Universiteit Leiden

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Blockchain, smart contracts and decentralized organisations

On Monday, 09 April 2018, Aron Fischer Ph.D., freelance mathematician and researcher of Colony and Ethereum Foundation’s Swarm team, delivered an absorbing presentation on the Ethereum blockchain, smart contracts and decentralized autonomous organizations (DAOs) at Leiden Law School. These headline-grabbing topics can be approached from the perspective of different scientific disciplines, but given the nature of the audience, largely composed of lawyers, legal researchers and law students, Aron focused on the legal and governance questions raised by these technologies.

The first half of his presentation was devoted to demystifying blockchain technology and bringing the participants onto the same page concerning its use cases. He began by discussing Bitcoin and cryptocurrencies but was quick to point out the more intriguing implementations of a blockchain, beyond forming consensus about sending money. With Ethereum, consensus can be reached on something far more complex - the complete state of a simulated, decentralized computer. The ‘Ethereum World Computer’ provides users with the infrastructure to create any software programs they wish – from games to registries - without fear of censorship or downtime. The software deployed on Ethereum are ‘smart’ contracts, characterized by their capacity to hold capital, based entirely on programmed rules, and self-execute transactions once certain conditions are met. Aron provided illustrations of smart contracts abstracted from real-world examples, from multi-signature wallets that are akin to joint bank accounts to escrow agreements that handle transactions between pseudonymous parties that don’t trust each other. More recently, there have been ‘decentralized applications’ (DApps) that encode rules of trading, corporate bylaws and voting systems into smart contracts, creating tantalizing possibilities for how business is conducted and governed in the future.

While highlighting the numerous possibilities afforded by the Ethereum, Aron was pragmatic about the limitations of the technology. It continues to be expensive and time-consuming to use blockchain, making it difficult to scale, smart contracts contain bugs, which have disastrous consequences for those with capital locked in, and there are frequent attempts to game the system. The rough-and-tumble reality of the Ethereum ecosystem raises novel questions regarding liability and damage, risk mitigation and enforcement, which members of the 40+ audience flagged. For researchers, it provides a unique opportunity to observe privately ordered ‘fixes’ of these challenges, such as an ‘escape hatch’ that allows a group of developers to signal the existence of a bug and prevent the self-execution of a smart contract. At the same time, there has been much discussion regarding formal dispute resolution on the blockchain, through the creation of institutional mechanisms, such as on-chain arbitration, or by allowing the blockchain itself to act as an arbiter by consensus.

The second half of the presentation looked towards the next step in blockchain’s evolution – decentralized autonomous organizations. Aron spoke about Colony and the initiative to build a blockchain-based platform to coordinate decentralized collaboration. Inspired by the success of a group of Redditors in competing in Elon Musk’s Hyperloop challenge, Colony seeks to lay the foundation for organizations that are self-governed, non-hierarchical, un-bureaucratic and meritocratic. To do so, Colony is developing user-friendly protocols in which administrative, evaluative and work tasks can be apportioned and rewarded once complete. In these nebulous organizations, financial and governance rights are not solely the function of capital investment but turn on meritocratic and dynamic reputation. Aron concluded the presentation by explaining how reputation accrues to a user and the weighted voting mechanism used, as and when needed.

The seminar benefited from an engaged group of participants who asked thought-provoking questions late into the evening; ranging from how blockchain will impact the future of energy markets to how the intellectual property created by Colony organizations may be protected.

This was the first BLRN Seminar, organized by the Future Business Structures team, and we extend our gratitude to Aron Fischer Ph.D. for his presentation and the audience for their participation.

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