How do we control the material world with smart contracts? by Vinay Gupta (Devcon4)

some of you may remember me from the early days of cerium I came in to manage the project release Kara gasser jones late 2014 trend about your foundation and i have been pretty quiet for a couple years and because i was working on a big unsolved problem so when I was still at the foundation I started building outreach to the City of London legal community because I knew that we were going to need some way of enforcing smart contracts as legal contracts and the template that I was working from was Ian Gregg's Ricardian contract model so this entire talk is basically an update of the Ingrid Ricardian contract model from the perspective of trying to turn that into a generic way available technology which we can use all over the ecosystem for basically everything where we need to touch and what we call fear assets so basically I spent a lot of time rolling around with lawyers this is what I've learned so the first concept is the concept of a fiat asset right we have a nice clean compartment for crypto assets we all kind of know how that works we know that you know possession of the keys is possession of the asset all the rest of us right fear assets are the assets that are controlled by governments and a nice way of thinking about it is if the legal status of the asset changes when you cross a border with the asset it's a fear asset so if I take my wallet out and I put it on the street in London 20 minutes later my wall is gone on the police don't want to know if I take my wallet and I put it out on the street in Saudi Arabia I come back in two weeks and it's surrounded by traffic cones so that is an example of a fear are set the local governance regime directly controls how the asset works right the asset is in a sense produced by the governance of the material world that the nation-state provides and this is the world of fear now fear is not just fiat currency it's houses because there are national properties registers it's cars it's anything that house regulation attached to it that's the Fiat world so the question is how do we control fear assets with code simple enough so I want to put this in the context of global trained right right now something like 50 percent of global trade goes over high-frequency trading systems which are basically enormous sir farms where they measure out the cables to the trade in computers basically to the millimetre so that nobody gets an advantage in trade because they've got shorter cable and they can make decisions faster we're in an age where nearly all of our really big global systems are directly affected by the speed of light delay right GPS works on the speed of light delay each ft is optimized for speed of light delay Google spanner gives you a seven millisecond window in which a transaction could have happened so they just put a little delay and that's where things that Google Docs don't get screwed up when you use them internationally and we've got blockchain which solves the light speed delay problem which prevents us from synchronizing the computers with batch a block right ten minutes for Bitcoin fifteen seconds for theorem that's there to manage the speed of light delay so my contention is the global trade is either going to be completely centralized or you're going to have to synchronize computers internationally to conduct global trade and for that it's either going to be a blockchain or something equivalent so I'm completely convinced that the synchronization of the world's computers for all purposes of global trade is going to wind up on a blockchain or close to equivalent technology this is the big game right this is what we're chasing and in that process we can either wind up with a better world because that same system cups trucks carbon trucks slavery trucks environmental pollution trucks political oppression in the regimes in which these things were produced or we can have a global system that watches all hands anonymizes all payments and gives you with no record leaves use no record-keeping so how we implement this transition from paper-based trade to computer-based trade is hugely going to affect the everyday economic reality for the entire planet this is a fight that it's worth us participating in and it's a fight that it's important that we win the balance of power that shapes global trade is a complex adaptive system it's a set of multiple competing forces that are struggling for control of the society right we are essentially in the people part of that group right we're not on a single norm normos global faceless corporation run by one massive shareholder right we are actually at assemblage of the people so our position in this is that we the people would have to represent a better future by implementing ascetic that gives access to a better world and the economically out-compete the competitors for that rule right I mean one way that I talk about this is Star Trek loyalists or cultural oil lists we're kind of the science-fiction faction that are trying to get to a preferable future and to get there we have to out-compete the state and the corporations to arrive there right this stuff is all extremely political we are not less political than the Bitcoin community we're just a little slower to figure out what our values are but it's the same game it's just we're going after a much much wider spectrum of activities than just competing with states to issue currency it's a much broader perspective so this is our issue right we are having a horrible problem breaking out into the real world so that we can use smart contracts to control fear assets until we solve this problem we are not fully empowered right we can't get hold of the future and shape the future because as soon as we get outside of the world the smart contracts outside the world's crypto assets return we powerless the magic stops working we have threshold we can't get past it so I'm going to tell you is I've reached that threshold but the solution is kind of ugly I know how to get to the real world now I know how to control it smart contracts some of you are going to hate what I have to say some of you are gonna love it please if you find a better way of doing it let me know but let's go so especially trillion of assets year I've already talked about the size of this it's worth noting BSE on credit cards gave us three of the world's five biggest companies right b2b is conservatively twenty times the size of the entire BS e-commerce market it's a vast pool of transactions if we could figure out how to get into that market it's a very very big game right the entire e-commerce game is about two and a half billion dollar a trillion dollars of transactions a year there's a vast space