The Lawyers of the Future

By Daniel Goldman Leave a Comment Feb 19 0

So most people are familiar with “the blockchain” by now. But fewer people are familiar with smart contracts. Bitcoin was the first blockchain based cryptoasset. But the types of transactions that Bitcoin’s system could perform were very limited. Ethereum expanded on this limitation, by allowing full scale programs to be run by the system, with some limitations. There’re many places to learn about the full nature of what smart contracts can and cannot do. But what the addition allowed is for very complicated transactions to be conducted in a distributed and decentralized fashion.

Blockchain technology and smart contracts are in their infancy. So far, they’re mainly being used to create digital tokens that are traded for speculation, or for the funding of business operations via ICOs. But over time, we’ll start to see more technology that can be controlled through smart contracts. And as that happens, smart contracts will become an increasing part of our every day lives.

The DAO Debacle

DAOs or “distributed autonomous organizations” are an interesting use of blockchain and smart contracts. But the basic proof of concept DAO, literally just called The DAO, happened to be a total failure. What happened?

The smart contract that defined the DAO had a bug. Basically, when a transaction was made, the order that the balance was updated was backwards, so before the new balance was updated, a person could ask for the money back, and could do so multiple times. This allowed the attacker to siphon off a lot of money, and that spelled the end of The DAO, and unfortunately, the emergence of a fear of this technology.

Contract Failures

But not only is such failure possible with any program, and in fact there was a recent example of a person in China siphoning off a lot of money from ATMs (The Verge), but actual contracts often have loopholes, especially with poorly written ones. Carl Vitullo, in The Future of Bitcoin and Ethereum, suggests that smart contracts aren’t reliable, and with the whole DAO mess, it’s easy to see why. But are actual contracts reliable? If two average people wrote up a contract, odds are any good lawyer would be able to poke a hole in it. Just look at Judge Judy.

The job of a lawyer is to ensure that there are no significant loopholes, or at least do everything possible to limit them. And so, in the future, a lawyer will need to be able to evaluate smart contracts. For this reason, a lawyer is going to be as much programmer as anything else, and while the law will still matter, it will be the proper functioning of the smart contract that will matter the most.

A good smart contract lawyer should have been able to realize that transaction order mattered and that the way in which The DAO was coded would allow for someone to withdraw large sums of money from The DAO. But this also brings up another good point.

“Smart” Smart Contracts

In reply to my discussion on an alternative to Facebook, provisionally called Topix, Mark Stair asked me what I thought was missing from EOS. While EOS seems like an interesting alternative to Ethereum, it doesn’t do what I need for my projects. It can, and so can Ethereum, as both are able to implement almost any time of distributed and decentralized application, but the type of smart contract system that I would like to see developed has as its goal the coordination and maintenance of contracts between humans and institutions, rather than the development of software applications.

This means that human readability should be improved. But it also means that a system of credit worthiness and arbitration needs to be built into the core of the system. In terms of credit worthiness, I would like to see an algorithm which determine an overall metric.

This metric could be combined with a proof of lock system, as I call it. It’s similar to a proof of burn system, where consensus is determined by sending tokens to an unusable address. From Wikipedia:

The idea is that miners should show proof that they burned some coins — that is, sent them to a verifiably unspendable address. This is expensive from their individual point of view, just like proof of work; but it consumes no resources other than the burned underlying asset. To date, all proof of burn cryptocurrencies work by burning proof-of-work-mined cryptocurrencies, so the ultimate source of scarcity remains the proof-of-work-mined “fuel”.

The only main difference between the proof of lock and proof of burn system is that locked tokens could be released in order to repay debts.

But who gets to unlock those tokens? And what happens when there’s a disagreement with the human readable contracts? I think this issue can be solved with a system of trusted nodes, similar to the anchor system in stellar: see cryptocurrency ecosystem. If there is a disagreement about whether a contract was executed correctly, the two parties could ask an arbiter node to make a decision. Once the decision is made, locked tokens could be released to the appropriate party, thus making the locking system a sort of escrow.

It’s possible that tokens could also be generated based on the amount locked, and thus the proof of work system could be bypassed, and making the system a hybrid between proof of burn and proof of stake, or proof of work could still be used in the generation of new tokens.

Going back to EOS, while this system can indeed be implemented on the system, as it could be with Ethereum, I would prefer to see it as an integral part of the system, rather than as an overlay.

The Cryptocurrecy Ecosystem

By Daniel Goldman Leave a Comment Feb 16 0

The cryptocurrency (or cryptoasset) ecosystem is a complicated topic, and when that I’ve written about only briefly, but it is an important topic. This article is partially an update of a Seeking Alpha article that I wrote back in June of 2017, however I won’t necessarily be covering the same cryptoassets that I mentioned in the original.« Continue »

Bitcoin: A Major Asset Bubble

By Daniel Goldman Leave a Comment Dec 25 0

A bubble is “when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely…” This commentary is going to be expanded as time goes on. But I wanted to quickly put something out into the world to explain my concerns with bitcoin and other high risk asset classes.

First, when I say that a sudden collapse is likely, it does not mean that one is imminent. It means that there is a high probability of it occurring. There are ways in which a bubble can end, besides in a crash. Speculation can die down slowly and allow the price to level off or drop slowly. Or the reasonable valuation of the asset can rise due to changes in supply and demand. Either of these situations would cause the bubble to end without a crash.

Bitcoin

It is argued that $BTC is not in a bubble. One argument used is that people have been claiming that it has been a bubble for a long time, and yet even new adopters have been profiting substantially. But as I said in the very beginning, a bubble just implies a high probability of crashing. A bubble can last for a very long time before it does, if it ever does at all. Many argue that the $USD is in a bubble, by the same people who profess that bitcoin is going to continue to grow and grow and grow. I agree that the dollar is a bubble. It has yet to crash, but that does not mean that it is not a bubble. The stock market has been argued to be in a bubble. Again, I agree. Months ago I wrote an article about how stocks were overvalued. Since then, stocks have continued to climb higher, but this climb has just resulted in greater risk.

What makes $BTC a bubble? Aside from the rapid spike in price, the high volatility associated with rampant speculation are to blame. Much of the exchange volume is due to speculation, and very little is due to use. This result has been caused by the inherent deflationary nature of the cryotoasset.

Stocks

One reason why I think $BTC and other cryptoassets are growing in price so much is because people who would normally be shorting the market are instead putting their money into $BTC et al. Because of the “BTFD” mentality, shorting stocks right now isn’t getting anyone anywhere, but most traders do not want to just leave their money on the sidelines. Because of the cryptoasset bubble, even though there is a lot of risk, the reward seems much better than stocks, and so money is flowing into the cryptoasset market. However, that also means that once things start to go south with the stock market, money very well may flow out of bitcoin and others and into short positions in stocks. Now, some of the long positions may transition to bitcoin or another cryptoasset, which may buffer the price, but it is hard to tell. What I do expect is a waterfall effect for the S&P 500 and other indices.

Conclusion

People can certainly profit during a bubble. A bubble may never really burst. However, the risk is great, and that point should be made clear. Also, the way in which the cryptoasset markets, precious metals markets, and stock markets are interacting, make the risk for stocks even greater.