it for just--

  • I'm not sure if it's two, but it's n slides.

  • But n is less than 100, I promise.

  • So just hold one second, OK?

  • So if you say that one function here

  • is to substitute for a failed legal system,

  • that suggests that the other key opportunity here

  • is to enable contracts where the transaction costs right now are

  • otherwise too high.

  • So this is a key opportunity to think of places where

  • if you can lower the transaction costs of the contract,

  • you will enable a contract which otherwise

  • can't exist right now.

  • So I'm on a scientific board for an insurance company.

  • So I was meeting the president last week.

  • And he was all excited about a new product which

  • they were investing in, which was going to provide

  • flight delay insurance.

  • And this product was going to be completely blockchain driven.

  • And this is what I'm trying to get to your point.

  • It would trigger payments in a completely automatic way based

  • on the information that's being reported

  • from the n different sites that are reporting information

  • about flights.

  • So I buy the contract.

  • It says, if my flight is delayed more than an hour,

  • I get paid $200.

  • And automatically, as he put it, it's

  • a no-touch product, by which he meant

  • no human needs to touch this product for this contract

  • to be enabled.

  • It's a kind of product that never

  • would have been available before, because the transaction

  • costs of engaging it were way too high.

  • But now that we've lowered the transaction cost

  • and have an infrastructure of trust, which

  • is what the blockchain is providing here,

  • there's a huge market that now is

  • available for a contract that otherwise just

  • wasn't there before.

  • Now, that market depends on making a couple assumptions.

  • You're not saying that there's 100% certainty

  • that everything in that market is working

  • the way it's supposed to work.

  • But the point is you don't need 100% certainty

  • for the vast majority of these kinds of contracts.

  • If it gets it wrong every once in a while,

  • that's good enough for government work

  • or good enough for airplane work.

  • And so that's going to be sufficient to enable

  • the market, recognizing that even in the legal system

  • market, guess what?

  • It doesn't always get it right either.

  • But it doesn't always enforce the contract well either.

  • In fact, the costs are much, much higher

  • to fail in the legal system.

  • OK.

  • So two kinds of transaction costs.

  • One system transaction cost suggests

  • that where you have less developed legal systems,

  • the blockchain is going to provide a real opportunity,

  • because you're going to lower the transaction

  • costs for those systems.

  • And the other is just contract transaction costs.

  • There'll be a huge explosion of markets where,

  • right now, the contract transaction costs are so high,

  • and we can lower them and thereby enable

  • a certain kind of transaction that

  • otherwise wouldn't be there.

  • OK.

  • Final point I want to make.

  • The other thing technologists always love to say

  • is the great thing we will do when

  • we do contract technology is they'll

  • solve the clarity problem.

  • Every term will be perfectly clear.

  • Because you write those contracts out,

  • and there's all sorts of ambiguity and vagueness,

  • and it's a total mess.

  • But when we've coded all of our contracts,

  • our smart contracts, then we'll have

  • perfect certainty for every single outcome,

  • and that will be great.

  • And the point I want to suggest to you

  • is that, often, obscurity is a real value.

  • Obscurity is what you want, because here's a way to see it.

  • So imagine this is a decision tree.

  • And it's really small, because I just

  • stole it from the internet.

  • And it doesn't have anything to do really with what

  • I'm talking about here.

  • But imagine a really complicated decision tree

  • like this, which is to represent all the possible things that

  • could happen with our deal.

  • So I want to buy the house.

  • But what happens if the house gets hit by a meteor?

  • Or what happens if you go bankrupt?

  • All of these possible outcomes.

  • And in principle, we could say we should be negotiating

  • every one of these blue dots.

  • We should be saying, what happens if this happens?

  • OK, then this is what you get, and this is what I get.

  • What happens if that happens?

  • What you get, what I get.

  • OK.

  • So imagine this blue dot here has

  • a 0.002% chance of happening.

  • So you know the chance of that happening is practically zero.

  • And so what's the reasonable amount of time

  • you should spend negotiating that term?

  • Zero, right?

  • Especially because if this term is something

  • you know he's really worked up about

  • and you could never come to an agreement about that term,

  • it would be ridiculous that the whole contract fall apart

  • because of this 0.002% possibility.

