Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Florian Glatz: Defining a Legal Framework for Decentralized Autonomous Organizations (DAO)

Episode Date: April 4, 2016

The relatively new concept of a Decentralized Autonomous Organization (DAO), is often praised as a new type of organizational structure that has no identifiable owner or owners, and whose actions are automated and determined solely by a pre-defined set of rules. Views on DAOs differ widely. On one hand, members of the Bitcoin/blockchain space often portrayal them as AI-like swarm organisms, free from the shackles of nation-states, and that can act at will regardless of laws or regulation. On the other hand, legal experts caution that, like corporations, DAOs and their creators could be held liable in civil lawsuits, and that they may be served a hard dose of reality when they end up in court. We are joined by Florian Glatz, attorney, researcher and software developer (not to mention the proud owne r of the awesome domain name blockchain.lawyer). We discuss some of the basic legal concepts surrounding contracts and in what ways smart contracts may or may not fit within our existing legal framework. We also dive deep into DAOs, and address some of the challenges they may pose in the near and distant future. Topics covered in this episode: The history of innovation in law How merchant law (Lex Mercatoria) emerged in the 13th century How we can define smart contracts The legality of smart contacts The need for natural language contracts vs. contracts which are written in code Decentralized Autonomous Organizations The Slock.it DAO What would happen if one tried to sue a DAO Episode links: Florian's Website What are Smart Contracts? In search of a consensus Smart Contracts, Platforms and Intermediaries How to Sue A DAO How to Incorporate a DAO This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/125

This is Epicenter Bitcoin, episode 125 with guest Florian Gluts. The episode of Bitcoin, the show which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sibha Sanctuio. And my name is Brian Fabian Crane. We're here today with Florian Glut. Floreen Glut is a legal researcher, a lawyer, and also software developer, one of those rare breeds.

Now, I've known Florin for a while, but recently he was giving a talk at our meetup in Berlin. in about the sort of legal side and complications of smart contracts, blockchains, and DAOs. And I thought it was a fascinating talk. It really opened up some new ways of thinking about these issues that I think are extremely important, but rarely discussed. And I'm really excited that we have him on today to dive into these things. And I think they'll, there'll be the kind of issues that will have a great impact on how this industry and this technology turns out over the coming years.

So thanks so much for coming on, Florin. Thank you for inviting me on the show, Brian. Well, it's, it's kind of stress. We were talking about this with Brian before the show. There's really a wide gap between so of what the cryptocurrency community considers as real legal issues and then what lawyers, how lawyers look at it. So just in the case of a DAO, you know, you talk to someone who's building, a DO. They're like, no, we're the DO. We're not involved in the project. The project lives

by itself and we're not legally tied to it. And then you have lawyers on the outside and say, well, actually, no, that's not the case. Courts will look at it quite differently and you'll find out that you are liable. And so we can go dive deeper in this. But just find interesting that there's quite a chasm between what the community thinks and what attorneys are legal expert, I think. Yeah, it's very interesting. I agree. And there certainly are different perspectives on the relationship between the law and this whole new space of cryptocurrencies, which touch upon legal topics quite intensely in many ways. And I think there is a lot to learn on both sides by lawyers and by developers in the cryptocurrency space. They can learn a lot from each other.

And I think in the end it will be a huge benefit for both sides and it will advance, I think, both sides. And hopefully we can see a convergence of those two spaces of which, yeah, I hope I can bring some or contribute something to this convergence. One of the interesting things too is that, you know, when we got into Bitcoin, already Bitcoin was bringing up all kinds of really interesting and complicated. legal issues related to currency related to money, providing financial services, you know, different liabilities and stuff. And then, you know, when we add smart contracts and Ethereum and all those things, it just it gets even way more complicated. And I think with Bitcoin, you know, maybe we have a reasonable grasp on a fair amount of the issues.

I'm sure there are lots of issues even with Bitcoin that are poorly understood. But I think when it comes to decentralized applications, DAOs, etc., we have almost no idea of how that's going to turn out. I mean, I think some of your work helps us understand how it might turn out, but it's just something where, because we haven't seen anything yet, right? We haven't seen any legal action. We haven't seen any regulation, nothing at this point. And from that perspective, I think it's going to be an AI extremely interesting area.

Yeah, I agree. I mean, Bitcoin really was, I mean, it started as a payment system, a new kind of payment system for the internet and the world in general. And the first legal issues that naturally arose were surrounded around the question of, financial regulations and what is Bitcoin, what is the legal nature of Bitcoins, the currency, is it money, is it a commodity, is it something completely different? And I wouldn't say that this is completely settled yet. I actually think that regulation in this regard is still in its infancy too. And many regulators worldwide are still kind of rather watching it instead of passing

regulation immediately. But the space, the cryptocurrency space, is moving so fast at lightning speed compared to how quickly regulators move that a completely whole new bunch of issues has already opened up around the question of distributed autonomous organizations, so some kind of non-financial application of this technology, and smart contracts which touch upon our idea of what a contract is from a legal perspective and so on. And yeah, there is basically a big game of catching up from the side of regulators, lawyers. And I agree that it is kind of difficult at this point to really say how it's all going to pan out in the end.

