Bitcoin, Blockchain &

CryptoContractsPart 3

Digital Autonomous Corporations

Prithwis Mukerjee, PhD, Praxis Business School, Calcutta, India

Imagine a company that ...★ Offers customers a way to track their assets and transfer them to others

on the basis of validated instructions○ this is similar to a current or checking account, offered by any bank

★ “Hires” employees for this bookkeeping activity and pays them with company shares

○ “employees” may also collect transaction fees in form of company shares

★ Has been operating since 2009 without any interruption of its services★ Has a current (2016) market capitalization of nearly US$ 5.5 billion ★ Has no managers, no CEO and no physical assets in any geography

What is Bitcoin ?★ Is it a currency ?

○ a new, efficient way to pay for goods and services

○ because it offers anonymity, been used for illegal cross-border trade, the “SilkRoute”

○ most conversion gateways (“exchanges”) have installed Know Your Customer processes

★ Is it a commodity ?○ something like gold or crude that needs to be

“mined” using CPU power○ can be bought, sold, held or exchanged for other

currency or commodity○ total amount limited to 21 million BTC

★ Is it a digital autonomous corporation ?

○ performs a bookkeeping service, tracks assets, allows transfer of assets

○ “employs” miners, pays them with bitcoin to validate transfers

○ has a real US$ denominated market capitalisation, based on current value of BTC

“Smart” ContractsDefined by Nick Szabo in 1997

A way to use hardware and / or software to programmatically encode various clauses into a contract so that assets are released if and only if certain conditions are met for example

if signature is valid

if asset has been received

if date has passed

if { other conditions have been met}

Used in Bitcoin validation

KPuC 700

KPuD 2500

KPuC 800 KPuB 500

sigC

sigC sigC

sigC

to understand the Bitcoin validation process, please see this slide deck

The Bitcoin Contract -- a little more detailKPuC 800 sigC

TXN SEQ

DUP HASH160

PubKHash

Equal Verify

CheckSig 800sig PubK

refers to an unspent UTXO on blockchain

retrieve locking script

encumbrance or “locking script” attached to asset by previous owner before it was given to current owner

“unlocking script” by current owner who wishes to spend asset

“Script” language interpreter joins two & evaluates.

800TRUE

FALSE

true

800TRUEfalse

Programmable Contracts❖ contain code written in the “script” language of the Bitcoin protocol

➢ reverse-polish notation stack based execution language➢ is evaluated to simple “TRUE” or “FALSE” value to allow or disallow a contract➢ it is deliberately not Turing-complete for security reasons

❖ other, non Bitcoin, blockchains, like Ethereum, have created more sophisticated programming languages➢ these can be used to encode more functionality, “smartness” into the contracts➢ for example, we can require

■ multiple signatures to release an asset■ a certain date before which a contract is not valid■ other, third party, external conditions to be met

DUP HASH160

PubKHash

Equal Verify

CheckSigsig PubK

Possible scenarios for smart contracts❖ “Internet of Things”

➢ Ignition of car will start when purchaser presents his public key IF mortgage payments have been made, ELSE banker’s public key can be used to start and take the car away

❖ Escrow Accounts➢ Money can be spent by owner of account only if certain quantum of money has been

deposited, otherwise money will go back to depositors after a certain date

➢ Automatic lottery : Only the funds of the highest bidder are can be spent by the lottery organiser, other bidders automatically get their money back at close of lottery

➢ After death of owner, heirs can automatically access assets

❖ Stock & Securities Market➢ the blockchain can more efficiently, accurately, and openly track the exchange of stocks,

bonds, and other financial securities

Wall Street has started to move ….❖ US Depository Trust & Clearing

Corporation➢ organisation that tracks and manages

the transaction of all financial instruments in the US

➢ Jan 2016 - issues a white paper that talks about a once-in-a-generation change of technology

➢ has teamed up with the Linux Foundation to create the Hyperledger project -- an open source project for blockchain technology

➢ Mar 2016 -- organises a symposium to explore the way forward

❖ US Securities and Exchanges Commission➢ Has permitted Overstock, a NASDAQ

listed company to release equity shares on an alternate trading platform

■ Overstock has in the past released corporate bonds to qualified institutional investors on the T0 blockchain

Two major open source initiatives❖ Hyperledger project

➢ https://www.hyperledger.org/➢ managed by the Linux Foundation and

funded by IBM and the DTCC➢ the project wishes to create distributed

ledger as a permanent, secure tool that makes it easier to create cost-efficient business networks without requiring a centralized point of control. With distributed ledgers, virtually anything of value can be tracked and traded. The application of this emerging technology is showing great promise in the enterprise.

❖ Ethereum➢ Ethereum is a decentralized platform that

runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

➢ Ethereum is how the Internet was supposed to work.

➢ Ethereum was crowdfunded during August 2014 by fans all around the world. It is developed by ETHDEV with contributions from great minds across the globe.

Ethereum is a new kind of Law“Traditional law is a form of agreement. It is an agreement among people and their leaders as to how people should behave. There are also legal contracts between individuals. These contracts are a form of private law that applies to the participants. Both types of agreement are enforced by a government's legal system. But Agreements are ambiguous. And enforcement is hard.

Ethereum solves both these problems. It does this with the marriage of two special ingredients: a digital currency, and a complete programming language.” http://etherscripter.com/what_is_ethereum.html

Ethereum is a platform for building the Digital Autonomous Corporation