EB125 – Florian Glatz: Defining A Legal Framework For Decentralized Autonomous Organizations (DAO)

Transcript

[Music] Hi, welcome to epicenter Bitcoin the show which talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution. My name is Casu and my name is Brian Fabian Crane. We're here today with Florian Gluts. Floren Glutz is a legal researcher, a lawyer, and also a software developer. One of those rare breeds. Now, I've known Floren for a while, but recently he was giving a talk at our meetup in Berlin

about the sort of legal side and complications of smart contracts, blockchains, and DAO. 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 they'll be the kind of issues that will have a a great impact on how this industry and this technology turns out over the coming years. So, thanks so much for coming on, Floren. Thank you for inviting me on the show, Brian.

Well, it's it's it's it's kind of strange. We were talking about this with Brian before the show. There's um there's really a a wide gap between sort of what the cryptocurrency community considers as, you know, real legal issues and then what lawyers how lawyers look at it. So, just in the case of a DEO, you know, you talk to someone who's building a DO, they're like, "No, we're the Dooo. We we we we're not involved in the project. the project lives by itself and the you know we're not legally tied to it and then you have lawyers on the other side say well actually no that's not the case courts will look at it quite differently and you'll find out uh that uh you are liable and so we can we can go dive deeper in this but uh just find it interesting that that there's

quite a chasm between uh between what the community thinks and and what you know attorneys or or legal expert might think yeah it's very interesting I agree and uh there certainly are different perspectives ives on the relationship between the law and uh this whole new space of cryptocurrencies which uh touch upon legal topics quite uh intensely in many ways and uh I think there is a lot to learn on both sides uh by lawyers and by developers in the cryptocurrency space. uh they can learn a lot from each other and uh 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 uh of those two spaces of which um yeah I hope I can bring some uh or contribute something to this convergence. One of the interesting things too is that it, you know, when we got into Bitcoin already, Bitcoin was bringing up all kinds of really interesting and complicated legal issues uh 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 and Ethereum and and all those things, it just it gets even way more complicated. And and I think with

Bitcoin, you know, maybe we have a reasonable grasp on on a a fair amount of the issues. I'm sure there are lots of issues even with Bitcoin that are poor poorly understood. But I think when it comes to, you know, decentralized applications, DAOs, etc., We we're just we have almost no idea how that's going to turn out. I mean, I think some of your work uh helps us understand how it might turn out, but it's it's just something where I think you 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. Uh and from that perspective, I think it's it's going to be an yeah, extremely extremely interesting area. Yeah, I agree. I mean,

Bitcoin really was um I mean, it started as a um as a payment system, a new kind of payment system for for the internet and and the world in general. And uh the first legal issues that naturally arose were uh surrounded or were around the the question of financial regulations and uh what is bitcoin what is the legal nature um of bitcoins the currency is it money is it a commodity is it something completely different and um uh 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 many regulators worldwide are still kind of rather watching it instead of passing regulation immediately. And uh but the space the cryptocurrency space is moving so fast at lightning speed compared to how how quickly regulators move that a completely whole new bunch of issues has already opened up around the question of distributed autonomous organizations. uh so some kind of non-financial uh application of this um technology and uh smart contracts uh uh which touch upon uh our idea of what a contract is from a legal perspective and so on and um yeah

there is basically a big big game of catching up from the side of regulators lawyers and um I agree that it is kind of difficult at this point to really say how it's all going to pan out in in the end. Um, but it's certainly intellectually very stimulating to discuss those topics and um to kind of fantasize about what could be happening and it's definitely at the intersection of uh yeah even science fiction I would say um what is happening here and that's just super exciting. So personally I I find that that things are going quite well. I find it quite encouraging to see that in most places around the world bitcoin isn't illegal. uh that uh most

regulators have sided on this on the on the side that you know bitcoin is can be used as a currency like for example isn't is it subject to VAT um and like you know just recently here in France uh last week uh the the French government um uh put out this uh sort of new set of laws governing uh crowdfunding and crowd lending in which they encourage the use of you know experimentation with the blockchain and um as a means to secure uh position sort of bonds within a crowd lending scheme. So I think from from my perspective I think that things are moving in sort of the good direction. I you know they they're definitely looking

at it and taking a sort of a wait and see approach but uh it is quite encouraging I think on that regard. I agree and I mean uh the blockchain is essentially it brings um positive innovation also from the perspective of regulators because it is a perfect audit trail in the end. I mean um it allows new ways of auditability of transactions, financial transactions and otherwise. And um it really is a much better record um of what happens than any private database organized by um a single uh entity um as it was before.