But it's certainly intellectually very stimulating to discuss those topics and to kind of fantasize about what could be happening. And it's definitely at the interstate. section of, yeah, even science fiction, I would say, what is happening here. And that's just super exciting. So personally, I find that things are going quite well. I find it quite encouraging to see that in most places around the world, Bitcoin isn't illegal, that most regulators have sided on the side that Bitcoin can be used as a currency.

Like, for example, is it subject to VAT? And like just recently here in France last week, the French government put out this sort of new set of laws governing crowdfunding and crowd lending in which they encourage the use of experimentation with the blockchain and as a means to secure positions or bonds within a crowd lending scheme. So I think from my perspective, I think that things are moving in sort of the good direction. They're definitely looking at it and taking a sort of wait and see approach. But it is quite encouraging, I think, on that regard. I agree. And I mean, the blockchain is, essentially it brings positive innovation also from the perspective of regulators because it is a perfect audit trail in the end.

I mean, it allows new ways of auditability of transactions, financial transactions, actions and otherwise. And it really is a much better record of what happens than any private database organized by a single entity as it was before. And I think that regulators should welcome this technology because in the end it will bring more transparency to a lot of different industries. So in your talk that you gave. Stephen Bowen, you started by kind of positioning blockchains and smart contracts in a larger

context of innovation in law and technology in law. Can you give a bit of background about how you see those evolutions and how the kind of ties or how blockchains and smart contracts tie into it? Sure. So what I find very interesting is to think about how innovation can happen in law in general. And if you look at the history of how the law evolved, you can see that it didn't necessarily need technology

to enable innovation in law. And one primary example of this that is often cited in the context of this new space of cryptocurrency, is the so-called Lexmercatoria or Merchant Law, which is a body of rules that developed in all over Europe, starting in the 13th century and lasting until something like the 17th century. And basically the idea of this was that there was a discrepancy between the trade that evolved at that time, which was already crossing borders.

So there were merchants all over Europe that were trading goods with one another. And the legal infrastructure that was available to them in order to enforce the contracts and agreements they closed with each other. And the legal infrastructure was lacking. Either it didn't exist at all or the infrastructure was just. just underdeveloped. So either there weren't sufficient laws to protect the merchants or there wasn't capable enforcement systems to enforce contracts. And so what the merchants did is they created their own courts. They created their own enforcement system. And the courts

were so-called staple courts. And basically they were private arbiters. I private judges that were respected businessmen and they would basically make decisions that were binding among those merchants. And there was a very successful, very efficient system. It was able to deliver binding decisions for two parties that had some kind of legal dispute with each other within hours even because in trade sometimes it really is about there's a time factor that is very decisive, like if you're dealing with goods that, like food, that can be wasted if you have to wait too long and so on.

So that was a very successful system and it was a kind of innovation in the legal space that was created bottom up and not top down as we normally think about how laws are being made by members of parliament or back in the time. by monarchs. And I think this is a very interesting example in history that compares well to what might be happening right now in the cryptocurrency space. Another really interesting way to think about innovation in law that is happening today that also is not bound to technology on a primary level. is the idea of creative commons

and also open source software licenses, which is also the case where a group of people that is unsatisfied with how current copyright laws work coming together and saying we create our own body of rules using the tool, the tools that the legal system gives us, especially contract law, and using those tools to create our own rules, like the Creative Commons, which is a set of licenses that everyone can use.

And what the Creative Commons does is basically it liberates copyrighted goods in the sense that it says, well, instead of using the legal default way, which is, if you're you create a good that is copyrighted by default, which means all rights belong to the holder of the copyright, it says, well, now this copyrighted good can be shared among everybody. You don't need to ask. You just need to respect some kinds of rules, which can vary, but basically it reverts the legal order, the legal default. and this is also a really innovative use of the law in order to create something new, something useful for people.

And it's also something that was created in a bottom-up process, basically by people seeing a need to change the law as it works by default and creating something that is more useful. And I think that is a really, really nice way to think about innovation. in law and also to realize that it's possible. It's not always necessary to go through the procedures of lobbying politicians to pass laws and so on. But actually there is the ability of people to create their own change that they want to see in the world. And I think that's a very encouraging example of how innovation can happen in law.