  • So what contracts do all the time

  • is they create these fuzzy or vague

  • or ambiguous places as a gamble.

  • It's like, OK, we'll go forward.

  • We're going to just gamble that this 0.002% outcome won't

  • happen.

  • Most of the time, in fact, you can work out how often

  • it doesn't happen, right?

  • So most of the time, that would be just fine.

  • And if it turns out to happen, then what we'll do

  • is ask somebody--

  • namely, a judge-- to figure that term out.

  • We'll say, what should that term be interpreted as?

  • It was ambiguous, so what should the answer be?

  • And the judge will look at it.

  • And judge will say, well, it's fair that you win or he wins.

  • So the point is there are many times

  • when you ask the question, should you

  • negotiate a term ex ante?

  • And the answer to that question is no.

  • And in those contexts, an ambiguity

  • is a way to negotiate it ex post, meaning after the fact,

  • ex post, by using the court.

  • So as we think about these digital smart contracts,

  • this is why smart contracts are referred to as dumb contracts.

  • They're smart contracts for the equivalent

  • of dropping a dime in and getting a Dr.

  • Pepper, the sorts of things where the possibilities are

  • really small and narrow, or, like my CEO was really excited,

  • is your plane late?

  • Yes, I get $50.

  • No, I don't.

  • Things where it's relatively clear.

  • But there's a really important conceptual question

  • about what happens when we're trying

  • to use them for the kinds of contracts where what we want

  • is ambiguity.

  • Because if the very terms of deployment of the platform

  • demand specifying all of the outcomes in this tree, then

  • your basic thing is a whole bunch of contracts

  • you're just not going to be able to have in this space,

  • because the cost of specifying that tree will be higher

  • than the benefit of those contracts.

  • So it's a weird sense in which, on the one hand,

  • I've said to you that this technology can

  • lower the transaction costs of contracts.

  • But for this kind of contract, it

  • can actually increase the transaction costs of contract.

  • Because for this kind of contract,

  • if it reveals the ambiguities we need to negotiate about

  • and those negotiating ambiguities are just

  • too costly for us to negotiate, then

  • it's going to block us from having that contract.

  • It forces us to see the 0.002%, and you and I

  • have to come to terms on it.

  • And we don't yet have a good way to fake ambiguity.

  • I mean, the legal system fakes ambiguity,

  • because we just say, oh, yeah, yeah, we didn't see that.

  • They saw it.

  • He knew it when they wrote the contract.

  • But they don't have to admit they knew it.

  • But the code has to admit it knows there's an ambiguity.

  • And that's a hard thing to self consciously prevent.

  • OK.

  • So I've given you four ideas.

  • Happy to take questions or abuse.

  • Usually, I get abuse from business school students,

  • but OK.

  • AUDIENCE: So what if you can code into a contract the easy

  • scenarios and then say else-if--

  • LARRY LESSIG: Go to court.

  • AUDIENCE: --go to court or some multinational court

  • that is the Ethereum court or whatever.

  • LARRY LESSIG: Yeah.

  • And even the Ethereum court will have to have a court above it

  • if it wants to avoid government saying, if you have anything

  • to do with Ethereum, we're going to punish you, right?

  • So this is the sense of which I wanted to suggest,

  • to go back to your first question,

  • that if you think about it as layers of an onion, peel layers

  • back enough, and you're going to, in the end,

  • have to get to a state in some sense, a state

  • as an enforceable mechanism.

  • And that enforceable mechanism doesn't

  • have to be for every case.

  • Again, 99% of the time, you drop the dime in,

  • you get the Dr. Pepper.

  • But there's a contingency where you drop the dime in, and out

  • comes a bottle of gasoline.

  • And then you need to go to somebody and say,

  • you breached this contract.

  • And that person--

  • AUDIENCE: But if it's a contract between somebody in Alaska

  • and somebody in Rwanda, you still

  • have the question of which state you go to.

  • What's the jurisdiction?

  • So I feel like there would have to be

  • some extranational extra-state.

  • LARRY LESSIG: Yeah.