And uh I think that regulators should welcome this technology um because in the end it will bring more transparency to a lot of different uh industries. So in your talk that that you gave in Berlin, you you started by kind of positioning blockchains and smart contracts in a larger context of innovation in law and and technology in law. Can you give a bit of background about how you you see those evolutions and how how that kind of ties or how blockchains and smart contracts tie into it? Sure. So um what I find very interesting is to

think about how innovation can happen in in in law in general. And um if you if you look at the history of how our uh of how the law evolved um you can see um that it didn't necessarily need technology to enable um innovation in law. And uh one primary example of this that is um often cited in in the in the context of this new space of cryptocurrency is the so-called Lexme Ctoria or merchant law which um is a body of rules um that developed in all over Europe uh in the starting in the

13th century and lasting until something like the 17th century. And basically the idea of this was that there um was a discrepancy between um the trade that evolved at at that time uh 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 uh the legal infrastructure was lacking. Um either it didn't exist at all or um the the infrastructure was just um uh just

underdeveloped. So either there weren't sufficient laws to protect the merchants or there wasn't capable uh enforcement systems to enforce um 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. Um and basically uh they were private arbittors, private judges um that were respected businessmen and they would basically make decisions uh that were binding among those merchants and um that was a very successful, very efficient system. Um, it was able to

deliver uh binding decisions for uh two parties that had some kind of uh legal dispute with each other within within hours even because in in in trade sometimes it really is about uh there's a a time factor that is very decisive like if you're dealing with goods that um like like food that can be wasted if you 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 uh created uh bottom up and not top down as we normally think about how laws are being made by um members of parliament or back

in the time by monarchs. And um I think this is a very interesting um history example in history that compares well to what might be happening right now in the cryptocurrency space. Um, another really interesting uh uh way to think about innovation in law um that is happening today that also is not bound to technology on a on a primary level is um the the idea of creative comments or and also open-source software licenses which is also um the case where um a group of people that is

um unsatisfied with how current copyright laws work. um coming together and saying we create our own body of rules using um the the the tools that the legal system gives us, especially contract law and um using those tools to create our own rules like the creative comments which is a set of um licenses that everyone can use. And what the creative comments does is basically it liberates um copyrighted goods in the sense that it says well uh instead of uh using the legal default way which is if you create

a a good that is copyright copyrighted by default which means all rights belong to the holder of the copyright um it says well uh now this this copyrighted good can be shared among uh everybody. body. You don't need to ask. You just need to respect some kinds of rules which can vary. But basically, it reverts the the the the legal order, the legal default. And um this is also a really innovative use of um of the law in order to create something new, something useful for people. And it's also um something that was created in a bottomup 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 a really really nice way to to think about innovation in law and also to realize that it's possible. it's not uh not not always necessary to go through uh the the procedures of lobbying politicians to pass laws and so on but actually there is there is the ability of people to to um to create their own change that they want to see in the world and uh I think that's very encouraging example of how innovation can happen in law absolutely and and uh of course creative comments is something that's extremely

valuable and and uh I hadn't realized that uh sort of merchant had emerged from the bottom up like that and as you mentioned perhaps with smart contracts we may see something similar happened maybe in a few years we'll look back on it as as something that has emerged from sort of the you know developer community crypto earnest community bitcoin community whatever whatever you want to call it um so coming back to smart contracts uh uh this is a term that gets thrown around uh I I hear it being thrown around by people in all industries all the I'm I'm sure Brian uh you probably uh hear it as well and there's people just throwing around that term and not really necessarily knowing what's behind it. It's just it's like this buzzword. Um and uh so let's let's try to define uh what a smart contract