Absolutely. And of course, Creative Commons is something that's extremely valuable. And I hadn't realized that sort of merchant law had emerged on the bottom up like that. And as you mentioned, perhaps with smart contracts, we may see something similar happen. Maybe in the few years we'll look back on it as something that has emerged from sort of the developer community, crypto hernicus community, Bitcoin community, whatever you want to call it. So coming back to smart contracts, this is a term that gets thrown around. I hear it being thrown around by people at all industries all the time.

I'm sure, Brian, you probably hear it as well. And there's people just throwing around that term and not really necessarily knowing what's behind. It's just like this buzzword. And so let's try to define what a smart contract is. I suppose there are probably multiple definitions. But how would you define a smart contract? So standing in between this software developer identity and the identity of a lawyer, my favorite definition is really that of the original one by Nick Sabo,

who was also a lawyer or a legal scholar and a developer. And he defined smart contracts originally as a set of promises that are specified in digital form and including the protocols within which the parties perform on these promises. So that's a very abstract definition of what a smart contract is. But it really ties together the software component by referring to digital promises, digital form, which basically means software, code. and the legal concept of what a contract is about, namely promises party A, promising to party B to perform a certain thing in return for something else. And I really like this definition and promises, you could say, are the mutual rights and obligations that are

that define the nature of a contract essentially. And the digital form is very abstract, but it's machine readable code, I would say. And protocols within which the parties perform on these promises could be anything. And I think the most popular implementation of this kinds of protocols that we're seeing was Bitcoin in the beginning. and now it's Ethereum, I would say,

which offers even a bigger variety, a bigger choice of promises that you can formulate. And there are different definitions of what the smart contract is. Like Ian Grigg, who invented the Ricardian contract, as he called it, says that smart contracts are just state machines with money. So he's really already talking about smart contracts as applications on a blockchain, for example. What's the importance in that definition of there being a protocol? I think it's essential because what makes a smart contract interesting in the end is that it is enforced in an automated way.

or that the contractual clauses that the parties agree on are automatically executed. And without protocols that allow for this kind of automated execution of contractual clauses, your smart contract is pretty pointless. Then it becomes just a convoluted way, difficult way, to specify something that is more easily specified just in natural language. There are many ways of how people can close a contract. It can be in written form, it can be in oral form, it can be just by waving your hand in traffic, just signaling someone that he can, you know, pass over the street, although

you may be allowed to pass first by by the law and that automatically can create a contract between parties and so there really is from the legal side no limitation of how people can close contracts and I think using machine code to close a contract is really one of the most let's say abstract and most difficult to comprehend by by the standard of most people ability, a way to close a contract. And so I think protocols in that definition are essential because they really bring in this automated enforcement character that is so interesting actually about smart contracts. This makes me think of a discussion that I've had a few times with bankers around the idea

of a smart contract and trying to define. redefine an internal process with a smart contractor with some type of blockchain. And the, I guess the point at which smart contracts stop being interesting in that context is when you have to hand off the smart part of the contract to someone who initiates a payment over SEPA, for example, since we're not, you know, at this time, we're not using cryptocurrencies, open cryptocurrencies on a wide scale, and we're still using step-by, et cetera, for bank transfers. So that smart contract and automated part ceases to become interesting when at some point in the process, you have to stop and someone has to push a button to initiate a payment over essentially a private payment network.

Exactly. I think that it makes no sense for if the contract that is written in this machine code has to be understood essentially and then executed manually by a person. The whole point of it being written in machine code is that a machine can understand it and execute it in a completely autonomous way. There are many issues when you try to make people understand this machine code. There are many limitations of what you can actually formulate in machine code. Of course, like for example, Ethereum is always touted to be so interesting because it offers a touring complete programming language. But during completeness isn't really a savior when it comes to basically shifting from a legal contract regime to a smart contract regime. One interesting way to think about this is also given to us by Nixabo, who distinguished between so-called wet coat and dry coat.

and by dry code Sabo means machine code machine code software code that is understood by machines and wet code which is language that is processed in the brain

and of course you can I can write software code that is then written by read by a human and that human can try to process that code in their head but then it becomes wet code again and I think

it is just on a semantic level, a very limited way to express a sentiment or meaning with machine code. I think human language is a much more

suitable tool to communicate between humans. So definitely I think that the protocol part of this definition referring to protocols that are capable of executing completely autonomously this set of instructions in the smart contract.

