In Defense of Szabo’s Law, For a (Mostly) Non-Legal Crypto System

A Lawyer’s Response to Vlad Zamfir’s “Against Szabo’s Law, For A New Crypto Legal System”

Crypto Law — Is it a Thing?

Lawyers! Are you sick of devs holding all the power in blockchain-land? Do you wish you could go back to the good ol’ days when devs came to you with questions about how their software comports with the law instead of you going to devs with questions about how the law comports with their software? Do you feel (or secretly suspect), like no-coiner crypto-lawyer Angela Walch, that it’s puzzling to “act as if blockchains are all about math or science when they are really just about people deciding to work together…”?

Becalm thee! Rejoice! Vlad Zamfir, a leading Ethereum developer and sharding theorist, has announced the birth of “crypto-law.” Now you can again feel relevant by helping define a new, bespoke legal order specifically applicable to the social governance of blockchain technology (& presumably agreed upon and enforced among some cross-section of devs, users, miners, exchanges, police forces and legislators? but query how that works…). Your job security is assured! Your social standing, restored!

Unless, like me, you think that “crypto-law” in Vlad’s sense is something only a non-lawyer could dream-up, and while it may represent the kernel of a very interesting, creative and intelligent approach to blockchain, is in dire need of — well, for lack of a better word, some lawyering.

I’m trying to keep this brief and informal, so, without further ado, I’ll just say I disagree with aspects of Vlad’s proposal (though think he has the kernel of quite an interesting idea) and present a somewhat hastily hacked-together mix of criticisms and proposed alternatives in the three core proposals that follow:

1. We stick with REAL law about crypto rather than trying to invent “crypto law.”

What is “REAL law about crypto?” Well, it turns out a lot of it already exists, in the form of statutes and common law (including the common law of contracts, which allows for a high degree of private ordering), even though the vast majority those laws do not expressly mention (and were articulated long before the invention of) blockchain technologies.

Admittedly, some of this law suffers from either or both of two problems:

(a) Existing law can have gaps regarding blockchain tech, and these gaps should be filled — which can happen when legislators amend, or courts construe, old laws to cover new tech like blockchain. A great example of this can be found in Wyoming’s pending addendum to the Uniform Commercial Code, which attempts to gap-fill the UCC by defining different categories of blockchain tokens, tying them to the traditional UCC rules for a given category where reasonably possible, and creating new rules where necessary — for example, by creating a new concept of “control” for the perfection of security interests in blockchain tokens.

(b) Existing law can have bad (unintended?) consequences or innovation-stifling results when applied to blockchain. Again, this can only be solved by changing the law legislatively or judicially through normal political-legal processes. An example of this, in my personal opinion, are the U.S. federal securities laws, some of which make sense as applied to blockchain (anti-fraud, some disclosure requirements), and some of which don’t (Sarbanes-Oxley anyone?)— but which the SEC largely seems to currently believe should apply to many blockchain tokens on a largely wholesale basis. The solution for such issues is to engage with regulators to the extent they have authority to grant waivers and modifications of existing law appropriate to blockchain, or, where that approach is insufficient, to prevail upon judges or legislators to modify the applicable law insofar as it pertains to blockchain.

Despite the limitations described above — which we would expect apply to ANY highly innovative and thus “disruptive” new technology — law is law: the vast majority of it already exists and has enjoyed centuries of testing, debugging and (mostly) conservative, incremental optimizing. Whatever changes need to be made to it to accommodate a new technology like blockchain (and of course, as described above, there are some) cannot be just decided by Vlad Zamfir and other denizens of the blockchain (chainizens? blockchainites? popolo chainos?), no matter how many of them there are or how broadly they agree on it. Rather, the most Vlad and other blockchain devs/users can do is one or both of the following:

→engage in the traditional law-making/influencing process by doing things like lobbying, writing influential thought pieces, voting for the politicians and judges they think will represent their interests when it comes time to legislating and adjudicating, etc; and/or

→enter into contracts (which to be contracts must comply with real contract law, not “crypto law”) to agree among themselves to a certain set of governance rules as a matter of private ordering.

