Blockchain: Blueprint for a New Economy

world hardware technologies with

digital Internet-based software

technologies. 52

Smart property transacted with

blockchains is a completely new kind of

concept. We are not used to having

cryptographically defined property

rights that are self-enforced by code.

The code is self-enforced by the

technical infrastructure in the sense that

it is bound to operate based on the

underlying code and cannot deviate. A

property transfer specified in the code

cannot but occur as encoded.

Blockchain-based smart property thus

contemplates the possibility of

widespread decentralized trustless asset

management systems as well as

cryptographically activated assets.

There could be widespread implications

for the entire field of property law—or

great simplifications in that property

ownership can be recorded on the

property itself:

Trustless lending

The trustless networks feature of

blockchain technology is a key

enabler in the context of smart

property and smart contracts. Making

property smart allows it to be traded

with much less trust. This reduces

fraud and mediation fees, but more

importantly affords a much greater

amount of trade to take place that

otherwise would never have

happened, because parties do not

need to know and trust each other.

For example, it makes it possible for

strangers to lend you money over the

Internet, taking your smart property

as collateral, which should make

lending more competitive and thus

credit cheaper. 53 Further, there is the

possibility that smart contracts

executed in trustless networks could

result in much less disputation.

Contract disputes in the United

States (44%) and United Kingdom

(57%) account for the largest type of

litigation, and might be avoided with

more precision at the time of setting

forth agreements, and with automated

enforcement mechanisms.54 Related

to this, as cryptocurrency visionary

and smart contracts legal theorist

Nick Szabo points out, is the general

problem of poor (i.e., irrational)

human decision making, which might

be improved with automated

mechanisms like smart contracts.

Colored coins

One of the first implementations of

smart property on the blockchain is

colored coins. Certain Bitcoins are

“colored” or “tagged” as

corresponding to a particular asset

or issuer via the transaction memo

field in a Bitcoin transaction. The

idea is similar to giving someone a

dollar bill with an IOU for another

property asset (e.g., a car) written on

it. Thus, certain Bitcoins encode

some other asset that can be securely

transacted with the blockchain. This

model still requires some trust—in

this case, that the asset called out in

the memo field will be deployed as

agreed. Consequently, colored coins

are intended for use within a certain

community, serving as loyalty points

or tokens to denote a range of

physical and digital goods and

services. The basic idea is that

colored coins are Bitcoins marked

with certain properties to reflect

certain digital or physical assets so

that more complex transactions can

be carried out with the blockchain.

The transactions could be asset

exchange, and also the conduct of

various activities within

communities, such as voting, tipping,

and commenting in forums. 55

Smart Contracts

A general sense of blockchain-based

smart contracts emerges from the smart

property discussion. In the blockchain

context, contracts or smart contracts

mean blockchain transactions that go

beyond simple buy/sell currency

transactions, and may have more

extensive instructions embedded into

them. In a more formal definition, a

contract is a method of using Bitcoin to

form agreements with people via the

blockchain. A contract in the traditional

sense is an agreement between two or

more parties to do or not do something

in exchange for something else. Each

party must trust the other party to fulfill

its side of the obligation. Smart contracts

feature the same kind of agreement to act

or not act, but they remove the need for

one type of trust between parties. This is

because a smart contract is both defined

by the code and executed (or enforced)

by the code, automatically without

discretion. In fact, three elements of

smart contracts that make them distinct

are autonomy, self-sufficiency, and

decentralization. Autonomy means that

after it is launched and running, a

contract and its initiating agent need not

be in further contact. Second, smart

contracts might be self-sufficient in their

ability to marshal resources—that is,

raising funds by providing services or

issuing equity, and spending them on

needed resources, such as processing

power or storage. Third, smart contracts

are decentralized in that they do not

subsist on a single centralized server;

they are distributed and self-executing

across network nodes. 56

The classic example used to demonstrate

smart contracts in the form of code

executing automatically is a vending

machine. Unlike a person, a vending

machine behaves algorithmically; the

same instruction set will be followed

every time in every case. When you

deposit money and make a selection, the

item is released. There is no possibility