EthCC 2: Vinay Gupta

all righty so I am Vinnie Gupta I was the original launch coordinator for hiriam so I kind of project manage the launch frontier and a bunch of the other names where things I invented and I'm gonna talk about what are you doing since then very briefly so yeah I mean that was four years ago right we've really come a long way um but there are certain barriers that we haven't been able to break through conceptually we've developed enormous amounts of stuff for dealing with non-physical things but we still haven't succeeded in getting a breakthrough into the real world so this talk is gonna be about how we use etherium smart contracts to control real world assets and this includes things like security tokens but it also includes things like renting hotel rooms electronic locks and all the rest of that kind of stuff that we've talked about doing but we haven't yet done in any kind of scaled way so we start with the concept of etherium right it's a thing which handles the ethereal world it's good for handling non-physical stuff that's what it's for thought so it's about and it works very well for doing that mmm material on the other hand is for handling physical stuff right it's a way of using aetherium smart contracts to control physical things and by control physical things but amina's control the legal aspect of a physical thing so the proprietary rights the contractual rights we're not talking about things like robots here we're talking about the practical legal business of doing things like buying and selling houses cars that's kind of stuff and it all uses a theory on smart contracts as a way of writing to the legal system so you could think of this as almost being like the inverse of an Oracle right an Oracle reads data to the real world from the real world and puts it into a smart contract this takes data from a smart contractor writes it into the real world anyway which is recognizable by legal courts as an event a thing happens so this gives you some sense of the sorts of applications we're talking about right if you REM does things Cassio's and material does things like being about buying self physical stuff it's all the same technology but it's embedded in a legal context which allows those technologies to write to the legal system and exactly how that works is what I'm mainly going to be talking about it's a little bit but where we are so let's start with this basic question why can't I buy a house using a smart contract and there are some sort practical questions like well you know what by the volatility of the coin you're using we're beginning to resolve that with things like dye but there's a deeper problem which is you buy and sell houses on contracts and that contractual framework includes within it implicitly a court because a contract is only a contract if somebody will enforce the contract if there's no possibility of contract enforcement you don't really have a contract you just have a piece of paper with some notes about what was gonna happen on it contracts are enforceable they're not useful so in each contract there is an implicit court and the implicit court if you don't specify it will be the core of the country that the people who are executing the contract are in so if we do a contract here today it will be heard in a French Court or something goes wrong but contracts allow you to specify what legal system and what court you're going to have used in the contract so you can specify which court system will hear the contract but you can also specify your choice of law so you could do weirdies or Tarek things like saying that you want to use Japanese law for a contract that's signed by two French citizens and the world's legal systems allow for that because it just turns out that things like that are necessary sometimes and so their courts allow it um this allows for institutions called arbitration courts or private courts and these things show up all over the blockchain space there's lots and lots and lots of discussion about using arbitration there must be fifteen or twenty blockchain start-ups which are discussing providing arbitration services because what this allows you to january is a core which actually understands oops it easy rats but it was in January is a court that actually understands what it is that you're doing right and this construct the private court system that understands what you're doing is necessary to provide legal enforceability to a smart contract if this weren't contract isn't fully in control of all the assets on chain so if you're doing things like anatomic swap all the assets are on chain you know ether goes in an ear should xx contract token comes out but there's no point of which there's possibility for the contract to diverge from reality because everything is on chain it's a sealed system when you want to come out into the real world you can be a contract disputes you paid me ether I didn't give you my house and in those situations you need an arbitration court to come in and sort the mess out so once you think about this in the context of economic enforcement you begin to see where the questions are in these systems right arbitration courts are not free you have to pay these people because it is after all a private court and they are damn expensive so you go from the kind of you know fiat court where your taxes are who are paying for these legal services and forward through to the arbitration court which is a private transaction and these things are damn expensive because the arbitrator's are very high level lawyers in most cases and they're charging you $400 now we're for a few days of work to resolve the dispute and by the time you've had a proper arbitration that would have gone through for some mildly complex case $25,000 of costs would not be at all surprising if you imagine twenty-five thousand dollars of costs with say a 1% dispute rate even if you insure the risk so it's spread out over everybody that's involved in the transactions you know every user has to put money into the arbitration pot so that you've got good access to justice when something goes wrong it's still going to