next door which is completely underserved because credit cards are no good for v8v payments this is all of the real world stuff right 200-acre robot ports tied together by paper contracts and bills of lading if we can figure out how to get into this game we become a global economic superpower and our values become amplified if we can't get into this game we remain relatively marginal this environment which is increasingly going to be regulated by people that don't like our values right we have to move into the real world so the first thing that we need to be able to do is we need to be able to identify real world assets in a way that's unique enough to get control of them we need the equivalent of IP addresses we need the equivalent of DNS we need to probe one-off cryptographic hashes and the world is already filmed with our sets that have these numbers and there are also numbering schemes to give assets numbers these numbering schemes are under constant attack at the top one is our bank no the middle one is a car registration number the bottom one is a laptop number all of those kind of structures are constantly under pressure from things like counterfeit goods but even if you just start the game with these numbers it puts you a parity with the real world if you could then make these numbers properly cryptographic and bind them to a chain at point of manufacture you get better than the real world lots of projects working on that for things like drug delivery so it's not the real world is the unenumerated an unidentifiable we can't actually get hold of things the problem is that if we get hold of things without an appropriate binding to some kind of legal entity you don't have any ability to control the asset you can identify become controlling so the first piece of new stuff that we're building out is a thing called an asset passport at an asset passport is basically digital identity documents on the self sovereign model more or less for assets and it's implemented to handle the kind of squishiness of the real world using a set of staked partners that do things like value of the asset identify the asset verify the asset it doesn't have more than one owner and these kind of processes so you have an asset you take all the relevant legal facts about the asset your attire to speak to each one of the legal facts in case the fact is wrong and then you bundle all about all up into a nice machine readable bundle and this house set passport in process is the first step in getting an asset onto the blockchain and under smart contract control does this make sense so far that's a pretty easy thing to conceive of there's no magic there we haven't hit the hard part yet second thing automated custodians this is kind of where the fun begins so a kazoo ian is a corporation or a trust it could be something like a bank and it has the legal and requirement of owning an asset as a proxy for some other actor in the system now these things are all over the commercial world and they handle goodness knows billions or trillions of transactions a year and there are you know an unenumerated number of these things at different jurisdictions handle them in very different ways right so the job of the custodian is to look to the digital world as if it's a smart contract and to the analog world as if it's a paper contract so it's basically the structural equivalent of the Ricardian contract the Ricardian contract has a digital component which is a smart contract as an analog component which is a paper contract and it relies on an arbitrator to interpret both sides of that in a successful way I thought fits a lot of load on the arbitrator's it's very hard to find qualified arbitrators in this bubble rather than having that element which has a foot in both worlds be instantiated in a contract pair its instantiated as a legal institution one side of the institution looks like a smart contract you call the contract it does things the other side looks like an analogue institution which has a full set regulation and regulatory licenses so this thing is the adapter between the smart contract world and the legal world and what works to make that happen is a concept that we take from the crypto world which is staking these things have extremely strong contracts insurance indemnification regulation district resolution arbitration every single mechanism you can use to make sure that the automated custodian does exactly what the smart contract tells it to do is deployed to give us a nice clean interface between the fiat world on the crypto world and in this direction this is a unidirectional interface you write to the material world by writing to this foreign contracts that drive the automated custodian now at this point what we've introduced here is a point of centralization so if you imagine a single automated custodian for the entire planet you can see that that might have some issues I'll come back to that a little further in does this all make sense so far I want to make sure that we only because you know the legal ascent machinery around building these things are seriously non-trivial so that is a very complex legal object multiple layers of corporations complex legal instrumentation different jurisdictions implement in different ways it's a really really serious piece of work to build one of these things and never mind to build upon its worth of them so what comes out of that is the assets which have passports which are embedded inside of a custodian are now what we would term smart property so smart property is where you take an asset to take an object you bind it to a set of metadata which is the asset passport in process so no the object is for example searchable you could figure out where it is and who owns it because you can interrogate the metadata which is on chain right if the asset chooses to publish a set of essentially API hooks right that's a contract endpoints that you can hook you could then do things like buy the asset directly on chain and as long as the asset is correctly watch through the custodian as soon as you put the money into the smart contract you know the legal owner of the asset right and that works equally well right for a single asset as it works for a house or a portfolio of stocks or anything else because the legal machinery pivotal custodians is able to correctly address any legal object all Fiat property has necessary handles to be embedded in a custodian and at that point as long as you've got the correct smart contracts and the correct legal contracts you can use the existing machinery of state to get hold of any physical asset and turn it into a blockchain address in Milazzo right it's a ton of legal work but the engineering is sound and you can actually do this so what this