EB142 – Claire Warren & Scott Farrell: DnA Contracts - Bringing Human Discretion To Smart Contracts

Transcript

this episode of epicenter bitcoin is brought to you by Jax Jax is the user-friendly wallet that works across all your devices and handles both midpoint and ether photo/j a double xio and embrace the future of cryptocurrency wallets and by hi dot meet protect yourself against hackers and safeguard your identity online with a first-class VPN go to hide out me / epicenter and sign up for a free account today hi welcome to episode of Bitcoin the shorts talks about the technologies projects and startups driving decentralization and the global blockchain revolution my name is sibbeston future and I'm may roi today we are joined by scott and clear from the law firm kwm in australia this

is a global law firm and scott is partner at this particular law firm king & wood mallesons he has been practicing in financial markets and financial systems for 20 years including the creation of new financial market infrastructure claire is a senior associate at kwm specializing in capital markets derivatives structured products clearing and derivatives regulation they have together come up with an idea called DNA contracts that mixes digital and analog terms in order to form a new kind of let's say smart contract will be walking about what these DNA contracts are and what they can enable but before we start let's have a bit of background

about kwm and an hour interview is this court if you could give a bit of background sure thank you king of wood mallesons is a global law firm which has a very strong presence in asia we have more than 150 partners in China for example and as well we have more than 150 in Australia we have a similar amount in Europe as well we work for both global companies in all sorts of fields as well as startups in FinTech and other startups the we don't have a particular focus in only working in particular

sectors or industries we follow our clients and in some cases we hope to lead our clients into new areas and from our perspective Claire and I are not technology lawyers we create financial markets and financial systems and help people deal with the risks in those systems we come at this from the perspective of our startup clients and our financial services clients are heading in this direction and really our work is about making it easier for those people to understand your world rather than trying to be experts in the technology world trying to understand finance so I'm a senior associate that works with Scott in primarily the

background is in a derivatives and financial market space I've had experience in London before moving to Australia and helped a lot of clients throughout the global financial crisis since of 2008 onwards so have seen a lot of contracts when they don't go quite so well and there's a turmoil that comes from that and from helping our clients in this in this space is hell I've really got into more of the smart contractor and fin tech area as well so can you tell us a brief history of how your team got interested in smart contracts and how you ended up doing the work on DNA contracts yes we can and it

requires unfortunately to just listen to us for a moment to explain what we do in our day jobs what we what we do in our day jobs in in working in financial markets is we work in a legal code already we already work in legal documents that don't have verbs they just have series of words and their numbers listed down the page the reason the reason for that the reason that the International derivatives market works in that way is it already must be globally standard the risks are simply too big to have lawyers getting in the way by using their own words in many circumstances so we we already have trained ourselves over many years to

work in what legally can be a relatively automated environment once you move to the idea that this analog legal code that we have been immersed in can have some of its best elements done by something far more efficient you can then see how we get involved in smart contracts we do not think that smart contracts need to be left to simple things we can see the role that they have in a much bigger marketplace because we can see a direct analogy to what smart contracts can do with computation and what you know the last 20 or 30 years we have been doing with words in the financial marketplace once you have that transition you can see why

we need to help be part of the future and that led us into what would we do if we add this technology and applied it to our world what do you mean exactly like you'll have to excuse my ignorance of legalese but what do you mean exactly when you say that you're the contracts that you write don't have verbs I literally mean that and so the for example the idea behind derivatives contracts is that you don't need lawyers and so the the verbs are all standardized and contained in separate documents which are never touched and what you really play with is turning

switches on and off and then adding particular words which trigger other functions which are written in these separate books which are standard right around the world and so the actual if you and I were to do a derivative we wouldn't have an argument about whether something was reasonable or payable or all of those terrible lawyer words we would have an argument about whether it starts on this state whether the interest rate is payable on this basis and whether these are the right numbers to be used and that is a piece of paper we would exchange with each other everything else is already agreed internationally on the base of what effectively we would call a code and it's written it's kept in code

books they're legalese code books but they're standard so that you don't need to use lots of words for each transaction okay so if I if I can make the analogy then into sort of into the you know the development world and you know we have all sorts of open source libraries and open source applications that we use and so some of these are standard and standard functions and then a lot of times configuration is is in a separate file so what you're saying is that derivatives contracts for instance our standard all across the world the way that they operate and the way that things sort of happen within the terms of those contracts are standardized and

all the parameters of those contracts are then written in separate documents that reference the initial contract so as you mentioned you may have you know dates amounts interest rates that's or the parties involved and that sort of thing is that sort of a good analogy that's a very good analogy that's that's exactly kind of as it is so yeah so so we were in our traditional derivatives world we would import those definitional booklets into our particular contract just like you would in your kind of open source Walter they're all standardized so we would just import the ones we need in we don't even have to write them out we just include them by references just like importing a library into it into

some code that's that's really fascinating I had no idea that that's how actually it worked uh okay I have known a whole new view of like the legal system now and lawyers so tell us what are the some of the core issues that with smart contracts that you're trying to address probably the the core issue is that if you use smart contracts in a broader context into amounts and relationships which really count in the known technology world ie you're playing with other people's money in other people's futures then there is always a need to consider