I think that's really essential to this definition. So smart contract, the word smart contract has in it the word contract. What do you think is the relationship between smart contract and legal contract? I mean, at least at, you know, areas where I work for, you know, for example, Casey, he hates the term smart contract and there's a lot of people I think who think like it's you know it's it's very problematic because it creates these linkages which are kind of a little bit unclear of what exactly the relationship is how do you think of the relationship between smart contracts and legal contracts yeah so I would agree that language is dangerous in this regard and

the word smart contracts come comes with its difficulties At first, there is no connection between a smart contract and a legal contract. A smart contract is really just a piece of code that is being executed somewhere. And a legal contract is this idea of a binding agreement between parties. And the connection between the two really emerges through this ecosystem. in which smart contracts are being executed, namely blockchains. And the link I think is that a blockchain enables you to create binding commitments between multiple parties. And that is pretty much what a contract is all about.

Essentially what you can do with a blockchain and the, instructions you can put on a blockchain that we came to call smart contracts, is you can organize economic relationships between parties going so far as to create what we will talk about later, I guess, organize complete organizations. Like you could put the bylaws of an organization on the blockchain, at least to some part, and suddenly you're organizing the relationship of dozens, hundreds, maybe thousands of people on a blockchain in a binding way. So blockchains enable you to create binding rules between parties

and I think that is the link to contracts. So it doesn't really come from the language that we use. It really comes from the effect of this environment of a blockchain that allows you to have binding agreements between, multiple parties. But I agree that it's a deceptive name and maybe not the best one. There's even, I think, Vitalik Buterin, who wrote the white paper for Ethereum at some point said that maybe it wasn't the best choice to call the programs running on Ethereum smart

contracts because they're not really conforming to the definition that Savo gave back in the early 90s. But I think the name has stuck and now we have to live with it and I'm fine with it. What ways are there of combining smart contracts and legal contracts? Is it possible to say, like, I'm going to create a smart contract that is a legal contract at the same time or would one have contract that has a legal contract but a smart contract component what kind of ways to go about that are there so yeah i think there are many different ways to go about this um in general um from a legal perspective there is really no limit of how two people can enter into contractual relationship with one another it can happen through a contract that is written on a piece of paper and both parties

sign it, the very classical way. It can also happen completely orally. So a piece of paper is really just a way to document an agreement. The agreement, though, doesn't have to be closed on paper. It can just be a handshake. So that means essentially that you could close a legal contract through a blockchain-based smart contract system without a problem. Of course, in practice there might be problems because blockchains allow people that are completely pseudonymous, not anonymous, but pseudonymous, to interact with one another.

So I can start to have a binding relationship with someone else, of which I don't even the name, at least the at least the atress. maybe I know the IP address through some method, but that's the only identifier I might have of that person, but probably I have nothing. So it becomes pointless at this point then to think about it as a legal contract because there is essentially no identity attached to to the other party. And I can't even if there was a legal contract enforce anything. When it comes to the practicality of combining those two, the very first ideas that have been put out is basically to create a legal contract in the sense that it's a written document in human language and then to like a digital document and then to hash this document to create a hash of this document and put this. this hash into a smart contract. And basically this creates a link between the smart contract and the document that has been

formulated in human language. This would be one kind of simple way to create a link between a smart contract and a legal contract. In this case, would the legal or the written natural language document be a description of the thing that then that code where it is, its hash is put of, of, of, of, of, it's functionality and for what it does. Exactly. So I think the devil is really in the detail here.

So there is kind of this obvious way to make the link, but then, okay, you have a link between this legal contract and this smart contract. But what does that mean then? Let's say you want to go to court with this contract and enforce some claim that the other party didn't fulfill. So the first question the court would ask is, well, what is the content of this agreement?

Where is it specified? Is it specified in the legal document, in the human language document, or is it specified in this machine code document that is living on the blockchain? And that depends on many factors. And, I mean, first of all, it would be the question, the question is, what was the will of the parties?

Which document did they want? to make the binding source of their agreement. And it really depends on the circumstances, what that would be. Let's say that, for example, one of those parties is a business, and the other one is a consumer. And the legal document says, well, the parties agree on the rules that are specified in the smart contract. and that's all that's written in this human language part and the rest is formulated as conditions in machine code. Now I would venture to say that this is not possible because the consumer might not be capable of understanding the machine written code

and the court would say well due to consumer protection this is not a valid way of how to specify the contractual obligations of this relationship and therefore the court would basically just make up its own rules of what the relationship would now be between those parties so there are I think lots of pitfalls around creating this link now if you would say that the human language document contains a description of the code that is being executed in the smart part the question then is

what happens if you have a bug for example in the machine code and something different happens than has been described in this human language part is someone liable now who's liable for this bug the creator of this

contract or is it the other way wrong that there is a bug in the human language part and actually the machine code part is the ultimate source of truth. So this is definitely something that people trying to do this should consider and they should at least make it very clear in the human language part which one of those documents is supposed to be the ultimate source of truth when it comes to what the content of the agreement is. But as I've said before, there might be limitations due to consumer protection laws.