cost you something like two hundred and fifty dollars a transaction and that's unsustainable for ordinary trade right it might work if you're doing something multi million dollar bond deals but it's not going to be the kind of thing that will allow you to sell houses and cars and couches and so on there's too much friction and even if you engineer that friction down you're not going to get it to blow the threshold where you could compete with something like eBay it's just too damn expensive pure arbitration has been discussed a lot there are a lot of people talk about doing peer arbitration the problem with peer arbitration is the 1958 Newark convention and foreign arbitral awards which allows for international no enforceability of arbitration and complete her got all that this stuff is really soaked in um I've no background in law we've learned this stuff from scratch so I came from the smart contract were like okay how do we make smart contracts handle physical stuff this is what I have been learning for the past several years it's how to make smart contracts do it but it involves in orbing enormous amounts of completely alien way of thinking so the 58 convention says if you're gonna have an enforceable award it's based on a thing called the principle of comity so the judges in one jurisdiction say well you know these guys in the other jurisdiction are also judges that a lot like us there's Brotherhood between all the people that are implementing law and as a result we will obey their guidance on what should happen locally and we will waive their awards as if there are rewards that system breaks down when you have judges in one jurisdiction having to deal with the words that were made by non-professional legal people in another jurisdiction so somebody comes in with an arbitration award from a pure arbitrator and says right I want you to sell this guy's house and give me the proceeds it's very plausible that somebody will simply say no and at that point the peer arbitration system is dead because it's no longer enforcement so if you want enforceability you really have to use real arbitrators because you have no knowledge of when the peer arbitration system will simply stop working so the approach that we take to this is building a thing called an automated titleholder so what an automated titleholder is is it's the bridge between the smart contracts in the legal world and it operates by using a whole bunch of very cunning legal and smart contract engineering techniques to bind together an entity which to the court system appears to be a standard corporation and to the contract system appears to be a standard smart contract and it does a whole bunch of very clever things internally to make sure that those illusions are never broken so to the court system it is a company to the smart contract world it is a smart contract and it manages the matching of those two realities internally using a bunch of very clever Patricks and I'm gonna explain a little more about how that works in a moment now the point of this is that what we want here is an ultra reliable counterparty for a smart contract so if the idea here is the ether comes in and then I give you a title deed to a house the worst of all scenarios is the ether comes in and then the title deed for the house never comes out or it gets stuck in some kind of legal trap and it's stuck there for six months of litigation well we also don't want a situation where everything resort is resolved by escrow because escrow is incredibly slow and expensive it's a tax in the same way that an arbitration insurance scheme would be a tax you can't run an economy with a hundred percent ask for everything it's just too much friction what you need is the ability to enforce award and this is what we've built so how does it work right here are all of the actors in the system that you actually wind up working with if you want to do this work it's a big cast of characters so you have the blockchain you have private courts or arbitrators you have the national courts the national courts are in this scheme because the national core is what rules over the property in the system if you want to do this for the house or a painting or something like that all property recognized by the fear cause an owner so if we want to transfer ownership we have to do something that works from the perspective of the Fiat courts and that's why the Fiat courts are in the picture we're no longer in a situation where we've just got crypto assets what we have is crypto assets on one hand of fear assets and the other and our job is to join that stuff together seamlessly and so we've got the smart contracts we've got the automated titleholder which is this special kind of corporation we have the asset title which is basically our an entry on a state ledger for the most part and sellers contract buyer so let's look at the first way of seeing this stuff this is the wiring diagram of how all these things relate to each other you know fairly simplified way right there are many different kinds of relationships between these entities the particular magic happens in the places where you've got a single entity which is different kinds of lines coming into it so if you look at the smart contract for example it has lines that come in from the contract so the contract is talking to the smart contract it also signs that come in from aetherium so that's a place where the two worlds meet you can see the same thing happens with the ultimate titleholder these are the places where things cross over unfortunately the blue lines the purple lines come out almost identically on this projector and so you'll have to look carefully on that next time I will change the slide okay so Fiat property system will understand this it's just buying and selling so now you have contracts you have courts there's a chain component there and contracts go into title holders which control titles government courts control the titles as well and you just have the standard scheme where you register change with wand registry and everything updates no news the Ricardian contract this was invented by Ian Greg