Note: The second possibility (private ordering via contracts) is actually really, really powerful, and is a path that could enable chainizens / blockchainites / popolo chainos to do more with law, more quickly, in sort-of-but-not-quite the way Vlad Zamfir might like, than creating a whole new “crypto legal system.” I talk more about this possibility at the end of the article, but, for now, suffice it to say that’s part of my recommended approach and ultimately means I don’t disagree with Vlad nearly as violently as it might appear so far.

2. We Preserve Space for the Exploration of Szabo’s Law by Letting the Communities Who Want to Use It Do So

A. What is Szabo’s Law?

Vlad describes “Szabo’s law” thusly:

Szabo’s law is simple: Do not implement changes to the blockchain protocol unless the changes are required for the purpose of technical maintenance.

Most people may not notice it, but defining this as a law, as a law believed by Szabo, and as meaning exactly this “simple” thing are brilliant rhetorical maneuvers on Vlad’s part that, if we let them slip by unquestioned, could win half the debate before it has begun. Therefore, we must not do that.

If you read Vlad’s article closely it becomes clear that his critique is not restricted to this “law” of Szabo’s (which, to my knowledge, Szabo has never defined, and certainly has never defined as a “law”), but rather to what one might more ordinarily and naturally refer to as an “approach,” “philosophy” or “ethos” of Szabo’s. For example, he repeatedly refers to Szabo as being “insecure” and to various ancillary behaviors of Szabo (described in a not terribly flattering light) that have supposedly bolstered the spread and acceptance of “Szabo’s law.” Thus, it is clear that Vlad has beef not only with the simple “law” or rule he calls “Szabo’s law,” but rather also the cluster of norms, assumptions and objectives associated with that “law.”

Although I don’t agree that the thing Vlad is criticizing is a “law” and think it is extremely confusing and counterproductive to refer to it as such, I do agree it is a very real cultural force in the blockchain world and is sufficiently discrete that it can be reified, held up, reviewed and criticized, lauded or built upon. Unlike Vlad, I don’t refer this real thing as “Szabo’s law,” but rather as the “social-trust-minimization approach” to blockchain technology. While various people have described and advocated for this approach in various ways at various times, I think it is justly traced to the most articulate and famous expression it has received to date and a personal favorite of mine: Szabo’s paper “Money, blockchains and social scalability.” Thus, I do not disagree that Vlad is criticizing a real thing — the social trust minimization approach to blockchain — and that Nick Szabo is the poster-boy for that thing.

Nick Szabo and I have one thing in common: we’re both lawyers (although in Nick’s case he may not be practicing, he has a J.D. and is a very keen and longstanding student of the history of law, and that makes him a lawyer in my book). The similarities end there, since Nick is far more technically adept than I am and spent years developing revolutionary software, and I would venture to guess that I am more legally adept than Nick and spent eight years doing high-stakes deals for real high-stakes clients at real AMLAW10 law firms. But in this case, our similarity in both having a DEEP understanding of the law (rather than one developed mainly, by Vlad’s own admission, by reading what I consider a very controversial, scatter-shot and uneven blockchain-focused legal blog) explains why we’d likely both see the merits of social-trust-minimization and arrive at similar conclusions on the issues Vlad raises in his article.

I invite anyone who doubts the merits of at least exploring where social-trust-minimization-via-blockchain can take us to do one simple thing: read Nick’s article. I don’t have much to add to that, beyond referring back to the gloss I gave it in my article “Tokenizing Corporate Capital Stock”:

[F]rom a pure performance point of view, blockchains suck. Worse still, there is nothing that blockchain technology can do that can’t be done on a network utilizing a so-called “client-server/master-slave architecture” …Worse worse still, since these “client-server/master-slave” architectures can rely on centralized coordination mechanisms to achieve byzantine fault tolerance and sybil resistance, they are faster, cheaper and easier to use [than blockchain technology]. Thus, blockchain technology’s “unique selling point” (USP) for most applications is not “doing the same exact thing as centralized technologies, but materially faster, cheaper and more conveniently.” …[Instead, t]he USP of blockchain technology …is that it furthers the values of individual asset sovereignty by creating the technological predicates necessary for ordinary persons to hold, manage and transact with assets in an environment that is [socially-]trust-minimized while also being secure.