is. I suppose there are probably uh multiple definitions but how would you define a smart contract? So um standing in between uh this software developer identity and the identity of a lawyer, my favorite definition is really that of uh the original one by Nick Sabu who also uh who's also a lawyer and or a legal scholar and a and a developer. and uh he defined smart contracts originally as um 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 uh what a smart

contract is. Um but it really ties together the um the software component by referring to digital promises, digital form, which basically means software code and um the concept of uh the legal concept of what a contract is about, namely promises, party A promising to party B to perform a certain uh thing in return for something else. And um I really like this definition. And um uh promises you could say are the mutual rights and obligations that are

uh the n that define the nature of a contract essentially. And uh the digital form is it's very abstract but it's machine readable code I would say. and um protocols uh within which the parties perform on these promises is um could be anything and um I think the most popular implementation of these kinds of protocols that we're seeing is was Bitcoin in the beginning and now it's Ethereum I would say which offers even a bigger variety a bigger choice of of um promises that you can formulate and Um uh there are different definitions of

what a smart contract is. Um like Ian Grigg who who invented the Ricardian contract as he called it uh says that um 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 of there being a protocol? I think it's essential because um what makes a smart contract interesting in the end is that it is enforced in an automated way or that the

um 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. Um it there there are many ways of how you of how can of how people can close a contract. Um it can be in written form, it can be in oral form, it can be just by waving your hand uh in traffic just

signaling someone that um he can you know pass uh over the street uh although you you may be allowed to pass first by by uh by the law and um that automatically can create a contract between parties and um so there really is from the legal side no limitation of how people can close contracts and I think um 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 most people ability uh a way to close a contract and uh 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 I I I've had a few times with with with bankers around the idea of a smart contract and trying to define redefine an internal process with um with a smart contract or with some type some type of blockchain and the the I guess the the the point at which smart contracts stop being interesting in that context. Next 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 in a at at this time we're not using cryptocurrencies open cryptocurrencies uh on a wide scale and we're still using SEPA etc for bank transfers. So um that 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 a initial essentially a private payment network. Exactly. I think that um it makes no sense for um uh if if the contract that is written in in this

machine code has to be understood essentially and then executed manually by by a person um that the whole point of it being written in machine code is that a machine can understand it and execute it uh in a completely autonomous way. Um there are many issues when you try to um uh make people understand this machine code. Um uh um there are many limitations of what you can actually formulate in machine code. Um of course like for example Ethereum is always touted to be uh so interesting because it is a um it offers a touring complete programming language. Um but uh touring

completeness isn't really a savior when it comes to um to basically shifting from a legal contract regime to a smart contract regime. Um uh one interesting way to think about this is um also given to us by Nick Sabu who distinguished between so-called wet code and dry code and by dry code Sabo means machine code machine code uh software code that is understood by machines and wet code which is um 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 um that human can try to process that code in their head then but then it becomes wet code again and I think um it is just on a semantic level um very limited way to to express a sentiment or meaning uh with machine code. I think human language is a much more suitable tool to communicate between humans. So definitely I think that um the protocol part of of this definition uh referring to um protocols that are uh 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 is the relationship between smart contract and legal contract I mean at least at 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 ah it's you know it's it's very problematic uh because it creates these linkages which are kind of it's a little bit unclear of what exactly the relationship is. How do you think of of the

relationship between smart contracts and legal contracts? Yeah. So, I would agree that language is dangerous in this regard and um the word smart contracts come comes with its difficulties. Um at first there is no connection between a smart contract and a legal contract. Um, a smart contract is really just a piece of code that is being executed somewhere. And um, a legal contract is uh, this idea of a binding agreement between uh, parties. And um the connection between the two really emerges um through this ecosystem in

which smart contracts are being executed namely blockchains. And um the link I think is that a blockchain enables you to create um binding commitments between multiple parties. And that is pretty much what a contract is all about. Um uh essentially what you can do with uh a blockchain and the instructions you can put on a blockchain that we came to call smart contracts um is you can organize economic relationships between parties going so far as to create what we will talk about later I guess um

organiza complete organizations like you could put the bylaws of um an organization on the blockchain at least to some part and suddenly you're organizing um the relationship of dozens hundreds maybe thousands of people on a blockchain in a binding way. So blockchains enable you to create um binding rules between parties and I think that is the link to contracts. So it doesn't really come from from from the language that we use.