and so on, when you actually try to defer to the smart part, saying that ultimately the source of truth is in the smart part. I don't think this is possible under any circumstance, under every circumstance, I mean. Let's stay a little bit on there because that was one of the things that I thought was very interesting

when you were giving you a talk at the meetup and it made me wonder about the vibe, of a lot of the things that people are doing in the Ethereum ecosystem and with decentralized applications. So what exactly does that mean? I mean, does that mean that if you create decentralized applications, you kind of need to have a, you know, first of all, buck free and complete description of, you know, all the possible events that then has to be kind of signed off by the user in order to have a kind

of, you know, illegally binding agreement there? I would say yes. If you have the constellation where you have a business and a consumer closing a contract, then I would venture to say that this smart component of this contract, but also the legal component of this contract is falling under the regulations of general terms and conditions, at least in the European territory. And in the European territory, that means that contracts that are general terms and conditions

have to be formulated in the language of the consumer. And so like the form. language in the country that the consumer resides. And like in my case, it would be German or in the UK case it would be English. And it would definitely not be machine code. Machine code is not an official language in any jurisdiction that I know. And they would basically force the developers of a or someone who uses decentralized applications and wants to close contracts with consumers to consider this

and basically to offer a description of whatever the code does in a natural language form in order to make this a legally binding agreement. Now, what so many people cherish about this whole idea of smart contracts is that you don't need the legal component, that you don't need to interface with the legal system in order to create. binding contracts in a sense smart contracts with other people but as soon as you're getting into the area of running a real business of having your identity like your real identity attached to

to your decentralized application i think it's unavoidable to think about the fact that you are probably closing legal relationships with the people with the customers of your business although they might be solely interfering with you through a blockchain-based system. Today's magic word is contract, C-O-N-T-R-A-C-T. Head over at the let's-talk Bitcoin.com to sign in, enter the magic word, and claim your part of the listener award. Presumably most people developing decentralized applications will not do this, or they may do it in some way.

but you know the descriptions won't be complete that will miss certain edge cases or you know what are the implications of that I mean let's now say it is developed by some developers that are you know one confined through their GitHub username or maybe there's even a company that's hiring those developers that's developing that what would happen if you have then people using those those applications and they thus aren't well I guess they don't conform to the terms and condition regulations there well that would mean that certain clauses certain actions that the smart contract takes are not a consequence that the customer

would have to accept let's say that some event triggers an action by a smart contract, and that clause in that smart contract is something that by the rules of the, by the regulation of general terms and conditions, is something that is not allowed. Like there are lots of limitations in the terms and conditions regulation, that forbid things. Like, for example, clauses that are surprising for the consumer.

Like, let's say you close a consumer contract, and it says that, you know, in small print at the bottom of the last page, it says that you're buying a car. And in that contract on the last page in small print, it says, well, you're also selling your house, like you're giving your house for free to the merchant of the car. Right. I mean, that's a completely surprising clause that,

is not valid in this contract because the consumer totally didn't expect to also sell, give away his house when you bought this car, right? That's a very extreme example now, obviously, but it could be that certain things that the smart contract then does lead to a state that the consumer doesn't have to accept. Now, if the consumer then goes ahead and takes this whole thing to court and says, well, this thing happened and I don't think this is, is legal, I don't think I have to, I don't know, pay this fine, pay this kind of deposit

that I deposited within the smart contract relationship, then a court could rule that indeed this is a clause that is invalid according to general terms and condition regulation and then the person running this decentralized application would have to transfer back or would have to pay damages to that consumer. So that would be one possible consequence. I'd like to perhaps give my idea of how this could potentially be solved or how we could remedy this problem. It's something that I've thought about before and I'd like to get your opinion.

And I'm sure there's lots of holes in it. But the way I see it is, I think code should be the one true source of validity of a contract because it's, I think, objectively what is the least likely to have, say, contradicting claims in it. I mean, I'm not a legal expert by any means. I have a very limited knowledge of law and things like that. But I think that if it's machine readable, it's objectively true, I guess. And so one could imagine some sort of an open standard or protocol.

there could be multiple standards, you know, there could be standards for merchant law, for consumer law, for like business law, that sort of thing. And when you write a contracting code, you define sort of like when you're writing an HTML document, you say, okay, this is an HTML document. It, it adheres to this standard, and we can agree that this is the standard format. And it can be parsed, and so it can be parsed to check that it's, it, it, um, it to that standard and that there aren't any sort of contradicting clauses. So for example, if you had sort of merchant law, you could have a standard that defines sort of all the types of clauses and cases and like types of parties that you can

have in a merchant contract. And with this, then you can, if you can parse it, you can generate, you could have libraries, example that generate the equivalent in natural language in all types of languages. But so that the contract that's written in code is always the sort of one true source of consensus around whatever the agreement is. And then through this process of defining a standard and parsing the contract and ensuring that the contract adheres to the standard that has been sort of defined maybe by a consort. or community or if you take the equivalent with the web,