  • So you will see in these types of contracts

  • is there'll be a whole bunch of boilerplate that specifies

  • choice of law, which turns out to be a relatively easy thing

  • to do right now, choice of jurisdictions.

  • For most countries, it's pretty easy.

  • There are standard ways to do that.

  • All of that will plug in automatically.

  • But again, all of those are outside of the code.

  • All of those are law.

  • AUDIENCE: Comment and a question.

  • So I don't trust Vatalik or other software engineers

  • that they have the legal understanding and capacity

  • to write legally binding contracts.

  • So I trust the government or I trust the court.

  • I don't trust a software engineer

  • to write a proper code to protect me or my counterparty.

  • So what is your take on those smart contracts?

  • PROFESSOR: Can I add to that?

  • Not only your take on whether to trust but what

  • the courts in Europe and the US right now do if somebody says,

  • I wrote the contract, and here's the code.

  • LARRY LESSIG: Well, so when you say-- let me just

  • me understand the question better.

  • I'm sorry.

  • Your name is--

  • AUDIENCE: Hugo.

  • LARRY LESSIG: Hugo.

  • The way Hugo described it, I think,

  • is nice, with a whole bunch of conditional statements, which

  • is the code.

  • So the code says, if the plane leaves

  • more than 30 minutes late, then transfer $100 to his account.

  • So you don't trust Vatalik's system

  • to be able to implement that conditional?

  • AUDIENCE: Yep.

  • I don't understand-- I mean, I don't know the code.

  • I don't know if it's breakable.

  • I don't know if Jean can log in and change it.

  • LARRY LESSIG: I'm sure she can.

  • But the point is, for most people,

  • this is true of everything.

  • When I say to you, I'm a lawyer, I'm

  • going to write the contract so you can sell your car to Andy,

  • you can have the same questions.

  • You can have the question whether Andy

  • is going to have a way to flip the price so instead

  • of $10,000, it's 15,000.

  • So this uncertainty is everywhere.

  • It might be Vatalik would say, actually,

  • there's a more robust way to verify my code

  • than Lessig's contract code.

  • Because Lessig's contract code is written in English,

  • and we have all sorts of--

  • but my code, you can have independent people

  • who verify it.

  • So at the level of conditionals, I'm pretty confident.

  • What I'm not confident about is--

  • and I had the great pleasure in December of 2015 spending

  • a weekend with them, watching that group.

  • And it's this weird kind of--

  • he is like the messiah figure, and there's

  • 12 people sitting on the floor around him listening

  • to his every bit of wisdom.

  • So it was inspirational and scary at the same time,

  • because you see how much money is resting

  • on this messiah's structure.

  • But I have a lot of confidence in their ability

  • to do the conditionals.

  • But I'm not so confident that they yet

  • thought through how it plugs into the bigger legal story.

  • And that's part of what I was trying to pitch to them,

  • that's what I'm trying--

  • to him, and that's what I'm trying

  • to pitch to you, that it's never going to be the case.

  • I was at this conference in Australia where I met them.

  • And so many of the people there were speaking the way people

  • spoke about the internet 20 years ago.

  • It's like, oh, there's the real world.

  • We have governments.

  • But we're going to create--

  • like John Perry Barlow speak.

  • We're going to create this virtual world where

  • there is no governments, where we just

  • live free of government.

  • And it's so fucking naive about the way this stuff works,

  • because it's always embedded in a real world which

  • has a real government.

  • And that real government is not going

  • to look the other way if you're doing lots of damage

  • or not paying your taxes.

  • So the question isn't whether.

  • The question is just how and how much.

  • PROFESSOR: Can we go back there?

  • AUDIENCE: Yeah.

  • So I have a question about, what kind of implications

  • do you think this technology has to broaden access

  • to legal services in general, like letting people know when

  • they're being taken advantage or being able to provide more

  • standard versions of really common contracts,

  • like employment contracts or lease contacts

  • and things like that?

  • Do you think that this is going to be a game changer for those?

  • LARRY LESSIG: Absolutely.

  • I mean, you've got to muster the political will

  • to break the monopoly lawyers have in this space.

  • And I'll tell you, we're going to fight hard against it.

