The Blockchain and the New Architecture of Trust

339 Pages·2018·3.459 MB·English

by  Kevin Werbach

The Blockchain and the New Architecture of Trust
Information Policy Series
Edited by Sandra Braman
The Information Policy Series publishes research on and analysis of significant prob-
lems in the field of information policy, including decisions and practices that enable or
constrain information, communication, and culture irrespective of the legal siloes
in which they have traditionally been located, as well as state-law-society inter-
actions. Defining information policy as all laws, regulations, and decision-making
principles that affect any form of information creation, processing, flows, and use,
the series includes attention to the formal decisions, decision-making processes,
and entities of government; the formal and informal decisions, decision-making pro-
cesses, and entities of private- and public-sector agents capable of constitutive effects
on the nature of society; and the cultural habits and predispositions of governmental-
ity that support and sustain government and governance. The parametric functions
of information policy at the boundaries of social, informational, and technological
systems are of global importance because they provide the context for all communica-
tions, interactions, and social processes.
Virtual Economies: Design and Analysis, Vili Lehdonvirta and Edward Castronova
Traversing Digital Babel: Information, e-Government, and Exchange, Alon Peled
Chasing the Tape: Information Law and Policy in Capital Markets, Onnig H. Dombalagian
Regulating the Cloud: Policy for Computing Infrastructure, edited by Christopher S. Yoo
and Jean-François Blanchette
Privacy on the Ground: Driving Corporate Behavior in the United States and Europe, Ken-
neth A. Bamberger and Deirdre K. Mulligan
How Not to Network a Nation: The Uneasy History of the Soviet Internet, Benjamin Peters
Hate Spin: The Manufacture of Religious Offense and Its Threat to Democracy, Cherian George
Big Data Is Not a Monolith, edited by Cassidy R. Sugimoto, Hamid R. Ekbia, and
Michael Mattioli
Decoding the Social World: Data Science and the Unintended Consequences of Communica-
tion, Sandra González-Bailón
Open Space: The Global Effort for Open Access to Environmental Satellite Data, Mariel
John Borowitz
The Blockchain and the New Architecture of Trust
Kevin Werbach
The MIT Press
Cambridge, Massachusetts
London, England
© 2018 Massachusetts Institute of Technology
All rights reserved. No part of this book may be reproduced in any form by any
electronic or mechanical means (including photocopying, recording, or information
storage and retrieval) without permission in writing from the publisher.
This book was set in Stone Serif by Westchester Publishing Ser vices. Printed and
bound in the United States of America.
Library of Congress Cataloging-in-Publication Data
Names: Werbach, Kevin, author.
Title: The blockchain and the new architecture of trust / Kevin Werbach.
Description: Cambridge, MA : MIT Press, [2018] | Series: Information policy
series | Includes bibliographical references and index.
Identifiers: LCCN 2018011211 | ISBN 9780262038935 (hardcover : alk. paper)
Subjects: LCSH: Electronic funds transfers. | Blockchains (Databases) |
Bitcoin. | Trust. | Finance--Technological innovations.
Classification: LCC HG1710 .W47 2018 | DDC 332.1/78--dc23
LC record available at https://lccn.loc.gov/2018011211
10 9 8 7 6 5 4 3 2 1
Contents
Series’ Editor’s Introduction ix
Acknowledgments xv
Introduction: The Parable of the Tree 1
Buttonwood to Blockchain 1
Logically Centralized, Organizationally Decentralized 7
Law and Quantum Thought 9
The Path Ahead 11
I A Revolution in Nine Pages
1 The Trust Challenge 17
Without Relying on Trust 17
A Crisis of Trust 18
Defining Trust 21
Trust Architectures: Peer-to-Peer, Leviathan, Intermediary 25
Trustless Trust 28
2 Satoshi’s Solution 33
Too Trusted to Fail? 33
In the Beginning, There Was Bitcoin 39
Nakamoto Consensus 42
The Significance of Cryptocurrency 48
3 More than Money 53
It All Started When They Nerfed the Siphon Life Spell 53
Permissioned Ledgers 58
Smart Contracts 63
The DAO Saga 67
vi Contents
4 Why Blockchain? 71
Beyond the Whoppercoin 71
The Enduring Value of Intermediaries 74
Decentralization 76
Shared Truth 79
Translucent Collaboration 83
Tokens of Value 85
II Ledgers Meet Law
5 Unpacking Blockchain Trust 95
Something from Nothing 95
Distributed 96
Cryptoeconomic 98
Immutable 101
Transparent 105
Algorithmic 107
6 What Could Possibly Go Wrong? 113
Vision and Reality 113
Satoshi’s Error 116
The Limits of Decentralization 119
Not-So-Smart Contracts 123
Trusting the Token Issuers 127
Centralized Edge Providers 129
Rules of the Road 131
7 Blockchain Governance 133
Vili’s Paradox 133
The Power of Consensus 135
Governing the Governors 138
The Social Contract 141
Governance in Practice 143
8 Blockchain As/And Law 149
Vlad’s Conundrum 149
Things That Cryptoregulate 153
This Time It’s Different? 156
Ex Ante Design vs. Ex Post Dispute Resolution 160
Law as a Technology of Trust 163
Modes of Interaction: Supplements, Complements, Substitutes 165
Contents vii
9 We’re from the Government, and We’re Here to Help 175
We Need to Begin Somewhere 175
Regulatory Controversies 178
The Token Offering Test Case 182
Regulation and Innovation 189
A Framework for Regulation 194
III Building the Decentralized Future
10 Connecting the Legal and the Technical 203
The Education of Nicholas Szabo 203
Making Law More Code-Like 204
Making Code More Law-Like 212
Fusions of Cryptogovernance 218
11 An Unpredictable Certainty 225
As Speculative as They Are Rich 225
Decentralization Cannot Hold 228
Overcoming the Trust Trade-off 233
Blockchain as Spanning Layer 236
12 Conclusion 241
Mike Hearn’s Odyssey 241
A Matter of Trust 245
Notes 247
Index 305

Series Editor’s Introduction
Sandra Braman
Some believe that the blockchain, the technology that underlies crypto-
currencies such as Bitcoin and can do so much more, makes it possible for
people to create their own custom legal systems. Others go even further,
arguing it will replace the nation-state altogether. But as Kevin Werbach, in
The Blockchain and the New Architecture of Trust, points out, we have heard
this before, with the Internet, and as before, he argues, not only will gov-
ernments find a way to regulate blockchains—and with blockchains—but
doing so is what will allow us to make the best uses of this clearly disruptive
and, indeed, transformative innovation.
We are already seeing the potential. Walmart has found that using a
blockchain for supply chain information allows it to identify items asso-
ciated with food-borne disease that need to be removed from shelves in
seconds rather than weeks. Where political and economic turbulence have
left property records uncertain, the blockchain can keep land titles straight.
The UN World Food Programme’s efforts to use the blockchain in its efforts
to support refugees have been successful. The Delaware Blockchain Initiative
is using it to record stock ownership in a manner that increases the effi-
ciency and transparency of the stock market. A myriad other uses of the
blockchain have been conceived, are under experimentation, or are already
in use.
The blockchain looks purely technical but, again like the Internet, it
is sociotechnical in nature. Humans are essential to its performance: proof
of work systems that support major platforms depend on miners, decisions
about investing in blockchain hardware and software are made by humans,
people are critical to blockchain operations in a variety of contractor and
curator roles, and it is on the basis of human subjectivity that blockchains