This is the real Szabo’s law, and how it relates to blockchain, in a nutshell.

B. What is Zamfir’s Law?

What does Vlad want instead of the Szaboist (Szabbic? Szaboean?) social-trust-minimization approach? Well, it’s frankly a little hard to tell, but one way of interpreting him would be that he would like chainizens to come together and define their own “laws” (albeit not really “laws” — more like just a socially agreed ruleset) for how/when/where to fork blockchains/blockchain protocols, so that they could be forked relatively often, delivering swifter “justice” to the wronged, ensuring the enforcement of non-crypto-law and crypto-law on the blockchain, and facilitating blockchain innovation at a faster pace. So, what I surmise that he wants is a body of rules (including, presumably, meta-rules for how those rules can be amended or supplemented) that everyone agrees on after a long debates whereby, if, for example, Parity has lost funds due to a hack, Parity can submit the issue through some kind of social process (query what that is) and that process would work swiftly, decisively and legally to determine whether, how and in what amounts the funds should be returned to Parity via a fork.

Does this sound familiar at all? It should. IT’S BASICALLY THE CURRENT LEGAL DISPUTE MECHANISM PROCESS, BUT APPLIED TO BLOCKCHAIN UNDER A NEW QUASI-LEGAL SET OF RULES AND A NEW QUASI-LEGAL SET OF JUDGES/LEGISLATORS/REPRESENTATIVES AT THE BEHEST OF A NEW QUASI-BLOCKCHAIN-GOVERNMENT. Essentially what it appears Vlad would like to do is create an entire crypto legal system that runs parallel to, but outside of, without conflicting with or being in violation of, the traditional legal system. Vlad, if I have that wrong somehow, feel free to pipe up and correct me, but you have to admit that although you have been very clear about your critiques of immutability, you have not been very clear in the alternative about how/when/where mutability decisions would be made under your vision — so, in fairness, I don’t have a whole lot to work with on the latter score.

Let’s call the law that such a system should exist and should govern blockchains “Zamfir’s law”.

While Zamfir’s law represents an admirable/interesting goal, it is also arguably a very wasteful and implausible one. WE ALREADY HAVE A GREAT LEGAL SYSTEM, BUILT OVER CENTURIES. At least in the United States and other highly developed parts of the world, that is. It becomes a very reasonable and natural question to ask why we think “crypto law” patched together by a maybe motley (albeit maybe lovable) group of crypto enthusiasts is likely to do much better — at least at scale (again, see below under #3 for some contrary points re: private ordering).

C. A Hypo: Why Do Szabo’s Law and Zamfir’s Law Conflict?

To understand why/how Szabo’s Law and Zamfir’s law may conflict, and why Szabo’s law (or, really, Szabo’s social-trust-minimization approach) is something worth preserving/exploring, let’s consider a variation on a hypo that personally has been very influential in exciting me about smart contracts on the blockchain and the potential value of social-trust-minimization as applied thereto.