back in the 90s it's a paper contract that specifies an arbitrator and it specifies the behavior of a smart contract if something goes wrong with the smart contract and the arbitrator has legal authority to go in and fix it because they're named in the original paper contract this is the standard thing that everybody is using to get access through the world they're all over the blockchain space now we have the smart property so this is the thing that material is doing this is the clever part so here we have a smart contract which is tied to an automated title holder which is tied to a set title so this is like the kind of enormous lis grown-up big brother' version of the special purpose vehicle which is what's used for doing things like real estate securitization so in a special purpose vehicle you put the property into a special purpose vehicle a single purpose corporation and the equity in that corporation gives you a partial ownership right of the underlying physical property and that's all the real estate organization stuff you hear about it's running on that kind of the problem is the in that model the link between the smart contract on to the SPV is very weak because it's not at all clear why is that the shares from that SBV are represented by that specific er C 20 token it's also not clear where these things would be exchanged because at this point in history there are no functioning securities exchanges so there's a whole bunch of questions about the SPV is a way of approaching this because the SPV s that we have were designed for interfacing with the ordinary banking system where money comes in but if something goes wrong you've got the ability to reverse the payments and there's no anonymous banking to speak of when you take the regular SPV structure and you drop it into an environment that has non repudiate able payments and things like z cash and zk starts kicking around the normal s PV is no longer fit for purpose it's just being dropped in deep into the 21st century without any updates and it's only a matter of time until you wind up with security tokens which turned out not to be marked by any assets because somebody has stolen the assets out from under the security token and the token itself is worthless preventing that requires a really radical tightening of how the sPB's operate otherwise you wind up with extremely hard payments going in one direction and squishy vulnerable attackable SPV tokens in the other direction so this stuff is a real issue so we have the smart contract with the automated titleholder with the asset title now what we're doing here is that we are joining the Ricardian contract that specifies what the parties want to happen to the automated title holder which does the legal control of the assets so an instruction is generated between the two parties we make an agreement I put my money into the smart contract as a payment any federal dier wherever it happens to be the smart contract is read by the automated titleholder systems and then updates are made to the legal registers that control the assets and what that allows us to do is essentially an atomic swap where as soon as you see an update on the blockchain indicating that the contract has updated you can be very nearly certain that you're another legal assay had the legal owner of the you bought a respected by the court in the jurisdiction of the assay so this is the legal machinery that you need to be able to do things in the general forma of sending a thorough smart contract and receiving a villa in Brazil in payment right it's actually the thing that you need to get all the way to the point where you can go car shopping with your phone and you know there's a barcode on the car and we take a picture of the barcode and it tells you how much it is and you send a payment from your wallet and the system updates and then you pick up the keys and you walk off the wall it's it's the machinery for doing that know things like houses and cars exist on their own registers they're a bit fiddly to do so we're not starting with houses and cars this month we're starting with common property or what they call a chattel property moveable property it's another name for it which is basically stuff like violins or cameras or just ordinary things but that bridge once it's built every jurisdiction you operate in and every class of property you want to work with it's just an extension to that bridge so you start with the things which are easiest to do and then you push forward until you do everything and that's what we're doing um it's about joining of the smart property the recording of contract as far as we know that's never been done before right this is the new thing and the automated title holders where the magic are right the the internal machinery which makes that possible is why we have taken so long to get material up to speed that stuff is extremely subtle and very very complex as mr. Rey has learned to say everything simple is a lie right there's no way to simplify the legal complexity in these systems because if the legal system catches on something because there's some 1857 wall that specifically applies to multi occupancy flats which have had a flood as a result of the breach of a river caused by a sheep and it turns out that the legal world and your smart contract now deviate from each other and there's no way back because the legal system will not respect a smart contract on its own so you know there's no way of doing this that is not about full respect of the complexity of the legal system and the legal system is a sort of multi thousand-year-old accumulation of human knowledge about everything that can go wrong when people make an agreement and then try and implement it so there is no simplifying it just has to be done the hard way so what you can do with material is this right and you bring us some assets right we start with common property in the UK so you come to us with a bicycle or a camera or a nine million dollar Stradivarius violin and you say material I would like to auction this for ether or Die or I want to swap it for a crypto kitty but only a really good one and