the context of the society you're in you're going to have to deal with the framework that we as people deal with each other and what I mean by that is if Claire and I were to do a derivative together our relationship is not limited to that derivative and if some things happen which we can't predict and our history in dealing with the financial crisis and other crises before that tells us there is always some things that can happen that you can't predict then human judgment and human discretion is invaluable to get the right way out of it I can say that with from a perspective of real experience prior to

the financial crisis we worked on lots of derivative products which were very heavily mathematical some of them the algorithms that were part of the legal contract for 80 pages long and that was just algorithms behind it but those algorithms however complex they are they couldn't respond to the most simplest of problems for example if Claire became bankrupt then we would have to have the outside world imposing its own rules on what our relationship was and whatever we had agreed would happen wasn't as important to the rest of society for the rules of that society in other words smart contracts if they're going to be used to a real size in a real society do

need to have some respect for the laws of that society and potentially get the support of those laws to be really effective so what you're saying is that in in this particular case so if you give the example of you know a delivery reverse contract between you and Claire if if Clara to be bankrupt then it's the the rules of what need to happen what needs to happen in that particular scenario is no longer a part of these standard contracts that you mentioned earlier we have to come back to sort of national laws or perhaps some sort of arbitration that is not defined by law

but it's perhaps as defined is rooted in negotiation between the two of you is that about right um yeah I think there's this two parts to it really there's elements of derivative contracts that do already talked about what happens if something so bad happens but a lot of the time it's left to the discretion of the parties as to whether they want to trigger that result within the contract itself and that level of discretion is extremely important and extremely desired by a lot of people in the financial markets whether they wish to trigger that event or not the second thing is yes and there are national

bankruptcy provisions in many jurisdictions probably pretty much all that quite often will come over the top of a particular contract and say no this is not the way it's going to happen it's going to happen in in another particular manner and so there's kind of two elements to that I think really so our audience mostly is people from the software industry code etc so can we walk through an example of one standardized derivative contract in which under certain circumstances human best click discretion becomes important and we cannot engineer human description discussion out due to whatever reason one example sure why don't we whatever

use the complex example of actual default level steps together so we say Claire and I have an interest rate swap which is just an agreement that Claire will regularly pay me money based on what interest rate and I will regularly pay her money based on another interest rate the idea behind that derivative is that as time moves on it actually has real value one of us gets to win and lose depending on how the real world interest rates have moved different to what we have originally agreed and that means that we're one of us to fail to not be able to perform it could be that one of us has lost a

contract which was worth real money to them and so what happens in the derivatives market place what is agreed between most of the participants around the world is that say I was the one who failed to pay because I was bankrupt and there's no way of making me pay when I'm bankrupt because a legal system will make any payment from me at that point void regardless of what we had agreed because we can't contract out of that under our legal system is clear would have the right because I was bankrupt to finish it all now to close it all off and to say actually what has to happen is I should just pay Claire the value of the transaction which which it had at

that time but the important thing about that is if you only had the information of that contract and if you only had the information on the interest rate derivative market you would not have the right basis to make the decision for Claire as to whether she should actually pull the trigger on me that is dependent on whether I've actually in addition loan Claire's money it would depend on what the rest of the book that claire has the other derivative that she has actually are doing at that time it would depend on how Claire herself saw the interest rates in the future and if the contract itself terminated automatically

Claire would be deprived of something of real value because the marketplace truly values the ability to choose that's called optionality and it's worth a lot of money and so that is an example where an unpredictable event has occurred because Claire obviously didn't think I was going to go bankrupt where she would never have done the transaction with me but the idea that you could predict and then presumably encode all the possible inputs into Claire's decision to continue or to terminate our relationship seems from our history and our perspective of dealing with people who make these decisions to be a bit beyond what is possible in the

information set that most people have yeah what do you like to add something and I mean I think that's it that's exactly right it gets back to the point about discretion and the optionality that is really valued with the clients that we see and the financial markets more generally that option whether to trigger that consequence to trigger okay yeah I want to shut down this whole relationship or not is really really key and it's it's valued possibly beyond all else and in some of these contracts that we deal in on a day-to-day basis there's probably one other thing that we should add here which is a clear demonstration of of perhaps a difference in thinking

between the analog marketplace app apps a digital marketplace in our world you can choose not to perform a contract there are consequences to that you will have to pay damages but it's it doesn't mean you get sent to jail or anything and there are really good circumstances where you may choose to not perform a contract because it suits your life to do that and you understand the consequences and you're happy to pay them that is an important right that real people have to adjust their legal rights to the real world situation they're in if everything were automated then real people should ask well how am I being compensated for the loss of that

right to choose between continuing performance and paying damages and that's not something as lawyers that we can take away from our clients unless they have agreed to give that up and that's the way we see issues around complete automation of contracts is to be aware of what you are giving up by doing that not just be aware of what you might be gaining let's take a short break to talk about Jax Jax is a cryptocurrency wallet created by the people at the central now there are two cryptocurrencies that matter at the moment one is Bitcoin and one is either but using them can be tricky what wallet

you use how do you secure them where did I leave my umbrella it's all a big mess and that's where Jack Scott Jax is a unified wallet it works across all your devices it works for the android phone apple iphone and it works for your desktop computer and they have browser extensions for chrome and firefox and it works for both currencies at the same time it works for Bitcoin and it works for either what are the things that makes Jack's as delightful as walking through the 50 smell of Paris on a Sunday morning and getting a whiff of fresh pastries is how they leverage HD wallets so they use this 12 word single backup seed for all three currencies and make it super easy to sync your wallets across all your