  • But there is no reason for 90% of what lawyers

  • do to be done by lawyers.

  • Just like if you buy a house and you

  • have to have a lawyer who sits there

  • and basically signs documents for you.

  • You're like, why?

  • And the answer is because the law

  • has been written to require that person to sit there and sign

  • documents.

  • And why?

  • Because the people who get paid to sign documents

  • have corrupted the law.

  • So there's lots to clean up.

  • But if we can clean it up, absolutely.

  • 99% of this stuff ought to be automatic.

  • And then let's get the lawyers to focus on the hard corner

  • cases, not on everything that should be automatic.

  • And that certainly should be true

  • not just within a jurisdiction but across jurisdiction.

  • AUDIENCE: Can I return to your insurance examples?

  • I got the idea that you could write a smart contract that

  • would pay you automatically if the plane was late.

  • But then you said it puts it on a blockchain.

  • Can you connect why he put it on the blockchain as opposed

  • to just putting it on his disc and letting

  • your credit card get credited?

  • I mean, where did the blockchain enter into that?

  • And why did he need a blockchain in order

  • to maintain that statement?

  • LARRY LESSIG: I think that the thing that he thought

  • he was getting out of the blockchain

  • is to increase the verifiability of third parties

  • of the actual payments according to the data.

  • So if I say to you, I'm going to be paying you

  • $500 if your plane is an hour late

  • and we have the data out there about the planes being late,

  • if he did it inside of his insurance company,

  • I wouldn't have any way to know that he paid you

  • $500 for the plane being late.

  • But if it's in a blockchain, there's at least conceptually

  • a way in which we could be doing this--

  • not that I'm reviewing it to you,

  • but we could be signaling--

  • AUDIENCE: That doesn't follow.

  • So that depends on who maintains the blockchain.

  • And then at the same time, it returns that.

  • Suddenly, everybody knows the cash flow

  • of that insurance company, which is likely

  • not something he wants to do.

  • LARRY LESSIG: Well, the cash flow of the insurance company's

  • bigger than authenticating the truth about certain types

  • of contracts.

  • AUDIENCE: Well, let us know the cash flow

  • of that part of the business.

  • So I mean, he may not want that.

  • I may not want everybody to know what planes I'm flying.

  • So you've implied that there's now

  • a public blockchain that does that to everyone to verify.

  • LARRY LESSIG: Yeah.

  • All I mean to argue--

  • and I didn't interrogate him far.

  • I was just taking his statement that he's doing.

  • So I'm trying to think, why would he want to do it?

  • Because I had the same kind of question you wanted to.

  • And it's just that if you are trying to create credibility

  • around your claim--

  • but do I have a reason to trust this insurance company

  • that, in fact, it's going to be doing this?

  • Then there's some transparency that this enables--

  • not necessarily the transparency of your credit card number

  • or your name or the flights that you're taking,

  • but that there was somebody who was on this who had a contract,

  • and we then made this kind of payment.

  • That would be a potential value that he has.

  • Now, if there's no value from that, then you're right.

  • The overhead of the blockchain or public

  • or private or whatever is too high,

  • and he just could do it inside.

  • And for certain companies, like if you

  • went to a credible insurance company, the credible insurance

  • company, you probably trust that credible insurance company.

  • But again, if you're a not credible insurance company,

  • if you're a startup and you are out there in the market

  • and you're saying, give me your money

  • and I'll pay you if the plane's late,

  • people are going to say, why should I trust you?

  • And you're like, well, here.

  • You don't really have to trust me.

  • Here's the data.

  • Here's the evidence in a more credible way than if I just

  • published a report on my website that I'm

  • doing what I say I'm doing.

  • PROFESSOR: Let's try to--

  • AUDIENCE: He has to escrow the $500.

  • PROFESSOR: Andy, let's try to get a couple more questions.

  • But my hunch is that it's probably a permission rather

  • than permissionless blockchain.

  • And it may be the insurance company

  • wants to ride on the buzz of blockchain.

  • But it's possible, also, that he thinks

  • that there'll be more trust, that consumers

  • will trust that if it's called a blockchain.

  • But you did an interview.