we then work with you and Papa probably your lawyers to figure out exactly what the paper contract will say under which you're going to sell this thing then a smart contract is prepared which implements the paper contract and an automated because rights holding entity will be created or will use one which we already have and the property will be assigned to that entity and once it's in that entity that entity is the legal owner of it and that entity can dispose of it by for example giving it to a new owner once the transaction is complete and we can do this now right it's still a bit manual and there's a certain amount of handle turning to make it work but um in queue to the violins we'll go online and in q3 with a little bit of luck we'll start taking things out of industrial supply chains and putting them directly into these systems and for use in trade finance and then after that it's just going to be a river because everybody that wants to use smart contracts to control the real world is going to need these kinds of systems to be in play and at this point were the only people in the world that know how to do this I expect the techniques will spread but not in a hurry because everything simple is a lie so we talked about the ultimately titleholders we talked about the SPV so I'm just gonna skip four on that property rails and payment rails so what we are discussing here is the creation of something which is the counterparty to a payment rail the payment railways use the blockchain to make a payment the property rail is the thing that gives you the title to physical property on return you know the outgoing rail is the payment the the return rail is the property rail so we're building is basically a property rail how do we verify that things we think are true or true how do we get the goods into the system in the first place how do we verify they're on forgeries the answer is insured Oracle's practically all the places where facts go into the system the fat comes in in the form of an insurance contract which is a consequential loss contract in the event that we take this GU these Goods into the system on the basis that this is out there 1955 classic forward something-or-other if it turns out to be a fiat Pinto somebody has to be legally on the hook for the damages that come out of them and we don't think there's any other sensible way of getting facts into the blockchain but the beauty of this is because it's an insurance system if the stream of data coming into the blockchain is extremely reliable then the cost of data will be very cheap if you have an automated system which is almost never wrong and it just spits the data directly out and Oracles the insurance on those facts will be extremely inexpensive if on the other hand you're an art historian and you have to do months of research to figure out whether something is genuine or not that's going to be a much more expensive process and the insurance policy that you sell as part of that process will be correspondingly much more expensive so this provides as a single overarching architecture for getting facts into the blockchain in a way which can be used commercially and that's very useful because it means that everybody is basically playing the same game from people that have you know and thermos and thermometers but it is constantly outputting what they think the temperature is right the way through to people that are doing you know six months of analytics before they decide whether or not something is real and then they're publishing the results it provides a way for data providers to get paid and it provides a way for data consumers to absolutely understand the limit their risk so um the bigger picture on this is that what we're attempting to do here is do for matter what the internet did for data in the past 30 years and I don't mean just the transmission of data right we can't physically transmit objects using the blockchain we're gonna have to wait for the physicists to catch up on but it's all the other stuff that we did to data or to information in the course of booting online the fact that every piece of information has a unique name right this clicker does not have a unique name there's no serial number there's no identity on this if it's lost there's no way of returning it to its owner right there's just no way of knowing what it is if you have a name for things there's lots of things you can do because now the objects are identifiable and it's so much easier to talk about a particular film or a movie or a book or you know pull them that a friend wrote and stuck on a blog if you've got a unique name in the form of URL if you're just going through a description and a search engine so the first thing is you get precise names for things out of this process um the second thing is that once you've got names for things you can attach metadata to the names who owns it where did it come from how much does it cost if it's lost how do I replace it if it's broken do I claim on my insurance or their insurance or just take cash out in my pocket and give it to the front desk at reception how does it work so we can start instrument in the world so you can take out your smart phone and you can understand the rights that are attached to the objects which are around you and that becomes very useful when you start thinking about renting things all the sharing economy stuff that we talked about doing 10-15 years ago it never really took off except in a very centralized corporate forum through things like Airbnb and uber it doesn't have to be that way right if you've got the ability to correctly connect physical assets to smart contracts there's no reason that the sharing economy should be a centralized thing at all and you can have single sharing economy backbones which carry all different kinds of sharing at the same time you don't need one app per sharing thing you could have a much more distributed ownership model you could go through and spend you know two weeks tagging every single thing in your house bind it all to smart contracts and then immediately call for rentable and then half of your stuff might wind up