When parties unknown managed to siphon more than $50 million in digital currency from the DAO (Decentralized Autonomous Organization) fund, it sent shock waves through the cryptocurrency community that have yet to fade.
The theft wiped away nearly a third of the $160 million in Ether, the blockchain-based currency investors had placed in the fund. The hacker was apparently able to exploit weaknesses in the 'smart contract' code that laid out the DAO's rules.
Ether-related smart contracts are built on Ethereum, a software platform backed by the nonprofit Ethereum Foundation. In response to the hack, after much internal debate users voted in favor of a 'hard fork' of the code that recaptured the stolen funds and placed them in a new smart contract.
Smart contracts as a concept remain highly controversial, with the strongest advocates adamant that code can act as law. Beyond the fact that smart contract code is far from infallible, as evidenced by the DAO hack, critics point to the lack of supporting legal protections found in the non-virtual world, as attorney Lukas Abegg argues in a post for Coindesk:
However, it seems clear by now, that the desired state of alegality, where no engagement from outside a smart contract is needed, is not reached yet. And it will probably still take quite some time to get there, if it can be reached at all.
That does not mean, however, that the concept of smart contracts has failed or would be useless. It just needs an architecture that respects the limits of current technology. And a clever work-around for the gaps in programming language and artificial intelligence that yet need to be filled.
Such a work-around might lay in the legal system from the classic meatspace, in particular a specific area called Alternative Dispute Resolution (ADR).
Its purpose is to give two or more arguing parties the formal means to resolve their disputes in private without having to resort to public state-run courts. It provides tools that allow you to set up your very own rules, define the processes of how to manage conflicts, and/or select the judges of your choice.
It has also the nice side effect of being actually classic-meatspace-legally binding.
Meanwhile, researchers at the University of Singapore are about to release an open-source smart contract analyzer tool, which they say will help users spot and fix bugs in smart contracts, as Coindesk also reports.
The analyzer tool is a good idea, but the smart contracts is still a risky and even utopian concept, says Constellation Research VP and principal analyst Steve Wilson, who leads Constellation's research into security and privacy.
"It's a creature of engineers and blockchain enthusiasts and not any serious lawyer," Wilson says. "To say 'code is law'—as if a programmer's creation is above the law— is a type of insanity that really needs to be corrected. I would rename smart contracts and stop embellishing them with qualities they don't have. There are contracts and there is code. It's a confusion of levels. The agreement between programmer and customer about what a program does can never be wholly expressed in the program."
"The parties to any contractual arrangement need to document their expectations of what's going to happen and that agreement has to be outside of the code," Wilson adds. "Blockchain enthusiasts tend to overlook the stuff that has to happen off-chain. For example, there has to be an agreed mapping of real-world assets to virtual assets. When you say, this code stands for a diamond and this stands for a land title, that discussion has to happen off the blockchain. You cannot have the agreement in the code. Let's abandon this term 'smart contract.'"
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