It really comes from from the effect of of this environment of a blockchain that allows you to to have binding agreements between multiple parties. And um but I agree that it's a deceptive name and maybe not the best one. There's even um uh I think Vitalik Butherin who who uh wrote the white paper for Ethereum um at some point said that maybe it wasn't the best choice to call the programs running on Ethereum smart contracts um because they're not really conforming to the definition that Sabo gave back in the

early '90s. But uh I think the name has stuck and now we have to live with it. and um I'm fine with it. What what ways are there of combining smart contracts and legal contracts? Is it possible to say like I'm I'm going to create a smart contract that is a legal contract at the same time or would one have a contract that has you know a legal contract but a smart contract component? What kind of um 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. Um, it can happen through a contract that is written on a piece of paper and both parties sign it. It's a very classical way. Can also happen completely orally. So um uh a piece of paper is really just a way to document an agreement. The agreement though doesn't have to be closed uh on paper. It can just be a handshake. Um uh as to so that means essentially that you could close a legal contract through a blockchainbased smart contract system without a problem. Of course, um, in practice, there might be problems, uh,

because blockchains allow people that are completely pseudonmous, not anonymous, but pseudonymous to interact with one another. So, um, I can start to have a binding relationship with someone else of which I don't even the name, at least the address. um maybe I know the IP address through some uh method but um that's the only identifier I might have of that person but probably I have nothing. So it is becomes pointless at this point then to to think about it as a legal contract because um there is essentially no identity attached to to the other party and I can't even if

there was a legal contract enforce anything. Um when it comes to the practicality of um combining those two um the very first uh ideas that have been put out is basically to um put a to create a um a legal contract in the sense that it's a a written document in in human language and then to like a digital document and then to to hash this docu to create a a hash of this document and put this hash into a smart contract and basically this creates a link between the smart contract and the the document that has

been formulated in 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 would the legal or the you know the written natural language document be you know a description of the thing that then that code where it is its hash is put of of of its functionality and of what it does exactly. So the the I think the the devil is really in the detail here. So um there is kind of this obvious way to make the link. But then okay, you have a link between this legal contract and the smart contract. But what what does that mean then? Uh let's say you want to uh go to court with uh this 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 in the human language document or is it specified in this machine code document that is living on the blockchain and um that depends on many factors and essenti I mean first of all it would be question the question is what was the will of the parties which which document did they want to make the binding source of their agreement and it really depends depends on the

circumstances which what what that would be. Let's say that um for example, one of those parties is a business and the the other one is a consumer. And um the uh the legal document says, well um the parties agree on the rules that are specified in the smart contract. And uh that's all that's written in this uh human language part and the rest is formulated as conditions in uh in in machine code. Now um I would venture to say that this is not possible because uh the consumer uh might not be capable of understanding the machine

written code and the court would say well due to consumer protection um this is uh not a valid way of how to specify uh the the contractual obligations of this of this relationship. and therefore uh the court would basically just make up its own rules of of what the relationship would now be between those parties. So there are I think um lots of pitfalls around creating this link. Now if you would say that um 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. Um is is uh is someone liable now who's liable for this bug the creator of this contract or um is it the other way around that um there is a bug in the human language part and actually the the machine code part is is the ultimate source of truth. So this is definitely something that those um that people trying to do this should consider and they should um at least make it very clear in the human language part which one of those documents is supposed to be

the source of 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 um uh 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 let 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 your talk. uh at the meetup and it it made me wonder about the viability of a lot of the things that people are

doing uh in the Ethereum ecosystem and with uh decentralized applications. So what 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 a a first of all bug-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 a legally binding agreement there. I would say yes. If you have the consolation where you have uh a business and a consumer closing a contract, then I would venture