there'll be a W3C for HTML or whatever. You could potentially think of a system where you have all your whole, all your bases covered from the legal, the code to this natural language contract that can be passed on to a consumer or read by someone who doesn't read natural, or machine code. Yeah, there are several aspects to this. this so I definitely agree that writing a contract in such a way basically that you I mean you describe several things right now you describe the idea of code being

more objective which I think is very disputable and you also described the idea of using a kind of markup language like XML or HTML to create this kind of structured document, which then ties into a template database that kind of fills this XML document, let's say, this XML document with quotes from this template database creating this kind of natural language contract. Now, it definitely leads to a more rational, more,

a bug-free way of creating a contract if you go about it like this. Basically, if you use a system in the way you described, you definitely exclude certain kinds of errors compared to when you draft a contract the way lawyers do it today, basically by opening Microsoft Word, and just writing stuff out of their head into this document, printing it out, reading it again, correcting some mistakes, and then letting people sign this.

there are often there are stupid mistakes in this kind of approach that you would exclude if you use this intelligent templating system and so on definitely i think that is something that will happen in the legal practice anyways because contract templates and templating systems and so on are just much much more rational and quicker way to draft documents that adhere to some common standard the other thing that you said that code is in a sense more objective I think I wouldn't agree I think that machine code is too limited really to express all the kinds of relationships that people have today and will in the future I think we will need you language to continue living the lives and to have this economic system the way we do it today and will hopefully in the future. Moreover, I think that there are certain advantages to human language compared to code, which is that the ambiguity especially is helpful in many cases, as much as it might be detrimental in other. but ambiguity is also a feature it's not just a bug of human language for example an example that I really like is in the German Constitution we have

some really fundamental laws about what kind of protections people enjoy vis-à-vis the state and it was drafted in the 1950s, so really long time ago. And in the 80s, the German Constitutional Court interpreted that according to Article 2, every German, or actually everyone in Germany, enjoys protection from the state regarding obsessive collection of data about them. So basically, the Constitutional Court, more than 30 years after the state, this constitution came into first said, well, they created a completely new right regarding

electronic data gathering and so on from something that was much, much older. And this is a really, really important fundamental right today even, much more than in the 80s, because of all this new technology that we have. And that only is possible because language is flexible and ambiguous. Now, this is also a bad thing, as we just saw in the case of Apple against the FBI or something, where the FBI uses this All Writs Act or something, which is, I think, from 1800s. And they use it to force Apple to reveal their encryption keys. And you're really wondering how it's possible how a law from the 1800s can force a technology company today to reveal encryption keys? I don't think that that's correct.

I think that what the FBI wanted was for Apple to not to release the encryption keys, but for them to help them unlock the phone by writing specific software that would allow them to plug into it and generate and iterate through the code. You're right. You're right. It's more refined than, as I put it now. What I really wanted to get it is that human language in the way that it's ambiguous is also a helpful tool because it allows judges and lawyers to basically adapt an abstract rule,

which what a contract is, to a specific situation. And this is something that machine code can't. Machine code is really very, it's binary, it's one or zero, and it can't really adapt to the multiplicity of circumstances that can occur in the real world. But I would agree with you that there are many ways how, um, uh, software technology can help us to be more rational about the way we currently draft contracts, for sure. So we talked already a little bit about, you know, what happens when decentralized applications

interact with consumers and, and of course, the kind of end vision there is a decentralized autonomous organization. Now, one of the projects that's getting a lot of attention is a project. called slocut so i thought it would be interesting if you can kind of just look at their example and and what that looks like from a from a legal perspective i'm sure some of us some of the listeners will not be familiar with what slocut is and does so perhaps it would be good to have a you know a very brief introduction of how it works and and then we can talk about the kind of you know legal aspects here um so the way i i understand it is that slocket offers um

a platform to basically tie the blockchain to the Internet of Things. And the first application is a smart lock. So a lock that you can put on a door or a car or any other thing. And this lock can be unlocked and locked through transactions on the Ethereum blockchain. And basically there is the concept of an owner. of this lock so he's like the he's like the administrator of this lock and he can rent out for example access to this lock to other people and that's basically what that's the idea what slock it wants to build now slocket has this really interesting way of going about this they are not

just this normal company that goes ahead and produces this stuff but basically they are creating what they call a DAO a distributed autonomous organization which is basically a smart contract or a set of smart contracts running on the Ethereum blockchain where basically they are running a crowdfunding campaign to they let basically anyone who wants to who believes that this is a clever idea to create such a smart lock let anyone pay money into our ether in that case into this smart contract DAO by that those people become a shareholder of this DAO a co-owner and then this DAO would spend those funds that were crowdfunded to create this smart lock actually in the real world now obviously smart contract although it's part