You live India. I live in the United States. We meet on /r/mechmarket and I learn you have a fancy custom keyboard —brass weight, carbon fiber plate, HHKB layout, retooled vintage nixendorf switches, full RGB with hotlites, types like a dream — I’d like to buy. We have the idea of entering into a contract where I agree to buy and you agree to sell your keyboard for $1,000. For keyboard deals, payment in advance is customary, and, moreover, you are not willing to send me the keyboard unless I first pay you the funds. But in doing my due diligence, I learn that India has a notoriously inefficient, byzantine legal system that is hard for even Indians (no less Americans like me) to navigate successfully — clearly, if I pay you, but you breach the contract by failing to deliver the keyboard, I am effectively going to have no remedy, since there is no way I am going to endure the time and expense of suing you in India — particularly since it’s unlikely I’ll get a satisfactory remedy even if I do. I therefore consider doing the agreement under U.S. law, but then realize that even if I clearly, quickly and efficiently prove a breach of the contract under U.S. law, it will do me no good unless I can enforce the judgment in India where you and the keyboard reside — thus all the problems of the Indian legal system remain unavoidable. But, I have an idea — “let’s do the deal through a trusted intermediary!” “If we use PayPal,” I say, “PayPal will effectively insure me against the possibility of your fraud. If I don’t get the keyboard from you after paying for it, PayPal will refund me. While that’s not as good as being able to get “specific performance” of the contract as a remedy (i.e., a court forces you to deliver me the keyboard you agreed to sell) like I would be able to do if you were in the U.S., at least I will have a remedy, which is better than no remedy, and I think for the sake of being able to do a deal to get this dank-ass keyboard, that’s a risk I’m willing to take.” You don’t like that idea, though, you tell me, because PayPal places almost all the risk of a fraud claim on the seller. PayPal also charges the seller transaction fees, which is part of how it makes economic sense for PayPal to insure the risk of fraud in these types of transactions — in effect, me using PayPal means I am paying a lower price for the board as a discount reflecting my distrust in the Indian legal system. Finally, you note that it so happens you have been burned by PayPal before — you sent someone a keyboard bought through PayPal, and the buyer attempted the non-blockchain version of a “double-spend” by immediately filing a claim with PayPal for non-receipt, which resulted in the purchase price funds being held-up at PayPal for six months while PayPal investigated the claim. Even worse, PayPal got it wrong and decided against you, and thus you were out both your keyboard and your funds, with no effective remedy — since you were no more willing to wind your way through U.S. courts for a $1,000 claim than I would be willing to wind my way through Indian courts. You will never forgive PayPal, don’t trust PayPal, and believe PayPal has a pro-American bias and will never give you a fair shake. I don’t trust India’s legal system, and you don’t trust my proposed intermediary (PayPal) that would enable me not to trust India’s legal system. What do we do? *The Arena Lights Dim* *Metallica’s “Enter the Sandman” Fades Up* *Lights Start to Twinkle, Digital Coins Cascade on the JumboTron* *Blockchain Enters the Arena, Strutting like Ric Flair in his Prime, to Thunderous Applause* What about this? Let’s say you know code, I know code, and we both have a strong confidence level about the way a particular blockchain and code on it works. What could we do then? Although you don’t trust PayPal, and I don’t trust India’s legal system, in general, any two people can find at least one other person they both trust. And in this case we have —/u/Ripster — a paragon of virtue, a hero, a legend in the mechanical keyboard community, who (we’ll posit) conveniently happens to be located in the United States within driving distance of me. Now, couldn’t we do something like this?

→deploy a smart contract on Ethereum that we both feel we understand

→I deposit $1,000 worth of ETH there

→the smart contract gives Ripster’s private key the sole authority to either send the $1k to you (upon successful delivery of the keyboard) or back to me (if keyboard isn’t delivered by deadline x)

→you mail the keyboard to Ripster

→Ripster releases the ETH via a transfer command sent to the smart contract, signed by his private key (or first shows me the keyboard so I can inspect it and then releases the ETH)

→I take the keyboard from Ripster.

THIS IS MY (AND, I SUSPECT NICK SZABO’S) DREAM FOR BLOCKCHAIN. One can play with the details and probably imagine ways that social trust can be even further reduced, but the point is that this technology opens up massive, massive opportunities to enhance dealmaking through private ordering. Deals that wouldn’t be done, or would only be done more expensively or with more problems and risks, can get done, or get done more cheaply or with less drama, leveraging blockchain than not. Or, at least, such is the dream — it is up to us to make it a reality.