to say that this uh the smart component of this contract, but also the legal component of this contract is um uh falling under the regulations of general terms and conditions at least in in the European um um territory. And um in the European territory that means that um general terms uh contracts that are general terms and conditions have to be formulated in the language of the consumer. And um so like the the the the formal language in in the country that the consumer resides and uh like in my case it would be German or in in the UK

case it would be English and it would definitely not be machine code. machine code is um not a lang not an official language in any jurisdiction that I know. And um they would they would basically force the developers of a or or someone who uses uh decentralized applications and wants to close contracts with consumers to consider this and basically to offer a description of whatever the code does in uh in a natural language form in order to make this a legally binding agreement. Now uh 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 uh to interface with the legal system in order to uh to create binding uh contracts in a sense smart contracts with other people. But um 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, uh I think it's unavoidable to think about the fact that you are probably closing legal relationships with the people um with the customers of your business although they might be solely interfering with you um through a blockchain based system.

Today's magic word is contract. C O N T R A C T. Head over to let's talk bitcoin.com to sign in, enter the magic word, and claim your part of the listener [Music] reward. Presumably, most people developing decentralized applications will, you know, will not do this. uh or they may you know do it in some ways but you know the descriptions won't be complete they will miss certain edge cases or you know uh what are the implications of that I mean let's now say it is developed by some developers

that are you know one can find through their GitHub username or maybe there's even a company that's hiring those developer that's developing that uh what would happen if you have 10 people using those those applications uh and they thus aren't um well I guess they they don't conform to the terms and condition regulations there. Well, that would mean that um certain clauses, certain actions that the smart contract takes are not a consequence that the customer would have to accept. Um let's

say that some uh some some some event triggers an action by a smart contract and that clause in that smart contract is something that by uh by 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 in the terms in the um terms and conditions regulation uh that 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 uh you know in small print at the bottom of the last page it says that um like like

you you you're buying a car and uh in in that contract on the 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 to 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 he bought this car, right? Um that's a very extreme example now obviously, but um it could be that certain things that the smart contract then does um 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 um I don't think

this is this is legal. I don't think I have to, I don't know, pay this fine um pay this kind of deposit that I deposited within the smart contract relationship. Then a court could rule that indeed uh this is a a clause that is invalidu according to general terms and condition regulation and then the the the person running this uh decentralized application would have to transfer back or would have to pay damages uh to that consumer. So that would be one possible consequence.

I'd like to perhaps give u my idea of how this uh 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 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 uh of validity of a contract because it's I think objectively what is the least likely to um to have um say contradicting claims in it. I mean, I'm not a legal expert by any means. uh have a very limited knowledge of you know law and things like that but I think that if

it's if it's machine readable it's it's objectively true I guess and so one could imagine some sort of an open standard or protocol or there could be multiple standards you know there could be standards for uh merchant law for consumer law for like business law that sort of thing and when you write a contract in code you define sort of like when you're writing an HTML document you say okay this is an HTML document it it it it it adheres to this standard and we can agree that this is the standard format and it can be parsed and so that it can be parsed to check that it's it it um adheres to that standard and that there aren't any sort of contradicting clauses. So for example in you know if

you had sort of merchant law uh you could have a standard that defines sort of all the types of clauses and cases um uh and like types parties that you can have in in a merchant contract. And with this then you can if you can parse it uh you can generate you could have libraries for example that generate the equivalent in natural language in all types of languages. Um but so that the the contract that's written in code is always the sort of one true source um 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 consortium or community or if you take the equivalent with the web W3C for HTML or whatever. Um, you could potentially, you know, think of a system where you have all all your whole all all your bases covered from the legal the the the code to this natural language contract that can be passed on to consumer or read by someone who doesn't read natural or machine code. Yeah, there are several aspects to this. So um I definitely agree that um uh writing a contract in

such a way basically that you I mean you you described several things right now. you you described the idea of um uh code being more objective which I think is very disputable and um you also described the idea of using a um kind of markup language like XML or HTML to then to to create this kind of um structured document which then ties into a template database that kind fills this um XML document, let's say this XML document with um um quotes from this template database, creating this kind of natural

language contract. Now, it definitely leads to a more uh rational, more um bug-free way uh of creating a contract. If you go about it like this, um, 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 kinds of approach that you would exclude uh if you use this