partially an autonomous entity in some sense, cannot, I don't know, run factories on its own and pay people on its own. So it needs a real-world entity to become actionable. And the way that Slokit goes about it is that they create a legal entity. Actually, they created it already. It's a U.G. It's a German, basically the equivalent of a limited in Germany. and this limited is they call it the service provider so it's the the component that makes this DAO actionable in the real world and the Achilles heel so to speak of this whole idea is basically then the relationship of this service provider to this DAO

and the way that Slokit envisions it at least is that the DAO votes on who the service provider should be to create this lock to manufacture it to basically make the designs and hire people to build it, pay probably factories in China or I don't know where they're going to produce it. And the question then really is how can the DAO control what the service provider does?

what is this relationship between this entity on the blockchain and with potentially thousands or 100,000 of individuals being invested in this, having voting rights according to their proportional to their investment? How is this entity going to control what this service provider does? And I think it's a great experiment that they're doing. They do believe that this is the future of organizations. And I think it's great that they are trying it because it really is an open question if it works, how it works, and what the pitfalls turn out to be. I think no one really knows at this point.

I think one of the key elements of how the DAO wants to exert control over the service provider, is basically by paying them in milestones. So as a first step, the DAO would vote on who the service provider is. It would probably be the SLG, this legal entity. And then this legal entity has to deliver results. And it will be paid in like milestones. And if the service provider fails or just,

or just doesn't deliver or whatsoever, the DAO will cease payment to the service provider. That's the basic model, I think. It's sort of like the service provider is providing some sort of proof of work, right? They have to present proof that they've done something, should be like produced a lock or whatever. and then the DAO pays them a reward. I don't know, I'm just thinking about this. The DO pays them a reward for having produced this work. Yeah, they pay them a reward or they pay them actually in advance

in order to enable them to actually order all the goods and do all this. I mean, there is a certain risk on the side of the DAO that the service provider runs away with the money, but they reduce this risk by basically splitting the payments into, milestones. But so from one, I guess a few things here. So first of all, is it possible, you know, like let's say on the German law for this company to have this relationship with this non-legal entity and to, you know, get essentially all their revenues from from some entity that is not the, you know, legal incorporated entity. So this is that's one question. And then the other question I have

here is now let's say they pre-pray for you know this tranche slock it goes develops these locks or whatever you know presumably and and let's say they they do an okay job at it but maybe some people are happy with it some people are unhappy with it and is there some kind of recourse for some of the people who put in money there that they say well you know they they didn't do as i expected and can i now go and try to get, you know, so do them? So the way that I think Slokket imagines this relationship to happen between the DAO and the service provider is solely through alignment of incentives, not through contract. So there are like two ways to regulate this relationship between the service provider and

the DAO. One is through incentives and the other one is through actual contract. And the way I understood it is that they want to do it solely through incentives, not through contracts. So that means that the DAO is really this organization that lives solely on the blockchain that has a certain amount of money. And they have a governance structure embedded in a smart contract. And this government governance structure basically says they act upon majority decisions. in sense. So the stakeholders, the shareholders, they will vote and if a certain quorum gets met, then some action will be triggered or not. Basically, payments are going to be paid to the service

provider or not. And I think that is the whole relationship that those two entities will have. And I think it is the easiest way to organize this. Now, people are already thinking much further ahead, trying to create a closer link between a potential DAO and a legal entity, which would basically say that you create a legal entity and in its bylaws you say, well, this corporation is being all decisions regarding this corporation are being performed on this blockchain smart contract

and whatever is being decided there is going to be executed in this legal entity. Now this is a completely different way to go about this and it contains much more problematic areas from a legal point of view than what Slocut is trying. Now the disadvantage of what Slocut is the Slocut model is that for example the

the slot at UG the service provider will create certain intellectual property for example they will create branding stuff logos whatsoever they will create maybe patterns regarding how the slok works they will create trademarks

they will create copyrightable stuff this is all intellectual property that has to belong to some legal entity it cannot belong to a DAO. A DAO is nothing recognized by the law, so they cannot hold any IP. So in the case of SLOCET, the question becomes, well, if the DAO at some point in the future becomes dissatisfied with the work of the specific service provider, what is going to happen to this intellectual property? Officially, legally, it is still owned by the service provider,

and there is no way for the DAO to force the service provider to transfer. for this IP to, I don't know, the next service provider that they elect. Now, if you think about incentive alignment as a regulation mechanism again for this relationship, you could say, well, then maybe the service provider has to put this huge deposit into the smart contract. And if they don't give back the IP,

then the DAO will get. get this deposit, like the security deposit. That's mechanism design. But I mean, how big will this deposit be, right? You can't really, you don't know how successful will this locketlock be. Will the IP be worth millions, billions, or will it be worth nothing? And so there have been people on the internet suggesting that the DAO should have a proper legal entity as a real world equivalent.