However, you know what could really potentially limit the value of this dream? That’s right , you guessed it— Zamfir’s law could. Notice again #15 in my hypo. For this scheme to break our dealmaking logjam, it is critical that we eliminate all forms of trust other than the two forms of trust we happen to share — social trust in Ripster and mathematical/computational trust that such-and-such smart contract code deployed on such-and-such blockchain will lead to such-and-such predictable results. But if the blockchain can be changed through a socio-legal but extrajudicial “crypto-law” process, there is an additional piece of social trust we need beyond that of our shared trust in Ripster — trust in “crypto law” and the people that apply it. To me, this is a major problem and could drastically undercut the potential benefits of blockchain.

Of course, Vlad and critics like Angela Walch will point out that such trust is always needed — even Bitcoin, the most change-averse blockchain, can be changed, and thus in using Bitcoin I am “trusting” those who could change it adversely will not do so. But, as a general matter, what is easier to trust:

(a) a blockchain “governed” by a highly ingrained, time-honored and widely touted “Szabo’s law” that both in theory and practice means the blockchain is almost never changed except for super important reasons that nearly any reasonable person would agree upon? or

(b) a highly complex Zamfir’s law/“crypto law” that, in practice and by design, entrusts the decision of whether, when and how the blockchain is changed to a group of people, the complex principles they have agreed upon and the particular way that they might decide to apply those principles in a given case?

I would submit that, in general, the blockchain governed by Szabo’s law is easier to trust, and thus in a certain sense helps “minimize trust,” or minimize the amount or complexity of trust, that is needed to facilitate private ordering via blockchain, whereas Zamfir’s law vastly increases such trust, and thus begs the question of why blockchain would even be preferable to existing alternatives that also require high amounts of social trust. After all, isn’t it possible that you distrust “crypto law” and its administrators just as much as I distrust Indian law, and that therefore by using blockchain we would merely shift, rather than solve, the trust problems that led us to consider using blockchain in the first place?

On the other hand, here is what I will acknowledge: people can have very different preferences for what they place their trust in. Some people (presumably like Angela Walch) see everything as “ultimately being about people” and have little faith in or desire for automatic, mathematical decision-making. Others (like me and presmably Nick Szabo) think there is huge promise in being able to make deals while minimizing the number of people, social variables and social institutions that must be trusted to do so, and the degree of trust that must be placed in those things to whatever extent such trust is needed. It’s a free world, and there’s lots and lots of room to have different technologies, and even different blockchains, that cater to those varying preferences.

This brings me to my next point.

D. Why Are Szabo’s Law and Zamfir’s Law, Despite Conflicting, Not Mutually Exclusive?

I think Reluctant Raccoon put it well:

Long story short: there are different blockchains. Some can use Zamfir’s law. Some can use Szabo’s law. One can even fork a given blockchain that uses Zamfir’s law or a given blockchain that uses Szabo’s law, and try convincing people to instead apply Szabo’s law to the forked version of the former or Zamfir’s law to the forked version of the latter . We can let the market and history decide which approach is better (either absolutely for all purposes or relatively for some purposes). There is no need to call for a repudiation of either, or to condemn either. Let the world experiment.

3. We Preserve Space for the Exploration of Zamfir’s Law by Letting the Communities Who Want to Use It Do So — But Through Private Ordering (Contracts) Rather than “Law”

As described above in point #1, in my opinion “crypto law” as Vlad seemingly conceives it (something voluntarily agreed upon by a cross-section of blockchain people) is neither a necessary nor viable alternative to what I’ll somewhat comically call “legal law” — I mean real law, the law established by states and enforced by threat of coercion in the form of violence, imprisonment and/or deprivation of property. You know, “old-fashioned” law — your Dad’s dad’s dad’s law.

HOWEVER, you know what Vlad’s “crypto law” sounds like, aside from the ill-advised name for it? Oh, I don’t know, how about “governance agreed to via contract in a system of enforceable private ordering”? I know that’s a mouthful, but isn’t that, at the end of the day, both what he is apparently really proposing and all he really needs? Corporations do this. LLCs do this. Private parties making deals do this. All the freaking time. And legal law, real law, helps them.