intelligent templating system and so on. Definitely I think that is something that will happen in the legal practice anyways. Um 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. Um uh the other thing that you said that code is in a sense more objective. I think I I wouldn't agree. Um I think that um machine code is too limited really to um to express all the kinds of

relationships that people have today and will in the future. I think we will need human language to um to to to continue living the lives and to have this economic system the way we do it today and will hopefully in the future. Um uh moreover I think that there are certain advantages to human language uh compared to code which is that um the ambiguity especially is helpful in many cases that as much as it might be detrimental in others. Um but ambiguity is also a feature. It's not just um a bug of human language. Um, for

example, an example that I really like is um in the German constitution, we have uh some really fundamental laws about um what uh kind of protections people enjoy visa v the state and uh it was uh drafted in in the 1950s, so really long time ago. And in the 80s um the German constitutional court interpreted that um according to article two every German um or actually everyone in Germany enjoys protection from the state regarding obsessive collection of data

about them. So basically they they the the the constitutional court 30 more than 30 years after the this constitution came into force said well um they created completely new right regarding electronic data gathering and so on um from something that was much much older and um this is a really really important fundamental right today even much more than in the 80s um because of all this new technology that we have and that only is possible because language is flexible and ambiguous. Um 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 um all rits act or something which is I think from 18 1800s and they use it to break 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 I I don't think that that's correct. I think that what the FBI wanted was for Apple to not not to release the encryption keys, but for them to help them unlock the phone by writing by writing specific software that would allow them to plug into it and generate um and and iterate through the the code. You're right. You're right. It's it's more more refined than

as I put it now. Um what I really wanted to get at is that um human language uh in the way that it's ambiguous is um also a helpful tool um 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 u you know what happens when decentralized applications interact with consumers and and of course the kind of end end uh vision there is yeah the decentralized autonomous organization. Now one of the projects that's getting a lot of attention is a project called slit. 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 SLA is and does. So perhaps it would be good to have a you

know a very brief introduction of 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 Sloit offers um uh a platform to u basically tie the blockchain to the internet of things and the first application is a smart lock. So um a lock that you can put on a door or a car or any other any other thing. And this lock can be unlocked and locked uh through transactions on the Ethereum blockchain. And basically there's the

concept of an owner of this lock. So he's like the he's like the administrator of this lock. And um he can rent out for example access to this lock to other people. And um that's basically what the that's the idea what SLET wants to build. Now, Sloet has this really interesting way of going about this. They are not just this uh 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 um

basically um 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 uh let anyone pay money into or ether in that case into this um smart contract DAO by that those people become a shareholder of this DAO a co-owner and um then this DAO would spend those funds that were crowdfunded to um create this smart lock actually in the real world. Now obviously smart

contract although it's 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 SLocket goes about it is that they create a legal entity. Actually they created it already. It's a UG. It's a it's a German basically the equivalent of uh of a limited in Germany and um uh this limited is they call it the service provider. So it's the the the component that makes this DAIO actionable in the real world. And um the the heel so to speak of this

whole um idea is basically then the relationship of this service provider to this DAO. And the way that Sloet envisions it at least is that um 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 to build it pay probably factories in China. I don't know where they're going to produce it. And um uh the question then really is how can the DAO control what the service provider does? How what is this relationship

between this entity on the blockchain and um with potentially thousands or hundred thousands of 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 um I think it's a great experiment that they are doing. Uh they they do believe that this is the future of of organizations. And um 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.

Um I think what um the one of the key elements of how this of how the DAO wants to exert control over the service provider is basically by um paying them in milestones. So so as a first step the the DAO would vote on who the service provider is. It will probably be the SLOT UG um this legal entity and then uh this legal entity has to deliver results and it will be paid in like milestones and um if the if the service provider fails or just doesn't deliver or whatsoever

the DAO will seize payment um to to the service provider. That's the basic model. I think it's it's it's sort of like uh it's sort of like the the the service provider is providing some sort of proof of work, right? They like they have to present uh proof that they've done something. Should be like produced a lock or whatever. And then the DAO pays them a reward. I 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 and and uh do all this. I mean there is a certain risk uh 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 for 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 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 you know legal

incorporated entity. So, so that's one question and and then the other question I have here is now let's say they they prepay for you know this ranch slidet ghost 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 uh you know they they didn't do as I expected and can I now go and and try to get you know sudom.