And this then can hold the IP and so on. This is not the service provider model of Slugget. This is really a different model. This is really saying that, okay, a DAO has basically kind of this legal, real world entity that is still the DAO. And that's not the Slotid model. And in this other model with having a real world kind of identity, as a DAO, then maybe this legal entity can hold IP and so on.

But I think it's not clear if this is possible from a legal perspective. Yeah, very interesting. I'm extremely curious how this turns out. Somewhat tied to this, there's been an interesting article by Stephen Paley, who was writing about the idea of being able to sue. a DAO in particular that, you know, if you have a DAO, which is this sort of, you know, non-legal entity there, that, well, courts are not going to say this is just some, you know, non-legal entity, nobody's responsible.

They're going to say, well, this is, this is an entity that has a, you know, legal character. And in particular, I mean, he was talking about the American context that this would be considered, you know, kind of a general partnership. and then sort of everybody would be liable and potentially, you know, the courts would take somebody or potentially anybody that's kind of involved in this to hold accountable, maybe take damages from, do you share that assessment? I certainly wouldn't exclude the possibility that someone that is part or interface interacting with such a DAO would be dissatisfied with something and then try to sue people

that he knows, he or she knows are part of that DAO. That's certainly something that could happen because although in general in the blockchain world, at least today, there is still this idea of almost anonymity or pseudonymity. it is very easy to in some cases to get the identity behind some person interacting with this blockchain identity and then it's totally possible to go to court and claim things if this is going to happen really depends on what this DAO does like for example if you have like I think Stephen Paley talked about an insurance DAO as an example and that definitely is a very dangerous game to play I would say because an insurance DAO is something it's

unlike the Slokett example the DO insurance basically just works with the assets on the blockchain monetary assets and basically creating insurance pools for example with ether or some other token that is worth something and then if one person has an insurance claim then there is a subgroup of this insurance DAO that assesses this claim and they can decide whatever and maybe they make a totally wrong decision and then if it's about a lot of money I'm sure that the person that feels betrayed will go to some court and claim the money if it's about a substantial sum. In the case of Sloket, I think it's different

because there really is a very simplistic relationship between this DAO and the service provider. I don't see why they're, because they have this idea of the DAO paying the service provider in like milestones, there's this very clear, I mean, if the milestones are kind of small enough, not too big, I think it is kind of a relationship, that would work where I think there is a low risk that someone would go ahead and sue this DAO.

But in the case of an insurance, that's completely different. Insurance is classically about a lot of, I mean, you need a lot of money, gather, concentrate a lot of money in an insurance in order to make it work in the first place. And there I could very much imagine that someone tries to sue a DAO. And that's just one aspect of it. I mean, another aspect is that you can't run an insurance business without being regulated in the first place. Insurance is a business that is under the supervision of financial authorities. And you can't really run such a business anonymously. So even if no one sues that insurance DAO, public authorities would anyways try to find out who is running this insurance DAO

and try to identify the people behind it because they are running an illegal scheme if they are not, you know, regulated. So, I mean, that is... If there is substantial money in such an insurance DAO, for example, it would definitely be on the watch list of regulators and they would just, from out of their own interest, investigate this scheme and try to identify the people behind it.

You wouldn't really need a member of this DAO being, you know, agitated. and feeling like suing someone in there. Cool, super interesting. So we're up with our time. But so there was a few other topics that we wanted to get to and we didn't manage to. But that being said, I think this is, there's a lot more to talk about here. And I think there's going to be, I'm sure, a lot of new issues.

So they're going to come up over the coming months and years. So, you know, hopefully we can do a follow up at some point because I think there's this will be very interesting to follow these developments very closely. Yeah, I would love to. Thanks so much for coming on. It was, yeah, super interesting and I think very important discussion. Thank you, Brian. Yeah, so with that, we're at the end of our shows.

Thanks to the listener as well for listening. So we're part of the LesopiCorps network. You can find our show and lots of other podcasts about blockchain, Bitcoin, and and related topics on let's stop Bitcoin.com. you can of course subscribe your episode on any podcast app on stitcher and you can also get the watch the videos on youtube that's on youtube.com slash episode of bitcoin and if you'd like to you can leave us an iTunes review or review on stitcher or some other platform and send us an email at show it episode of bitcoin.com and then we can send you one of these t-shirts and we would

really appreciate that so thanks so much and we look forward to being back next week I'm going to be my own mrs. Thank you.