devices so if you're using the Chrome extension or the desktop app you just whip out your phones scan the QR code and boom your wallets are synced & plus the people at Jack's take your security very seriously it's open source so anybody can look at the code and plus they never hold any customer funds all the keys are stored locally on the client side so go to jacks daioh that's Jay a double x io download the text wallet right now and understand what it's like to use in next generation wallet we'd like to thank Jack's for their support of epicenter I would actually like to take a different example and and and maybe if that's wrong way of thinking about it then you could correct me and that would help us so so the example I thought often when i

read your paragraph on human discussion being important for the performance of multiple contracts I thought of a typical home loan agreement so so let's say Scott you're the bank and and I come to you as a customer right and I I want a male 1 million Australian dollar side for a home loan and I agree to pay let's say 4500 Austrian dollars per month over the next 30 years we do the contract everything goes fine two years later I lose my job I'm unable to pay the 4500 Australian dollar someone now as per the contract itself as per the loan agreement itself you have the right to

come and foreclose my home but that might not be the optimal move for you because maybe you see in my situation that I am going to get another job in three months and I'm going to be able to repay you back then or it might be the case that like interest rates have reduced and you want to renegotiate with me a different contract that stipulates a lower monthly payment so that I can end up paying it so even though you have the power to foreclose you would want the option of being able to focus or not foreclose and this is the human discretion that we need in the

performance of of this contract is that is that a good example it is an excellent example the end it is a true example the amount of times that lenders choose not to immediately exercise all of their rights far outweighs the amount of times that lenders would immediately exercise all of their rights it's a business decision of the lender as to which path will allow them to one recover their money and to potentially continue to have you as a client in the

future that's the decision that they have to make at that time and exactly as you have mentioned you and I can't predict now we can't predict what those circumstances are we even less could we predict all the possible reasons why it would be a good idea to not foreclose on you because there's effectively a limitless number of possibilities that could happen in your life which would mean it would be a very good decision to give you a bit more time to refinance and to not immediately exercise the rights that's right i mean and essentially a person who is lending you money and doesn't really want to own a

house no you just want to be repaid their loan owning a house is is not really that useful for them yes they may sell it again but it's it's a lot of time and it's a lot of effort for them so there's always that part of the decision as well that that is taken into account like yes that that is a consequence that can happen but it's to be taken it in light of all the other factors that are out there in the world in this particular scenario the decision to not foreclose could be a I mean it could be a business decision so it could be based purely on on sort of you know rational principles you know like I want

to continue to bring in revenue from this loan or it could be empathetic all right it could be well you know this this person is in a difficult situation and so I we will be lenient and accepting perhaps like an agreement in which they can pay in a few months it seems like the the rational business decisions could be automated in some way but that the empathetic ille the ones that are based in empathy or maybe it's not even empathy maybe it's as you mentioned like I want this person to be a client in the future which although

you know comes always comes down to being a business decision what sort of where's the threshold I guess where these things can be automated where does it cross the line into like this can no longer be automate this has to be a human decision where do we establish you know in in the DNA contract you know the the human intervention switch has to be turned on I just to add to that they also could be a range of inputs beyond our relationship because one example of what will lead to a decision to either for clothes or not for clothes is what does the rest of your portfolio of loans

look like two completely different people and what do what does the economy of the country that you are currently exposed to look like so what we saw as being an and i should say this is part of the fundamental value that we think we are contributing is just to point out that there are decisions which we can't see can be simply computed and so the point that we get to is where is the efficiency frontier where to collect all of the possible inputs that would go into a computer decision on this point would be inefficient because of either

the computing power or this simple huge number of data inputs that you have to collect addin trust makes it far better to move it to a more efficient computer being the one inside someone's head rather than try to mimic the decision tree that so honest Gossage entry is just bringing in so many complex inputs some of which would not have even existed at the time the original contract was drafted yeah that's right i mean the way we look at using computer technology to kind of improve or change how how we currently see contracts in

the kind of traditional space is through okay how come how can they be improve whether that be through efficiencies through speed or all through reducing error so it comes to a trade-off between between those things okay when are we not doing that anymore when is it actually not any any of more efficient and it would be different in every different type of contract you'd have completely different considerations for for instance for in our world a derivative than you would in say a homeland like they would just be it would really depend on the type of product that it is but it's the same kind of decision to be made is a cable what is not efficient anymore and what is actually not leading to a good outcome okay and I think one one other interesting trade-off that it's

important to mention here specifically in the context of smart contracts as we imagine them in something like etherium or a blockchain is anonymity that is one of the sort of I guess objectives of of smart contracts with your Ian smart contracts is that you can interact with with participants in a completely anonymous way if you wish that that does what what block chains have made possible in this case if you're reverting back to some sort of an analogue human subjective decision you have to that that is a trade off you you you didn't you no longer have anonymity once you enter into that world what can

you talk about some of the different types of contracts on the spectrum from fully anonymous to not anonymous where parties must know who they're interacting with what what are the different use cases for full-on smart contracts a la dao to you know the sort of traditional contracts that we have that we use and we've been using for four centuries and we're a DNA contracts fall in the middle and you've touched on a very important point because we don't come from a tech background we don't think smart contracts have to be limited to anonymity or platforms which provide anonymity we think actually there is a

