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Legally binding contracts

on the

blockchain

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Introduction to LegalThings

Started in 2014 as a platform to create, share and sign contracts�
In 2016 we rolled-out proof of existence through the Bitcoin blockchain

Client portfolio include corporates (Ahold, DEKRA, Heineiken), real estate (Merin, CBRE), government (OM, Police), Law & Notary (VBC, TK, CMS)

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Who is LegalThings?

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What is a Live Contract?

agreement

+

events

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LegalThings One is a platform for creating and running Live Contracts

livecontracts.io

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Goals of LegalThings One

Empower self-reliance�
Reduce workload and friction�
Mitigate fraud

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Distributing power

livecontracts.io

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Empowering self-reliance

Understand the rules�
Access to information

Power to execute

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Reducing friction

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Reducing friction

Why don’t we just create an efficient system?

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Mitigate fraud and reduce workload

bureaucracy × fraud = constant

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LegalThings One: the solution

Decentralized storage of data
Encryption
Digital signing�
Blockchain
Ricardian Contracts
Finite State Machine

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Decentralized storage of data

Data is split up into small chunks that are spread across many systems�
Multiple systems have a copy of the same data�
Downloading can be done without a central system (P2P)�
There is no single owner of the data

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Encryption and data striping

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We’re using AES256 to to encrypt the data. Next we use data striping (as in Raid0) to shred the encrypted message into 16 different chunks. The chunks are mixed with chunks of other messages and then stored separately.

Each party gets a key to access and data and decrypt it. That key constist of the address of each chunk, in the right order, plus the AES256 key.

FAQ

Why is data striping needed?

AES-256 is one of the saved encryption protocols around and trusted by governments to encrypt classified information. However encryption can always be vulnerable in ways not discovered yet. Striped data looks like random noise, striping encrypted data will also result in something that looks like noise. This means even is AES-256 is broken, you still need to brute force assembling a message and trying to decrypt it.

Why aren’t you using RSA for encryption?

Asymmetric encryption, especially RSA, is vulnerable forth quantum computers running Shor's algorithm. This data will be stored forever, so we do not want to encrypt it wi an algorithm that might be broken soon.

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Blockchain technology

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9 3 ...

a + b

9 3

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We have a block of data. This can be text, a picture, a spreadsheet. For the computer is doesn’t matter it’s just a series of numbers (called bytes).

What we do is take these number and use them in a calculation, like A + B. In this case we have the numbers 9 and 3 so the result is 12.

If we agree upon the formula, putting in 9 and 3 will always result in 12. However we can never determine the input from the answer, we could also have 4 en 8 or 6 and 6. The formula is one way.

This is the basics of hashing.

To visualize it, lets represent each digit as a shape. So 12 is a cross and a circle.

When we’re creating the next block of data, we inject the shapes ‘12’ into it. By doing so we create something that looks like pieces of a puzzle.

That data block goes through the same hashing function resulting in ‘64’. Those shapes are used in the next block and so on.

What we now have is a simple puzzle of data. The important part is, that if someone would try to change the data in the blue block it would result in a different hash value and it would no longer fit the puzzle.

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FAQ

With this formula, if we now the result 12 and the number 9, we can easily determine that the other number is 3. Why can’t I add some padding so I can change the data and get the same hash?

Unlike this simple sum, a hash function will result in a very different number if you change only one byte. The is no way can see from looking at a hash if 2 values are almost the same or completely different.

Now here we’ve shown 2 digits with 10 shapes giving 100 combinations. With a hash there are 32 digits and 256 shapes, resulting in very large number (1.158 * 10⁷⁷) of combinations. That’s more than the number of atoms there are on earth. It’s nearly impossible to find the same hash twice.

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Storing events

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a + b

hash

document

blockchain

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Digital signing

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public

private

public

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Formalizing an agreement

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Live Contracts

Finite state machine

Smart Contracts

Programming language

Paper Contracts

Natural language

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Smart Contracts vs Live Contracts

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Who determines these indisputable facts?

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Smart Contracts rely on unambiguous facts to be self-executing and self-enforcing. The contract can only use data that has been committed on the blockchain. Since all parties are biased, we need an oracle that we trust upon supplying correct and unbiased data. However this breaks the promise the blockchain once made. As we’ve now created a centralized trusted third party.

With Live Contracts we take the opposite approach. In a Live Contract nothing is ever a fact. Things are always according to someone.

Example: According to me the Bitcoin price yesterday was 8000 dollars. To make this statement I went to coinmarketcap and looked up the price. You can go and verify it, than according to you and me the price 8000 dollars. Other people can also verify and continue this forever and always the statement will be “according to this group of people the Bitcoin price was 8000 dollars”. We can never establish a universal truth.

Enough with the theory, let’s look at a simple example.

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Formalizing an agreement, a simple example

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Who: Jake (16)

Side job: Mowing lawn of his Uncle Mike

Pay: 10 USD

Conditions: Grass < 2 inches + don’t damage lawn or gnomes

Gnomes: 20

Fine: 30 USD / damaged gnome

Frequency: once a week

Duration: infinite

Arbiter: Frank (Jake’s father)

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Example - Paper contract

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“Jacob M.S. McGill (hereafter “Jake”) and Michael F. McGill (hereafter “Mike”) agree that Jake will mow Mike’s lawn once a week to a length of 2 inches (hereafter “the Work”), for which Mike will pay Jake USD 10, unless Jake damages the lawn or any of the ornamental garden gnomes (hereafter “Gnomes”) present on the lawn in the course of the Work. Jake will reimburse Mike with USD 30 for each Gnome damaged. Disputes will be settled by Frances W. McGill (hereafter “Frank”).”

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Example - Smart contract

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Example - Smart contract

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Let’s zoom in on the part where Jack and Mike sign the agreement. For a smart contract to be self-enforcing, both Jack and Mike must deposit 2 ethers, about 600 dollars each. This money is in escrow, neither of them can touch it while the contract is running.

With these small amounts it might be feasible, but having to put a full year’s salary in escrow for all your employees? Forget it.

And think about the employee. Can you ask him to deposit penalty fees for each clause? Only to returned to him when the contract ends.

Point is, implementing legal contracts as a smart contract introduces all kind of problems. These problems seem solvable at first glance, but in fact solving them negates all benefits of using smart contracts.

Let’s see how this agreement looks like as a Live Contract.

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Example - Live Contract

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Lawn should be mowed

Lawn needs to be checked

Jake should be paid

Wait

approve

mow lawn

Conditions

Grass is approx 2 inches

Lawn is not damaged

Gnomes are not damaged

Conditions

Last time grass was mowed >= 1 week ago

pay USD 10

What is the complaint?

disapprove

yes

no

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Example - Live Contract

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disapprove

What is the complaint?

Awaiting response

Lawn needs to be checked

formulate complaint including pictures

Arbitration needed

Withdraw complaint?

Work should be paid

Complaint is valid

acknowledge

Wait

dispute

no

yes

agree with Mike

agree with Jack

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Demo of Live Contracts

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Want to try a Live Contract?

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Thank you for your attention

Time for Q&A

@livecontracts

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