I don’t really like/support EOS, but one interesting feature of EOS is that it combines blockchain tech with wet contract tech via a purported “constitution” written in natural language and inscribed to the EOS blockchain in a Ricardian fashion. I’ve been very critical of the particular way the EOS powers-that-be decided to implement that approach, and one can query whether their constitution is enforceable and quibble with the extra-legal manner in which it has been enforced. Also, in general I share Vlad’s concerns about on-chain governance (and so really I just disagree with him, as I hope I’m elucidating here, about the extent to which blockchain governance (whether on-chain or off-chain) is necessary or advisable). However, the core of the idea behind the EOS constitution—i.e., combining blockchain technology with a sort of contractal “terms of service” and potentially a “terms of forking” for its various users/maintainers — is very interesting and potentially powerful, and might be a great way to implement ideas like Vlad’s within the framework of existing law.

For example, AFAIK there is nothing to stop Vlad from forking Ethereum, declaring that his version of Ethereum can only be used in, modified by, or participated in by people who sign (under whatever meaning of “sign” — might include a click-through agreement) a contract that agrees that all disputes regarding stuck funds, hacks, forks, whatever other issues will be decided by a “Council Of Vladdites” who follow “Crypto-Law” — as defined on Exhibit A thereto and as it may be amended or supplemented from time to time pursuant to Crypto Law #5 regarding amendments. That would seemingly achieve most of what Vlad wants to achieve by rejecting Szabo’s law, but would not do so at the expense of eliminating the existence of systems that happen to like and/or just want to play with and explore the possibilities of Szabo’s law.

I would humbly ask — what is wrong with this version of “crypto-law”? What is wrong with an approach that utilizes current truly legal contract law to allow a community of like-minded people to come together and have a sophisticated blockchain governance system for a particular blockchain, thus enabling it to fork often? I see nothing wrong with it. I’d even love to see it adopted and experimented with, and of course as a lawyer I would kill to be able to help advise what the contractually agreed “crypto law” should like. As a lawyer it’d be like advising on one of the coolest deals of all time — a deal to set up a platform for deal-making!

But I also do not see why this model should be universal or why it should be the only possible type of blockchain. And one question I have for Vlad is whether that is part of his position, or whether he just wants crypto-law to be one of many options for blockchain. One might argue (and I suspect, but am not sure, that Vlad would/will argue) that blockchains are “too dangerous without crypto law”.

But why? “Legal law” still exists, no matter what we do, and legal law can regulate blockchain’s dangers just fine. Maybe not perfectly, but fine. And such law will continue to evolve, and get better, as we lawyers grapple with this fascinating new technology. Why presume in advance that it is unworkable and try to impose a parallel “crypto law” that essentially depends on the existence of a new “crypto state”? For all we know, the “cure” to blockchain’s supposed dangers could end up being more corruptible and dangerous than the disease. And, if experience is any guide, when new governments/legal systems are set up from scratch, they usually suck, give power to weirdos, and end up as catastrophes. There is good reason to be cautious.

Conclusion

Vlad is quite a brilliant and interesting fellow, and I’m glad he’s working on and publishing his ideas — including those about blockchain governance and “crypto law.” That doesn’t mean I can’t criticize them. Just as if I were to write some screed about some aspect of coding, I would most likely badly mangle it in one way or another, but maybe also strike upon some interesting ideas, I analogously believe (truly without knee-jerk condescension) that Vlad is missing quite a few nuances about law and governance as he has ventured into legal terrain while being a non-lawyer. BUT, to Vlad’s credit, there is nevertheless quite an interesting idea he has implicitly cottoned onto— namely, that of combining blockchain technology with the power of private ordering via legal contracts. I would humbly suggest that this (perhaps combined with some real legislative and regulatory lobbying), rather than proclamations about how blockchain governance should be, what “crypto laws” should be created, etc., would be a much more constructive frame within which to tackle the issues Vlad is, very very rightfully, concerned about regarding the maximization of blockchain’s benefits and the minimization of its harms.

I would welcome further dialogue with Vlad or anyone else interested in these topics.