huge amount of leverage to that technology being applied in the whole world of relationships which some which are documented none of legal systems and so if you end but it it doesn't anonymity doesn't itself mean that a contract may not benefit from having a human judgment applied it does it does mean that it could be part of the framework that we won't need human judgment because that's what we're buying we know we're doing this this is this is what we are paying for we don't want to have the flexibility of a

relationship we don't want a banker to be able to choose to not foreclosed we want to be anonymous now in in the world of broader contractual relationships of high value contracts anonymity is not going to be possible because of the regulatory framework that everyone functions in because the regulators and government of the world's want to know that huge sums of money are going to places where they think huge sums of money are going but when you don't have anonymity it usually means you have some kind of relationship context and that's where there is likely to be a benefit for the analog part to

actually get value out of that loss of anonymity when you do have anonymity it is possible that having an analog context which doesn't have to be a simple human making a decision but something which is outside the very structure which creates a problem to solve a problem so if there is an issue with a system which has anonymity is it possible that that system could get itself caught in a problem that it can't solve in which case is there any kind of safety valve which can be used to resolve that problem if you think about if we think about it in that context that's effectively a large part of what we're doing with aspects of our analog

contracts is allowing the computational element to call out for help when the computational element has effectively got stuck and as architects of that at the start we're trying to build in those areas where we it is now more efficient to not make the computer just spin wheels but to actually provide an answer from the outside so i think that's right so so you can have the code you know us ask people for inputs when it needs them or ask some other source for inputs when it needs them justice just as contracts do today and then keep running again that can be an element of using an analog thing is looking outside of the

code and one other that's automated or not is a different different matter you can have that automated but you can also have things where and we call them kind of hard off ramps where someone can go actually I want to take this this contract out of being fully automated and I want to deal with that with my counterparty now now that comes down to yes there is no unanimity for that and that you need an element of trust and you need to know who your counter parties are but there's no reason why you need need that in a particular contract if the parties don't want that so starting again on this question of anonymity I'd like to get your opinion on on this if you had the choice now that we can have anonymous contracts

it's just as I think I mean unless you can correct me that this is relatively new that we can have anonymous contracts fully anonymous in an ideal world should we by default always try to tend towards having anonymous contracts rather than having contracting with part in which partners in a known if we had to choose between what the default position would be should it not be anonymous as much as much as possible where we can automate and then and then have fail-safes that tend towards analog when is when it's needed where we see let let me speak to that not by me making a choice because

it is not my choice to make but let me just speak to that as to when anonymous and anonymity has developed in the financial market place before this where it has developed which is usually through things like exchanges in clearing systems is when there is no element of risk between the parties the risk has already been completely isolated and effectively it has become irrelevant as to who the other party is no part of what has been bargained for and no part of what is being performed

actually is influenced by the existence of the other party that is a very small kind of contract normally or it'll a very short term as and I want to buy this standardized thing you want to sell this standardized thing when it is used in circumstances of longer term contracts what has to happen is a super trusted third party has to be inserted in the middle because as it goes longer term people are counting on the contract to actually be performed which gives rise to credit risk which normally means I have to know who has just promised to perform this because there is a real risk they won't

perform in those circumstance what the marketplace what the people who consume these services ended up creating was a super trusted party in the middle it would effectively perform in the place of everyone else and so really what I'm getting to is in choosing whether to make an anonymous or not we again have to work out whether what we're giving up by way of information is important to the contract that we're entering into it might be critical to the contract if we're actually counting on someone to do something because even if the contract says the money is paid once the other side has gone into bankruptcy you have to give it back so even if you try and

hardwire rules of performance into a computational contract under most legal systems you'll end up in the same spot as you would if you try to hide hardwire something into an ordinary contract is you just can't contract under out of our legal system which means that there are some risks which means that information about who you're dealing with could be relevant to the way that you price that deal because you can understand the risks you're taking so we've been talking a lot about about about DNA contract since the beginning and it occurs to me that we haven't really defined what the components are and actually what DNA contracts means so let's maybe let's let's dive in a little

little deeper and and and explain what we've sorted we sort of have but it briefly explain what a DNA contract is where the different components are and how this components interact sure sure so so DNA stands for digital and analog basically so it's it's one contract that comprises two sets of terms and that do different things one being a digital set of terms which which operates through automation through code another set of a week we've called them analog terms which is you know kind of legalese terms terms in kind of writing and the idea being and we've taken an interest rate swap as an example just just as a proof of concept

to see if it works is that the easy bit the bits that provide for calculations of amounts do so the calculations between the parties that Scott and I discussed earlier based on different interest rates that can be done by a computer so that can be put with in what we call the digital terms but there's sometimes bits that you need discretion for so if for instance I failed to pay a certain amount which gave Scott the right to terminate the contract should he want to we leave out of the digital terms we say know that that's better for a human head to decide whether to trigger or not that's in the analog terms and so you go through each of the