gives you is a world in which the feet are sets or is easy to access as URLs right you could in theory in fact drive one of these automated custodians using standard web technologies you could just publish a bunch of api's but the problem that is by the time you've built the necessary security and identity machinery around those API is you might as well use the blockchain it builds a very very different model of how we think about the world so we'll run through that again right you start with a bear piece of fear property that you cannot address on chain because it has no identity there's nothing to talk to right we attach a set of metadata to that one chain that gives us a way of indexing the object we can talk about the object we still don't have control of it but it ways to know it exists we take control of it by giving it to an asset custodian right and that custodian is automated to the point where what the smart contracts tell it to do legally performs or it pays a very ordinary model inside of the crypto universe we bind the offset to the smart contract and using the legal authority of the custodians at at that point we now have real control of assets those assets then form a category of things called smart property and the smart property assets can do whatever you tell them to do now that is a way of totally unifying the physical and the digital from the perspective of both the blockchain where you right now into the real world but also from the perspective of the government's that control so much physical matter because these systems look to the real world exactly like the real world right an automated custodian is just a custodian and there are thousands and thousands and thousands of custodians so it's a seamless integration it's not that there's a clunky bridge what we have is a container which is a set of legal engineering and smart contract engineering a contract engineering which takes all the messy mismatches between the crypto world and the real world and manages them in a completely controlled environment so it's not that there's no complexity there it's not though there's no trickery it's not that the real world and the fear world in the same place it's that you build a set of machinery which matches these expectations in a way which makes the contracts completely coherent across both the fear in the crypto domain and in software engineering you've all seen systems that work that way right in any situation where you've got two technologies which are of completely different generations you wind up having to build a bunch of difficult complicated interface code anytime you interface with legacy systems you wind up with legacy system adapters right so this well the smart property registers and the asset custodians and the passports that is the equivalent of the legacy adapters which give us direct access to the namespace defined by the nation-states actually we've taking all the assets which are currently under nation state governments making them visible on chain and moving them right and this is the key it's the magic to enable us to get into the next step of blockchain growth this is the adoption mechanism until we can touch the real world we can't go anywhere the security token model which is currently getting so much play it's a very simplified model of doing this we take a single legal right which is the ownership of an asset we figure out how to get that legal right correctly represented on chain as a security token and then we use the standard tokenization machinery to bring these things to market that takes just a single legal right and automates it in a non chain way right but all that allows us to do is own things and build portfolios of property it doesn't generate any kind of new functions you can't use it to start new businesses it's just the ownership function what we really want to be able to do is something much bigger and more complex right what we want to be able to do is take all the functions that thing could have and build machinery around those functions right so if you have something like an apartment right you can buy it you could sell it you could rent it you could auction it you could rent it on short terms like kind of an Airbnb model you could contract out the maintenance on it there must be 50 different wiegel rights associated with an apartment so what you want is to be able to bring that entire suite of legal competences into a smart contract environment where you could get the entire set what that gives us is what we think of as being smart property it's the ability to fully drive the api's of the real world from blockchain smart contracts and you could sort of imagine the kind of wallet or software where you take something out if you're yeah you know phone and it gives you an interface that looks like the property screen from an MMO you know here's all the stuff that you own you take your bicycle you drag it to your friends face and you see land and it just goes off and does asset transactions it transfers the necessary so the bicycle is your friends until it gives it back to you and I could serve all the insurance liability for bicycle breaks right you take your house you drag it to securitize it hangs you back a wallet full security tokens right you can then sell some of those too you know somebody use some money too right you got five seven percent your house that give you my car all of those kinds of models become possible because we don't just do a shallow transformation of the physical into the digital where we just do the ownership rights we want to take all the youths rights as well and you can see that this model completely wraps around the utility token model because utility tokens then bind directly into the material world because those of the tokens you give people you want to use the asset and the security tokens are the tokens that you give people when you want to own the asset and ownership and use are two different contractual rights it took me a long time to learn how to think about law this way it has been a very hard learning process because I've movie your background at all I came into this as a nerd and I eventually realized was that lawyers are simply the programmers for the real world right and the real world is a nasty squishy imprecise place so the lawyers are basically constantly writing error handling code a paper contract it's about 90% exception hard-looking about 10% logic right that's just because the real world is really squishy so when you actually get to know the lawyers and you know it's a process and what you discover is they're just programmers that weren't given computers young enough you accidentally become lawyer in five years every weekend damaged you'd become programmer my chief legal