So the the the the way that I think slot imagines this relationship to happen between the DAO and the service provider is solely through alignment of incentives not through contract. So there there are like two two ways to regulate this relationship between the service provider and the DAO. And um one is through incentives and the other one is through actual contracts. And um 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 uh they act upon majority decisions in a sense. So the stakeholders um the shareholders they will vote and if a certain quorum um gets uh gets met then um some action will be triggered or not. Basically payments are being 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 um this corporation is being um all decisions regarding to regarding this corporation are being um performed on this blockchain smart contract and whatever is being decided there is going to be executed um 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 SLOTE is trying. Now the disadvantage of what SLOK is the SLocket

model is that um uh for example the uh the Socket UG the service provider will create certain intellectual property for example they will create branding stuff logos whatsoever they will create um maybe patents regarding how this lock works they will uh create trademarks they will create copyrightable stuff this is all intellectual property that has to belong to some legal entity. Um it cannot belong to a um a DAO. A DAO is nothing recognized by the law. So they cannot hold any IP. So in the case of Slucket, the question becomes well if

if the DAO at some point in the future becomes dissatisfied with the work of this specific service provider, what is going to happen to this intellectual property? officially, legally, it is still owned by the service provider and there's no way for the DAO to force the service provider to transfer this IP to I don't know the next service provider that they elect. Now if you think about reg if you think if you think about um 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 the

the um the DAO will get this deposit like the security deposit that's 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 locket lock be will the IP be worth millions billions or will it be worth nothing and um so there have been people on the internet suggesting that um uh the the uh 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 SLO. This is really a different model. This is really saying that okay a DAO has basically kind of this uh legal real world entity that is still the DAO and that's not the model and in in this other model with um having a real world kind of identity as a DAO then maybe this this legal entity can hold IP and so on. I think it's it's not clear if this is possible from a legal perspective. Yeah, very interesting.

Um I'm extremely curious how this turns out somewhat tied to this. There was a there's been an interesting article by by Steven Paley who was writing about the idea of 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 uh liable and and potentially uh you know, the courts would take somebody or potentially anybody that's kind of involved in this to um hold accountable, maybe take damages from. Do do you share that assessment? I certainly wouldn't exclude the possibility that um uh 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 are part he or she knows are part of that DAO. That's certainly

something that could happen because um although in general in the blockchain world at least today uh there is still this idea of almost anonymity or pseudonymity um it is very easy um to to in some cases to get the identity behind some some some person interacting on this with this blockchain identity and um then it's totally possible to 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 um like I think Steven Ple talked about

an insurance DAO as an example and that definitely is a very uh dangerous game to play I would say because an insurance DAO is something it's unlike the locket example a DAO insurance uh basically just works with the assets on the blockchain monetary assets and basically creating insurance pools. Um, for example, with Ether or some other token that is worth something. And um, uh, then if if one person has an insurance claim, then there is a subgroup of of of this insurance DAO that assesses this claim and um, 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 Socket, I think it's different because there really is a very simplistic relationship between this DAO and the service provider. Um, I don't see why there 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 that

would work that where I think there is a low risk that someone would go ahead and sue this DAO um but in the case of an insurance that's completely different there it's insuranceances are classically about a lot I mean you need a lot of gather concentrate a lot of money in an insurance in order to make it work in the first place and um there I could very much imagine that someone tries to sue a DAO and uh 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 of of financial authorities and um you can't really run

such a business anonymously. So even if no one sues that insurance DAO, um 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 if there is substantial money in such an insurance CO 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 uh an a member of this DAO being you know agitated and and feeling like suing

someone in there. Cool. Super interesting. So, so we're we're at the we're up with with our time, but so there 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 uh 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 that are going to come up over the coming months and years. So, you know, hopefully we we can do a follow-up at some point cuz I think this would 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

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