terms of the contract and you made that decision when you design sort of architecture for it whether something can be automated and if there are benefits in speed efficiency and a reduction of errors in in doing so because a computer will efficiently and effectively perform the same calculations again and again and again better than a person can do it so we've been decided that actually what what do you end up with is during the normal life cycle of this interest rate swap walk quite often a lot a lot of different contracts nothing bad happens the parties perform their obligations and the money gets paid and the contract ends when it's meant to and all that kind of stuff is actually pretty useful

to be automated where it can be but it's all the bad stuff that takes up quite a lot of or contracts what happens when something goes wrong all the discretions or the commercially reasonable wording and all these sorts of things you see in a lot of lot of legal writing and takes up quite a lot of the contract but that's that's really important but actually it requires a lot of discretion and so we've kept that out of the digital terms there's some elements of the digital terms that also pass questions or things to be answered over to a human and then can continue operating again for example one of the payments under an interest

rate swap is calculated by reference to a floating rate of interest which is available on a particular we've closed on the Reuters screen so the code goes off and gets that rate from the Reuters screen but what happened if Reuters doesn't publish that rate on a particular day well the code then goes okay I can't get that I'm going to go and ask a particular human it's called a calculation agent in our circumstances the calculation agent determines that rate in accordance with the analog terms we've told them how they are meant to calculate that and then they put that back into the code and the code carries on working again so that's an instance where you have a human intervention

because it's easier to do so and then the code carries on working and tells the people how much they need to pay on a particular day the the one of the critical things there is that the provisions which are encoded and not just a way of executing the contract they're actually the terms of the contract at that point in time yeah so we don't see the D bit as just being a way to make the a bit happen we see the whole thing is quite a smart contract because the relevant terms are written in the relevant language at the time they are best used they are written in a

digital language they are the terms of the contract when it is most appropriate and in those terms move it to an analog contract when those terms are not appropriate and a critical element of this which comes from our background is it is very important that these terms match what happens in interest rate swap contracts which don't have this technology because what is fundamental to the derivatives market place because the sums of money are so huge you can't have basis risk between the terms of a DNA interest rate swap and another interest rate swap which is destined on an ordinary bassist so we wrote it so

that you would actually have computer terms but then we had to make sure that those computer terms actually matched what the rest of the world did because when you're dealing with billions of dollars the smallest difference could produce an enormous cost for someone if the market moves in an unusual way that's right so the analog in the digital together constitute the one single contract for that particular interest rate swap and conform part of the larger relationship that the parties may have using say traditional contracts as well so when you say analogue domes I i imagine like an english-language document and when you say digital terms it's it's code and then you have ways by

which these to refer to each other right like when I look at the digital code I can know which document is the corresponding analog term and when I look at the analog term I can know which is a digital domain how is this linkage made between code and english-language close yeah that's exactly right so yes you do you have the english english language prout and it refers to in our exact example it's a fairly rudimentary but we just returned referred to digital terms having a particular hash and the same in the digital terms we prefer to the animal terms having a particular hash they speak together but the idea is that they don't try and overlap so the

digital terms do one set of things and the analog terms do another set of things and there shouldn't be conflict between them there should be a seamless pass between what a human needs to do in the analog world and then back to the digital terms and vice versa over time if if needed with the idea being that actually if nothing bad happens there's no need to really look at the analog terms particularly because the contract will execute through the code I was going to add something which will probably won't appeal to all of the technology people they're listening to this but the way we explain it to non technology people and particularly because we're from Australia and stow everyone swims here it is literally like you're swimming in the fast lane at the

pool which is obviously the computer lane because it works very fast you run into someone in front of you who's not swimming very fast so you move over to the next Lane the analog lane because there is a blockage and then the terms of the contract actually move you back into the digital Lane as soon as you get around that blockage and so you move from swim lane from digital to analog and back and really what we've done is work out or when should those transitions occur based on our experience in the marketplace and then how those transitions should occur based on again our experience in the marketplace so to actually make it make it more tractable for the audience because I suppose not all of us have I guess maybe none of our audience has

ever dealt with an interest rate swap before but to make it more tractable I would actually take the example of the Dow the the now that that basically had all the money stolen now when you look at the Dow contract the Dow contract had this special role which was called a curator and a curator was supposed to limit the number of proposals that were going to be considered by the Dow shareholders through voting now so this curator was like a human that was supposed to study all the proposals that come in and somehow I apply a filter on these these proposals now what ended up happening in the Dow was that the role of the curator was not expressed in code

at all it could not be right because it needed human discretion and the Dow didn't end up defining the role of the curator in an English language document now the problem here is in one future day it might could have been the case that the shareholders did not agree with what the curator did and because they didn't have an english-language contract defining this relationship between shareholder and curator that would have led to conflict and probably you know in the future stalemates of various kinds so what a DNA contract would do rather instead is you define the role of this human input giving curator in English language and

then you also define what happens when the shareholders are not happy with the curator and how they can be fired in the analog world but when the relationship is working fine the Dow code can handle handle that execution of that organization in an automated fashion so when everything is going fine you use the automated code when there is a conflict between how a particular human is satisfying his role correctly or not satisfying his role correctly then you go into the analog world sort it out there and then go back into the digital realm and the DNA contract allows the switching from digital to analog and back yes then and I suppose the addition to that is that agreement as to what the