officer Christopher Rea who figured all this stuff out you know is an extraordinarily nerdy man and only very narrowly avoided becoming a programmer and and that's part of why we have this system working is because what we built was a culture which was fully tech and fully law and that was basically two years of conversations around my dining room table you know really getting to the point where everybody spoke everybody else's language well enough to come up with something which was a genuine fusion of code and law rather than a kind of afraid and in misma impedance mismatch parent once you understand that the processes which generate law in the process which generate code are the same kinds of people solving the same kinds of problems just for two different areas of technology we could basically begin to back into law in the same way that we're backing into legacy systems like si P right if you're doing integration with the RP system so you've got the asset control logic that currently runs capitalism connected to the blockchain you could do the same thing with law it's just the case of getting fully immersed enough to the point where it begins to look like one thing rather than two and this is basically the core of what we spend our time doing it takes a long time to make these kind of problems sewing for and the next thing that we have to do is a community after this is government because if we can figure out how to deal with lawyers where it becomes a single system we ought to be able to do the same thing with the state or any other standing institution it's just a question of getting deep enough into the understanding of the systems to understand that we're all trying to solve the real-world problems in a way that works in the real world it's just as the real world changes you get different generations of solutions and all these different generations the solutions are kind of running on top of each other and this is the complex system of society if we want to interact with that complex system we have to make deals and form partnerships with these entities and that involves understanding their logic and understanding their a historical period ok very briefly because always time for one question governance protocols if we take something like a Stradivarius violin and we very nearly had one with us today but we had some logistical problems and you need to protect for things value because it's hundreds of years old which means you need to be in a position where it's properly maintained and cared for if it needs a replacement of one of the parts which wears out with play you need to make sure that it's done by a proper person who's going to decide it's a proper person so making the assets such that they're protected over time whether it's rain forests or violins you need to take a ton of time to design governance structures so that the owners don't put short-term interests ahead of long-term interests and damage the assets that they're custodians of because I don't want us to build systems which basically turn into kind of cutthroat capitalism where we have like we've Ridge buyouts followed by asset stripping we want this to be a system where things have grew under long term custodianship and management so that they are cared for for the future and we need that approach with four historical artifacts we also need it for cultural artifacts we need it for environmental artifacts how are we going to do things like you know correctly tax carbon probably there'll be a blockchain in there you want to be able to take the rainforests of Google under real government structures so the final thing is centralization decentralization building protocols where the automated counterparties the automated custodians are reliable enough that you can use them on smart contracts and not wind up with a ton of error where error implies dispute which which is back in the Ricardian model where we got to go to arbitrators and all the rest of that stuff vm to get this stuff correct requires that all the custodians and all of the other actors in the system who doing things like providing title insurance all of those actors have to be an extremely high level of professionalism in the analog world right the analog world doctors have to be the best possible analog world actors and we need to make sure that as we grew these systems out we've got the appropriate certification training technology packages to make sure that the animal world actors are not stealing things out of the custodians and then screwing with the dispute processes by bribery if you want to think about doing business in developing world countries where we really desperately need effective trade infrastructure there are enormous pools of assets in developing world countries that could be used to stake and secure smart contracts it would enable trade if you're selling goods for a factory if you stake the factory itself on the performance of those goods it's much easier to do business with you than if you've got nothing but a promise and that ability to anchor deals against hard assets allows us to work in low trust environments those kind of competences require the entire analog system to be as good as it can possibly be or it would constantly in dispute and disputes are expensive so our big challenges as we go forward finding the correct set partners on the analog side to build analog systems which are fully integrated and compatible with the blockchain reality we just published the light paper explains a lot of logic explains a lot of legal reasoning it gives a really good idea of how these systems work there will be a white paper very likely associated our fundraising if they're at some future point that stuff is not happening yet if you hear anybody say that it's happening it's not happening but at some point the intention is that there will be tokenization of these things if we could find legal structures that we like for it that is TVA I guess that is all I had to say thank you do you have any measures in mind to prevent the centralization of custodians to the point that they look they would look like the big tech landscape we have right now so my expectation is that the custodians will turn into marketplaces with extremely strong oversight from the community so in any situation where you think that the custodians are becoming centralized that creates an opportunity for a second custodian went to the market because nobody wants a centralized to sodium so I think what you guys can invite community and forced antitrust regulation the other possibility is that we build market machines which punish custodians who get too large by for example taxation so we could build anti-monopoly machinery directly into the underlying contract frameworks you