“Code is the law”: how to avoid substitution of the principle of decentralization (part 1)
The history of the Ethereum platform — will the blockchain really open an era of managed self-regulation?
The end of winter was marked by the merger of several dozen companies, including giants of the financial and IT industry, in the Enterprise Ethereum Alliance (EEA). The Alliance will strengthen the security of the Ethereum distributed registry, develop standards and technologies for its wide application in business. Like Bitcoin and most other registries, Ethereum is based on blockchain technology, provides circulation of “digital assets” and is suitable for the financial industry (more about it — in an interview with the Creator of Ethereum for for Forbes). EEA is not the first Alliance to implement registries. However, its creation, along with the refusal of the us securities Commission (SEC) the other day to register an exchange-traded investment Fund to work with bitcoin, Winklevoss Bitcoin Trust, can make Ethereum the flagship of the introduction of digital assets into the business world.
Each registry is more than just a database distributed across multiple computers, accessible to everyone to view and enter new data. It is also a program code, thanks to which the registry is automatically aligned on all computers and acts on some logic: “skips” only “correct” in this logic data, on the basis of some data creates others. Lay the logic, where entering data means the transfer of some units, and the negative balance or double spending is unacceptable – get a kind of “international automatic Bank”. Add rules for creating, “issue” new units transfers for the benefit of those whose computers provide the logic get the growth and support of the system by the people in accordance with the market interest to its units, as is the case with Bitcoin. The system is “decentralized”: the code ensures the execution of logic, and within its framework the possibilities of people are equal.
But Ethereum is a special registry, and it is no accident that it ranks second after Bitcoin in capitalization (the market value of the registry’s “currency”, ETH, is more than $2.5 billion). It aroused great interest in the ability of users to write and run ” decentralized applications “in the registry, that is, programs from one or many “smart contracts”, setting the logic of interaction of people using them. Like a normal paper contract, a digital contract defines what should happen when certain conditions are met. For example: if the register receives data on the registration of the radiometer of the goods at the geographical point “buyer’s warehouse”, then the corresponding part of the Deposit will be automatically transferred to the seller’s account. It is enough to establish such a contract once to get a fast and reliable service to automate the interaction of many contractors on this logic – they will only determine the specific parameters of each delivery. Uber and without registries started the wave of “decentralization” of interaction between passengers and drivers, and now instead of the comfort and control “controls” the logic of the application. But the ease of using registries as tools to replace the writing of “from scratch” IT-systems and dramatically reduce transaction costs, can lead to serious changes in society, to the rapid death of the former and the emergence of new business models and entire markets.
The composition of EEA suggests that the priority will be to ensure the financial application of Ethereum. This is also logical given the novelty and complexity of the smart contract mechanism, both technically and legally. For example, improper performance of a conventional contract implies human rights measures, while automatic performance of a digital contract is always considered “appropriate”. However, both the problems and the prospects for the use of “decentralized applications” are related to the understanding of the principles of “decentralization”. This was clearly manifested in the interest in the “Decentralized Autonomous Organizations” (DAO) created on the basis of “smart contracts” and in the history of TheDAO, the Ethereum project.
Thedao Investment Fund, conceived as “TAO and the mother of all TAO”, last spring held the most successful crowdfunding campaign in history – for a month from more than 20 thousand investors around the world was raised about $150 million. “Smart contract” took funds in ETH and issued in return “digital shares” TheDAO. The idea of the project is as follows: investors get profit from investments of TheDAO funds in projects implemented by “subsidiaries” of DAO. “Code is law” and “TheDAO is code” and therefore does not need managers. TheDAO “decentralized”: all holders of “shares” can participate in decision-making on “stitched” in the code of contracts logic. In particular, they can propose projects and vote for their financing, and the corresponding contract with a certain number of votes will automatically allocate funds for it in ETH. No bureaucracy, no receiving of profits of Directors, nor the legal pitfalls for investors – everything works automatically. “Code is the law” is understood as the elimination of the human factor – participants must rely entirely on “smart contracts”.
However, on June 17, 2016, an unknown hacker withdrew ETH worth about $50 million, taking advantage of vulnerabilities in the code of “smart contracts” of TheDAO itself. There was an interesting conflict. On the one hand, the “attacker” only took advantage of the open to all the opportunity to write their own and execute existing code. On the other hand, the code did not work as investors expected. And, of course, the hacker therefore was going to assign the resources of the Fund.
It was decided to make a “hard fork”, that is, change the code and data (“history”) of Ethereum, returning the registry to the state before the theft – as if it was not. But part of the community continued to support the work of the former registry. It was separated under the name Ethereum Classic with the publication of the Declaration of independence and the Manifesto of the crypto-decentralized expressing the value of the immutability and independence of the registries from any “authorities”. And again: “code is law”, once the code gets triggered and the recording is made, no they can’t change. One of the advantages of cryptocurrencies is that it is almost impossible to freeze your accounts or withdraw funds from them (as in the case of a hacker) without your key. Therefore, the change of records is interpreted as a violation of the principles of decentralization.
So, “hard fork” is made, the funds are returned. However, the incident has put before us the tough questions. And before the advent of registers, we increasingly relied not on “authorities”, but on the rules expressed in the “paper code” of laws, statutes and treaties. And independence is good, but the role of many “authorities” and intermediaries is to protect against violations of the “rules of the game”, from incorrect or ineffective work of the norms themselves. In addition, to understand the written code laws, statutes and treaties is not easier, and error-free and code compliance standards are not yet guaranteed – TheDAO is a Prime example. Decentralization is the means to replace “depending on the authorities” vulnerable to the negative effects that firmly lock the inexorable code?
But “code is law” (or “power”) in the primary sources means something else. In addition to the custom, morality, law and other types of rules (“codes” or “codes”) governing the life of society, such a regulator is the hardware-software device and information policy of the Internet, its services (and not just the code). For example, an important role can be played by the fact of reading our message in the messenger by the interlocutor – more precisely, our ability to establish this fact and the ability of the interlocutor to hide it. But this in itself does not mean that we should consider the program code or records in the database something immutable. The growth of the organizing influence of information systems on our lives and their capabilities should encourage us to master them as a tool for regulation and development of society.