code says when its operating is what we agree and then what the curator says is also what we agree so that is part of one agreement that is quite important because that means that you shouldn't be able to argue that I don't like what the curator did in circumstances where will you agreed upfront either that it could make its decision as it sees fit or whatever or in accordance with certain rules and this is again in our background where we we work with complex derivatives that often have very complex indices which have someone exactly like a curator this is quite familiar to us but we do make sure that people agree to

everything they don't just to get to agree to the ordinary life cycle of a transaction they have to also agree to the default mechanism and that that's important because that means that they should and not what will happen when the unpredictable happens what not with the result is but they should understand the process that you have to go through and it's not it's not an outside process it's part of what you bargained for and that is quite an important thing in from our world constructing complex things and we think it's quite an important thing when consultations are used in complex things as well so one thing that occurred to me yesterday when we were

talking about this with mer is that even in a scenario where you may have a human intervention let's take it back to you know this idea of mortgage and you know that one of the parties so the lending party sorry the boring party filing for bankruptcy so we have this contract it's being executed automatically and at some point the you know the analog component is invoked some decisions are made in so the real world by subjective inputs and then we go back into we go back into the automated system and having dealt with

living in France I have to deal with administration quite a lot it's sort of a flagship here in France is that you know everything is everything is very complex administrative Lee and sometimes you have to go back on decision so sometimes you have to provide paperwork and that paperwork maybe isn't processed correctly or maybe you provide the wrong paperwork and decisions are made and then you have to come back on them so how would that how would that work then in that case where we go back into automation land and then we we discover that oh we made a mistake we we have to come back and we have to revert these decisions how would that work I obviously can't speak to the

complexities of French administration although that that did sound pretty tough what did you see that that's part of the ability to lift out lift the contract out of the computer Lane in circumstances where you you haven't even the computer itself the computation hasn't done it itself one of the parties has said or maybe both of the parties have said we need to lift this out to fix something up now the the reasons you don't have to define all the reasons for that as long as you come from a starting point of we want our will to be better not we are trying to create something where the computation framework is

always the one applying so for all sorts of reasons you may need to lift something out and adjust something and believe me we see this all the time from our world to where we have to adjust transactions not because people are having an argument but quite the opposite they need to adjust the mathematical terms of a derivative because that's actually not what they wanted to do and so the ability to move that effectively from the fast lane to the slow lane again so we repair the fast lane and then push it back is always there where that would be potentially unacceptable is to people who don't accept that we should ever have an ability for the parties to readjust the settings in the world of

financial markets you've always got to allow for that because it should never be set and forget because the future world is too unpredictable to have set and forget but if you're if you're if you just want to improve what currently is the case by pushing as many things into the fast lane as you can then the fact that you can sometimes lift out into the slow lane to fix things up that's just fine because you what the advantages is your only in the slow lane when you need to be and for everything else you're in the fast lane using computers to do the work let's take a short break to talk about hideout me you know you need a VPN provider to protect yourself against those nasty hackers

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thank height up me for their support of episode of Bitcoin let's bring it back into the block chains now one up one of the core components of blockchain technology is digital signatures and the ability for you know parties in a contract in a smart contract to execute decisions based on those signatures so that could be issuing a transaction that could be issuing a vote that sort of thing now when you think of a DNA contract and having to make decisions in an analog since those decisions have to be made by parties right in in the

contract so if coming back to this idea of a mortgage if we have to come out of the automated lane to the analog lane because we need to make decisions about someone's financial situation it is up to save the bank to make that decision and then bring it back into the automated lane do do you envision that these terms would have to be defined in the smart contract before it is issued to the black chain my I guess my question is how how do you establish who gets to make those decisions is that

based on keys that would be published in the contract prior to it being executed on a blockchain I think that that's probably rush when we come from from the background of trying to integrate the kind of legal relationship into contracts between parties are not the kind of more technical side of exactly how the technology would fit together but that from our understanding is how you would you would be looking at doing so you would agree up front before you put the contract on a blockchain you know the circumstances in which people could go in whether that just be at any time a person can go in and pull it out that's fine but you've agreed that upfront or

it could be you know in these certain circumstances the parties can go in and change things or take it out but whatever you do you would need to agree with the parties at the beginning that was going to be the deal that's that's right we're not we're not trying to impose any kind of inflexible idea in in that regard it becomes a question as to given how much you want to agree like that how efficient has the use of the blockchain still become is it still an efficient use depending on the fact that you have now got so much complexity in the underlying contract that the amount of time it'll spend in automation is not really worth the efficiency gains that

you would otherwise have from executing that contract in that form I'm getting the idea that there's a spectrum so you have completely traditional contracts at one end then you have these DNA contracts that are mix of smart contract automation and traditional contract clothes and then you have pure smart contracts so there you can think of it as a as a spectrum right and maybe some some relationship agreement such as a nondisclosure agreement should should always be in the traditional contract from because there's not much to automate here right whereas some something like an interest rate swap or a mod gauge falls in the middle where

they're spart part they partly automatable the cash flow is automatable while while the default scenario is not and maybe there is a third kind of possibility as well where a pure smart contract is the best and these might be situations where as you pointed as you pointed out that participants want to transact anonymously and their performance and obligations don't depend on each other that tightly so maybe this is there's a spectrum and like we are going to see all parts of these spectrum in the future but in terms of the DNA contract what the question that comes to mind is

