BitcoinConfHK

1. Crypto Law
Opportunities for cryptographic protocols in
shaping the legal systems of the 21st
century

2. Purpose of Law
● Prevent involuntary interactions
● eg. theft, murder, etc

3. Purpose of Law
● Mediate ongoing interactions
● eg. I offer to sell you shirt for $10, you send
me $10, I do not send shirt

4. Types of fraud
● Total
● not sending a product
● Partial
● sending a product with very bad quality
● Visible
● defect is immediately obvious
● Invisible
● defects take months to manifest
● defects have only a small chance of manifesting
● Types of underlying commerce
● Product, one-time service, ongoing service
● Financial service

5. Idea: incentives
● No legal system
● Profit from acting honestly: $3
● Profit from cheating: $10
● Legal system
● Profit from acting honestly: $3
● Profit from cheating: -$40
● Problems
● How to prove fraud (information asymmetry)
● Cost of filing a claim
● Cost of enforcement

6. Cryptoeconomies
● Involuntary interaction
● Violent attack impractical
● Hacking, perhaps practical
● Ongoing interaction
● Fraud more difficult (information is more public)
● Fraud easier (people are anonymous)
● General problems
● Commerce international (enforcement harder)
● Rapidly changing society (harder to set
standards)

7. Case studies
TorWallet (2013)
Pirateat40 (2012) Bitcoinica (2012)
MtGox (2014)

8. Solutions
● Know whom you are trusting
● Add disincentive to cheat
● Require collusion to cheat
● Make cheating more visible
● Make cheating impossible

9. Know whom you are trusting
● Idea: if A trusts B, and B trusts C, then C is
more likely to be trustworthy
● Secondary benefit: if C cheats B, C loses
reputation with A too
● Naive implementations vulnerable to sybil
attack, be careful

10. Add disincentive to cheat
● Deposits
● A submits N coins as deposit, if A cheats
then deposit goes to B
● Sacrifices
● A sacrifices N coins to be able to
participate in a system
● Idea: allow reputation to go negative
● Hostages
● A submits N coins as hostage, if A cheats
then coins are destroyed or sent to charity

11. Require collusion to cheat
● Multisig
● Oracles (for data)
● Wallets (for personal security)
● Multisig 2.0
● Withdrawal limits
● Rights of refusal

12. Make cheating more visible
Provably fair gambling
Provable solvency

13. Make cheating impossible
● Factum law
● Idea: the definition of how much money
you have is based on the results of past
contracts
● If you cheat, the system automatically
deducts $X
● Problem: not everything is cryptographically
verifiable
● Computational resources: yes
● Math problem solutions: yes
● Subjective effort: no
● Offline effort: no

14. Blockchain-based contracts
Financial derivative, 21 lines of code:
if !contract.storage[1000]:
contract.storage[1000] = msg.sender
contract.storage[1002] = msg.value
contract.storage[1003] = msg.data[0]
contract.storage[1004] = msg.data[1]
elif !contract.storage[1001]:
ethvalue = contract.storage[1002]
if msg.value >= ethvalue:
contract.storage[1001] = msg.sender
c = call(contract.storage[1003],[contract.storage[1004]],1)
othervalue = ethvalue * c
contract.storage[1005] = othervalue
contract.storage[1006] = block.timestamp + 500
else:
othervalue = contract.storage[1005]
ethvalue = othervalue /
call(contract.storage[1003],contract.storage[1004])
if ethvalue >= contract.balance:
send(contract.storage[1000],contract.balance)
elif block.timestamp > contract.storage[1006]:
send(contract.storage[1001],contract.balance - ethvalue)
send(contract.storage[1000],ethvalue)

15. Applications
● Self-executing financial contracts
● Computational applications
● Proof of resource
● Proof of bandwidth
● Decentralized organization management
● Shareholder relations, board election
rules, etc
● Decentralized oracles (Truthcoin,
SchellingCoin)

16. Benefits
● Cost of enforcement tends to zero
● Scalable (works for both $1
microtransactions and very large trades)
● No barriers to entry, anyone can participate

17. Problems
● How to determine precedents?
● What level of bad quality is actually
fraudulent?
● What are the defaults?
● Network effects
● Only effective if many people using it
● Solution: start in a community

18. End