  • You can pick who you want to--

  • LARRY LESSIG: Right here.

  • AUDIENCE: So proof of performance,

  • could this whole smart contract solve it?

  • So for instance, some countries will receive--

  • and I was talking to Leonardo about it in Cargill,

  • in his company.

  • They deliver wheat to some countries.

  • And proof of performance is always delayed.

  • And hence, it becomes a private issue.

  • So could smart contracts solve something like that?

  • LARRY LESSIG: Yeah.

  • If you had an alternative way to credibly represent a fact--

  • and again, this is kind of connected to Andy's point.

  • Is there an alternative way?

  • And is this the alternative way?

  • Then you lower the transaction cost of that kind of contract,

  • because I'm going to trust the contracting process more

  • if I'm confident that, in fact, the fact that I'm not late

  • doesn't penalize me, or you don't

  • penalize me claiming I'm late.

  • So to the extent you lower the cost of verifying

  • facts in the world, you increase the opportunity

  • for certain contracts to happen who otherwise wouldn't happen.

  • And that's the only trade-off that I'm

  • trying to emphasize by emphasizing the transaction

  • cost part of these contracts.

  • You had a question here?

  • AUDIENCE: Oh, yeah.

  • I was just saying maybe one of the benefits of applying

  • blockchain here would be not for one-off transactions

  • but for the insurance company, perhaps,

  • to have an aggregate thousands of transactions

  • where they've shown performance.

  • And they can use this for commercial reasons

  • to show that, yes, people get paid

  • when they purchase our insurance and get credibility

  • for particular products.

  • LARRY LESSIG: Yeah.

  • You would frame that as it would have

  • to be that that would be a value it was providing.

  • Otherwise, to Andy's point, there

  • would be no reason to adopt this.

  • PROFESSOR: OK.

  • Go on the back right.

  • I don't remember your name

  • AUDIENCE: Kyle.

  • So with, I guess, easier access to these derivative contracts,

  • do you foresee a world where there's

  • a lot more leverage in any type of market

  • outside of financial markets?

  • And do you foresee this creating kind of a risk in that way?

  • LARRY LESSIG: Well, I mean, this is your expertise, right?

  • Because, I mean, we already saw in the derivatives market

  • the fact that the choice by policymakers

  • was to allow it to be an invisible market

  • and not to regulate that market.

  • It created all sorts of risks that sensible people might

  • think shouldn't have been there.

  • And I think the same potential is

  • here, which is, again, to come back to the point,

  • don't expect there not to be government here.

  • I mean, to the extent people realize this risk

  • and don't have as much political corrupting power

  • as Wall Street did in our system,

  • we should expect governments [INAUDIBLE]..

  • PROFESSOR: I would say yes.

  • Even on bitcoin, you can create something called discrete log

  • contracts to do contracts for differences or derivatives.

  • But with smart contracts, you can put a lot of leverage

  • into the system.

  • And transactions can move quickly.

  • So I think the state will have an interest, particularly

  • if it grows.

  • We probably only have time for two more questions.

  • And I'm still wondering, how do courts currently look

  • at these as a matter of law?

  • In the late 1990s, I was honored to work

  • with Senator John McCain on something which

  • became the e-signature law.

  • I was just playing point for the US Department of Treasury.

  • It was really John McCain's law Congress was doing.

  • But I'm wondering how the courts today

  • would see these contracts.

  • Do we need something like an e-signature law

  • to have code accepted beyond what e-signature accepted?

  • LARRY LESSIG: No.

  • I think the e-signature infrastructure

  • is going to be 99% of what this system is.

  • PROFESSOR: You mean that which I worked on 20 years ago?

  • LARRY LESSIG: Yeah.

  • You solved 99% of the problem.

  • PROFESSOR: Little did I know.

  • LARRY LESSIG: Here, too.

  • Yeah.

  • I mean, that's why I wanted to wrap this

  • around the idea of a soda pop machine, right?

  • So it's nothing new, in some sense.

  • Contract law has always dealt with machines that

  • are delivering on obligations.

  • It's just a more sophisticated set

  • of proofs you're going to have to make in a court.

  • But it's the same underlying plot.

  • PROFESSOR: One more question.