we are that you are really proposing a new kind of contract technology something that's at least today non-standard maybe in the codes maybe maybe our DNA contract has never been challenged in inner code so how are we why why are we sure and how are we sure that this linkage between analog and digital instantiated to the mechanisms of hash functions etc will stand up to scrutiny when one of these agreements inevitably find their way into it into a code process the reason is because this is just a progression from what we've done before this is just a progression

of contracts that were upheld in the financial crisis under the most rigorous scrutiny that you could have because this is just a mechanism for describing the terms of a contract in a different and i would say heavily mathematical language we write parts of our contracts in mathematical languages already we have to because the marketplace we serve speaks in that mathematical language that stands up in court provided it is clear and provided that there are sufficient experts to tell the court what that means what we're really

talking about is parties can agree the terms of their contracts such that those terms in being expressed in some form it could be any form of computational code are more easily performed but the area of challenge to say that because that part of the contract is expressed in this language rather than that language is really to say that if I had caused 13 expressed in French in an English contract an English Court would strike that down know what an English Court would do is find out presumably from

someone who speaks French what those words actually meant because that's what the parties agreed the same applies to this we are not trying to choose a technology we are not trying to change the fabric of contract law we are just trying to demonstrate that that fabric can be adjusted to fit in with an automated world without changing the very nature of contracts themselves and we know that the very nature of contracts themselves can be upheld because it is every day do you have something to add there no I mean you will have the same questions that come with any contracts or you know do the

parties how to quickly understand the terms other unequal bargaining power between the parties those questions will still remain so I don't think that it would be any different because you've expressed part of it in code those same questions will be warded both parties understand the code under they in an equal bargaining power to understand the code that's just the same as as do they understand this algorithm in this contract today or is this contract too complicated for you know a retail investor for instance if you're investing in certain things you'll still have those same questions and indeed clay that's a really important point the question is not are these things always enforceable I believe the right question is whether the expression a part of the

contract in this language makes them any less enforceable because you are not looking for a benefit from increased enforceability you are looking for a benefit from increased inefficiency and you are hoping that there is no shortfall and enforceability which has occurred as a result so it's not intended to produce the Nirvana of everything will work all the time it's intended to keep that as a level playing field juice the added benefit of having the computational code active when it is most efficient yeah awesome I'm really glad to hear this answer because it means it means like this there's not a big roadblock at least on that side for

this for this technology so I think the final section we would like to cover some of kind of the like business and technology aspects so one of the first question is originally when when the etherium ecosystem was build this idea of smart contracts came the the fundamental driving force of the motive force was the perceived need to remove trust from financial agreements and many people debated that this this wasn't practically possible like in a loan agreement when Scott is lending me a million australian dollars there needs

to be a bit of trust on my side that I will repay because if you go on the other end where if you completely smart contract if I the process then I would need to put all of the monthly payments in escrow but that would defeat the purpose of the loan because I don't have the money today if I had the money today I wouldn't need the loan right so you cannot remove trust from a traditional loan agreement and like loan agreements are such a huge part of the economy right so there's a big parts of contact economy that you can't make trustless but whether right or wrong that was the initial motive force for building smart contract technology now we are coming to

this point we are saying okay we do need trust and you have to accept it and go for analog terms now but what becomes kind of business proposition for DNA technology what do you think it can improve and why do you think the market would adopt it if it's not the removal of trust that's that's an interesting question because as you have rightly say we come at it from a different side and it really comes down to the point as to what we think what we see a smart contract is being and in essence we think a smart contract is a contract it doesn't need lawyers very much so the lesser contract needs lawyers the smarter it actually is and certainly the more efficient it is and

indeed that entire framework I described for the International derivatives market place is designed to not lead lawyers or all the time so from this point there is a slight difference in the philosophy potentially between a benefit of having a smart contract and the benefit from something like the blockchain as an engine of trust and we don't think we're imposing this difference we think this difference exists in the very nature of the transactions you're dealing with as long as we don't get to change the world and the way people transact when we do try to do that it becomes we have to be very careful because people may not

understand that what they once had is not what they now have but in in this regard the mortgage is because it has pushed back an obligation of someone so it no longer is a trade now it is a payment now for something in the future automatically create some sort of risk and that's what I would be being paid for had I lent you the monies you would pay me interest as being the price of the risk i was taking on you now that means that they're either has to be a level of trust because that's a fundamental part of that transaction or we mitigate that in a way which effectively negates the entire function

of the contract and that's what you said and like you for example you giving me collateral to make sure you would pay the contract that would be pointless because I asked for a million dollars of collateral please so I think think the point there is in considering what can be moved to anonymous we are also considering of which transactions in the outside world have have trust as a fundamental part of them and then the question is do we want smart contracts to be involved in improving that world excepting that they were still going to be an element of trust or do we believe based on some philosophy that because trust must remain we should not try and

improve that part of what people do we because we see efficiencies in what people do think that you should make things more efficient even if you don't remove the element of trust but it might be that other people think that that's not the best use of smart contracts our belief is lots of people will think that the more safety the more efficiency the more convenience is very much worth taking a look at applying smart contracts to what they do today's magic word is analog a n al 0 g @ / de lespinois com to sign in enter the magic word and claim your part of the listener