on the road you know being carried by friends of yours who rented it to go and do trips or play concerts wherever they were gonna do there's an enormous amount of overuse of stuff in the physical world because we just don't have the architecture in place to do sharing or renting particularly cuz we can't insure things but if it's all bounded contracts borrowing it how to replace it and everything else will get bundled into a single transactional structure so I think there's an enormous impact here for reducing the amount of material stuff that we all need to own while maintaining the same quality of life and that reduces our ecological footprint I think there's a huge game to be played there so once we start thinking about this in terms of you called ecological impact we can also start attaching metadata for things like carbon footprint directly to the objects that we're dealing with so as certifications that things are fair trade or slavery free trade a statement about carbon offsetting all the rest of those kind of things can be tied directly to and the asset passports which means you can then have policies like you will pay more to rent something if it's been carbon offset or you won't buy anything that doesn't have a slave free trade certification and the underlying software that runs these systems can simply never show you something which doesn't meet your ethical standards if you decide you're never going to buy anything that doesn't carry our slave free trade certification you can just instruct your software to never show you any offer that doesn't have that certification attached so you could begin to automate your moral choices because your software can simply do the screening for you you go to the preferences you set your moral choices you cite your bars to ever the settings you want are and then it just screams the world out so all the commerce which doesn't fit your ethical standards is never shown to use a choice the software walks on your behalf to protect you from your own laziness I think that's hugely powerful um so that's all folks on the next slide I will show you where the meetup is if everyone wants to walk over there with me if you want don't worry about material info material comm send us an email talk to us tell us about the wonderful things we could do together and material comm /lp the light paper which is a really good description of what we're doing it uses slightly different terminology from the terminology on the slides we've made a couple of updates in the legal model in the last few months so it needs a little bit of an update but it's very conceptual or about whole thing works and it back to actual tangible physical assets in q2 and meet up directions are here thank you all very much I don't have much time for questions cuz I've meant to be at the meet up at five minutes ago a battle take maybe one or two very quick ones okay very quick though keep them short because I really got me somewhere else now going once going twice okay okay yeah yeah you have to go would we consider this to be an alternative to Amazon m-maybe if we wind up with massively scalable block chains and manufacturers tagging all their goods appointment's manufacture but by then Amazon will probably be an asteroid mining company that has enormous robot forgive you metals that fall from the sky on your coordinates so you know could you replicate Amazon with this kind of stuff certainly but Amazon is not a static thing it's a moving target another question then we got a role yes okay so the assets still fine right there's no way of doing this without giving the asset its legal identity but this entire scheme is basically for now it's legal identity and that's done using this kind of insurance structure that we call asset passport ring details are in the white paper gives you a lot detail on that is there it just is there any extra costs are you setting up a separate court or corporate vehicle for every asset class or is it sort of just a generic one that is a very long and complicated question good point and so yeah totalk so to talk to me afterwards okay um any burning screaming questions okay one more at the back and then I'm out here do it good so as like individual owners of an asset or a company with a product it's the incentive to actually you know you the software but you mentioned supply chain and so I wonder what are the incentives for manufacturers to supply chain exposed in this way okay so first thing is in the age of things like snarks using these kind of systems doesn't necessarily expose your supply chain as much as it would have say two or three years ago so there is firstly a decent chance that you could do this in quite private way and the second thing is that um one of the groups were working with is called famosa and it's the union of free and special economic zones and famosa are very interested in what happens when you integrate trade finance customs clearing of wood sticks on single chain so you put all the stuff into the blockchain system and then the same information the same matter day about the object is used by the people who are landing - they're used by the people transporting it's used by the customs agents and that same data goes all the way through to secondary markets so when you sell your laptop the the data trail goes all the way back to the factory so you're not buying for example gray market knockoffs and I don't know whether consumer electronics is where that kind of transformation would start I have a bit of a suspicion it might turn out to be something obnoxious like $35,000 handbags but I think in the long run the need for transparency down the supply chain is so strong food safety electronics drug cloning all the rest of that stuff I think it's very likely that we'll wind up with this kind of approach that is don't know what combination of factors will push it over but I think it's a combined thing I think it's all of the different use cases on the same technology thank you okay I'll see you all meet up I'm gonna basically gather a little crowded up there and then we can all go over together thank you very much [Applause]