  • We're MIT.

  • We're supposed to end five minutes early.

  • LARRY LESSIG: Oh, OK.

  • PROFESSOR: I don't know what you do at Harvard.

  • LARRY LESSIG: I don't remember.

  • PROFESSOR: It's Harvard Law.

  • LARRY LESSIG: Right here.

  • AUDIENCE: So I have a little bit of the opposite question

  • from Elon, which is a lot of the contracts you're talking about,

  • simple contracts, right?

  • You've got individuals on one side.

  • You've got large companies, like your insurance company,

  • on the other.

  • The insurance company can't, in fact,

  • go through the entire decision tree

  • and decide what every term is in their favor.

  • And the law deals with that all the time.

  • But here, you have another problem, which is now,

  • it's going to be OK.

  • It's going to be written in computer code.

  • How are the judges going to deal with that?

  • Now it's a language that is going

  • to be even tougher to deal with that problem.

  • LARRY LESSIG: Great question.

  • And the answer is--

  • so this is actually another version of your question.

  • The answer to that is nobody knows right now.

  • And so this issue gets raised in a lot of parallel contexts.

  • For example, there's a Supreme Court Justice from California

  • who's doing a lot of work about the question of black boxes

  • that predict whether you are likely to commit a crime again.

  • So if you're convicted of crime, the question

  • is whether you're going to have parole.

  • The parole process is supposed to decide your likelihood

  • of committing a crime.

  • So these companies have built these black boxes where

  • you spit in every bit of data.

  • And it comes out and says yes, you're a criminal,

  • or no, you're not.

  • And then the lawyers come forward,

  • and they say, well, I want to interrogate the black box.

  • I want to know what--

  • And the courts are completely confused about this.

  • Because on the one hand, they say,

  • no, no, this is their trade secret.

  • But on the other hand, they're like, wait a minute.

  • You can't decide whether I have liberty or not

  • based on these black boxes that just spit out numbers, right?

  • So I've got to be able to interrogate them.

  • Right.

  • So this is the most important innovation that's

  • got to happen in the law.

  • Lawyers have to become technically

  • sophisticated to be able to read code

  • like they read legal contracts.

  • They have to have a conceptual understanding of what

  • code can do so they can think creatively about code

  • like they think creatively about language, right?

  • And one of the most important innovations

  • that we, like the Berkman Center and people like that,

  • are trying to push into the legal environment

  • is to insist that just like lawyers now all study

  • economics, because that's a core way of thinking about the law,

  • we also should study basic code so we

  • can think about this modality of regulation.

  • Not expect people are going to be writing code,

  • but at least that they can think through it.

  • So I completely agree.

  • That's a fudge space that I didn't talk about at all.

  • But I think it's a really important problem, thinking

  • about whether the legal system is going

  • to be able to deal with it.

  • Because if none of the lawyers understand it, yeah.

  • Let me just end with one story about that.

  • So when I first started doing this work, talking

  • about code and--

  • I went to Paris 20 years ago, and I gave a speech

  • to some lawyer group.

  • And I sat down after the speech.

  • And the chairman of this legal group sat down next to me.

  • And I introduced myself.

  • And he stood up, and he grabbed my card.

  • And he crushed it.

  • And he threw it to the ground.

  • And he said, I am not a technician.

  • And his point was he, as a lawyer,

  • could never accept the idea that what he needed to understand

  • was code.

  • That was forbidden.

  • It was beneath him.

  • And I think it's a hugely important cultural problem

  • to integrate this form of knowledge.

  • Because if we don't, then the problem you're talking about

  • is really a huge problem.

  • But I think we can, because we've seen lots of--

  • PROFESSOR: So I want to thank you

  • on behalf of the class, Blockchain and Money.

  • [APPLAUSE]

  • I also want to say you're much better than Christopher Lloyd.

  • And if anybody wants to know the joke,

  • watch that West Wing episode that Christopher Lloyd plays

  • Professor Lawrence Lessig.

  • So thank you.

  • See you on Thursday.

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6.智能合約和DApps (6. Smart Contracts and DApps)

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    林宜悉 發佈於 2021 年 01 月 14 日
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