award so if we bring it back 22 you know recent events and the dow so recently we those the dow hack as you mentioned and you point out in your article as sort of the base for this whole discussion about bringing human intervention back into smart contracts in a way we could see the hard fork as you know bringing human intervention because these decisions were made outside of the blockchain and then essentially we had a fork and which changed the nature of the code and allowed dow investors to you know take

them bring take their money back out of the smart contract can you give us your your views and thoughts about this you know from press from from a legal perspective from where you stand what do you think about this whole this whole tau attack and and the resulting hard fork that's a good question let me express that in wording from from my world the the result of the hard fork is very similar to the result of to result if that had happened in any kind of centralized financial market infrastructure if we look at the dow

like like any blockchain it effectively from our world is decentralized financial market infrastructure it's a way that people connect to transact and that's what we see as as that now we're that sort of thing to happen in something that had a clearing house or in exchange with a regulator looking over the top there would be intervention which would be governed by the rules of that exchange where the clearinghouse of exchange would say just a second that's not the result that's supposed to happen here we are going to change the rules so that the money is going to go back and what was interesting from our perspective is it seemed that the hard for process achieved a similar result although based upon our readings of what

was happening in the press there seemed to be a little bit of angst and pain in getting to that result and the the potential for that sort of result to be that sort of process to be set in advance is something where which is more analog than digital so I think your analogy to say that the hard fork is more analog because it is something outside the original rules of the code of the contract or so I understand is very accurate and I think the the reason that it occurred is also very instructive as to when sometimes you

need to look beyond the source of a problem in order to solve it that's really interesting um we have one final question and then we'll close down what has in my opinion being an awesome interview and a very educative interview the question is so today like DNA contracts let's say in their infancy right this probably not not a lot of them around hit the market but let's assume a future scenario where they grow out of this infancy and maybe trillions and dollars of derivatives other contracts move on to this form how does this change the legal services

industry what what big change do you anticipate seeing if this technology were to succeed I think that it will require us as lawyers to be more aware of different ways that people communicate their transactions what this is toward us already is not that we need to be know all the complexities of computer code because we always see ourselves that more as architects and engineers but we do have to understand more of the language that engineers will speak in order to work with them so what it does for lawyers I don't believe it

will remove the need for lawyers and I don't not saying that just because I'm a lawyer but it's because of my belief that the law is just a reflection of what society regards as its rules and society will always want some rules that people can't contract out of we're all part of a society and so I think there'll be a need for lawyers but the lawyers will have to be adaptive enough to work out when we engineers could and I mean software and computer engineers could implement this far more effectively and then being able to speak in a language that those engineers can understand so we can get out of the way and let them do their job and do their job well yeah I mean yes I think I think

from my perspective it also goes to what you said about there's a spectrum there's a spectrum of things that that that is desirable to automate and there's a think this is the things that are not and there's everything in between and so I think you know lawyers are just there to be flexible so they're there to be flexible to be able to understand the interaction between both sets of terms they're there to understand the interaction between when something should be automated or could be automated and when people don't want it to be so a lawyer is really just product I think all of that and we'll have to change and adapt accordingly but I i agree with Scott and again a caveat saying that's not just because

I'm a lawyer I think there will still be a place for lawyers for a very very long tactical I would tend to agree as much as I like the idea of a the automation and in black Jane's smart contracts and all this fascinating technology I think that you know in the current system I do agree that I think lawyers will be around for a long time I don't think that anybody going to law school right now will have any lack of work in the coming years so just before you wrap up here let's say I mean you've written a paper about this which will have in the show notes all of all of the documentation about DNA contracts and the examples that you've given are

available on github and I'll have links to that and show notes at what is the current sort of technical implementation of this are you speaking with any developers about perhaps building a block chain which would incorporate DNA contracts at the moment everything is just open source it's an idea we are really looking for people's feedback as to what what they think it's just something that we happen to think is a good idea from our experience in the marketplace and we interested to get feedback from from other people we're looking to expand it into different kind of product areas as well to see how flexible the structure can be and where

that level of automation versus analog is desirable as as we said it will be different in different types of product it's not just limited I don't think either to financial markets products as well although they are a really good test case I think in terms of what we were working with and stuff at the moment we're very much just just happy for things to be out there um that there are three people that are looking at it closely in their internal systems we know so far and i'd have to say we've attracted an enormous number of friends but i didn't know we had in different parts of the world with who who are more from potentially your background than

our background and they do seem to be tinkering with it I should say from our perspective we're not we're not looking to have ki daal um developers doing this because again I come back to the fact that we serve our clients and so it's really a question as to them determining that whether this can be useful for them and then us trying to respond to that and work out how we could make changes to make it even more useful that's right great so we'll have links to all all of that in the show notes and we definitely look forward to seeing how this develops and maybe at some point this gets incorporated technically into some sort of block chain where we can we can have you know blah change that that in the

current system in the current legal framework would would be able to work with things like mortgages things like swaps derivatives etc which is I think probably is you know very well needed so thank you so much for coming on the show thanks to the both of you it was a fascinating discussion thanks to the both of you if it was great thank you very much for having us now pleasure thank you very much and thank you for or to our listeners for tuning in we release episodes of epson or Bitcoin every Monday you can find us on the LTV network Atlas a Bitcoin com where you'll find all kinds of great content about watch chains Bitcoin cryptocurrencies

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