5 ms·

> Is there any binding legal action you could take if there is fraud? It says blended teams of anonymous and identified people but then you are just investing i

> Is there any binding legal action you could take if there is fraud? It says blended teams of anonymous and identified people but then you are just investing in the identified people and will have to go after them. You can simply encode the full financing agreement (along with all relevant agreements, articles and by-laws) as smart contracts, and perform all company operations exclusively on the blockchain.

sbierwagen 5y ago
"Simply" is carrying a lot of weight there.
- rmbyrro 5y ago
  If you compare to the weight it carries in the traditional legal and financial markets, I'd say it's pretty balanced, or even in favor of blockchain.
- amscanne 5y ago
  Fully intended as a joke :)
geofft 5y ago
Do you have an example of how you might do this? Can you encode "and we have recourse to the Delaware courts" into a smart contract? I thought you could only encode statements about things that happen on the smart contract's blockchain, but I'm not very knowledgeable about this. If you do not have access to real-world courts, in the case of fraud, how do you recover your money? That is, suppose that investor A invests a bunch of cryptocurrency in pseudonymous founder B according to a smart contract, for a certain project, and B uses the funding to hire engineer C to help with the work. However, B and C are actually the same entity, who had no intention of doing any work at all, and B pays a generous "salary" to C and then comes back to A a few years later and says "Yeah we ran out of runway, we're gonna shut down, sorry" and A says "Yeah it happens to the majority of startups, it's fine." Then A hears a rumor about what really happened. How does A go about substantiating that rumor and getting their money back? The only solution I can see involves B putting up collateral in the smart contract equal to the amount A invests in B, and that can only be released when some decision is made some years later that indeed B was non-fraudulent (let's imagine, for the sake of argument, there was a smart-contract court of chancery that could evaluate whether B was working in good faith and had subpoena powers, although I'm also curious about how that could work). That way, in the case of fraud, A could recover the amount they invested because exactly that much money is locked into the contract for this very purpose. But the market for venture capital where the founders already have as much money as they are raising, and are willing to lock up use of those funds while they work on their startup, is extremely small - such founders are necessarily capable of bootstrapping themselves. So I'm genuinely trying to understand how it can be done or better yet whether anyone has done it. (Smart contracts are generally public, right? So if this has been done, it should be visible?)
- analyte123 5y ago
  A protocol / organization called Kleros is one attempt to solve this problem. A group of addresses that they attempt to verify as real people look at “evidence” and arbitrate disputes - those who vote in the minority lose money. Like most of these solutions (including escrow contracts) there’s a lot of uncertainty whether they will work in the long run. There was already a pretty bad case where Kleros ran some competition to “prove” their arbitration system worked and it arguably failed [1]. Your first scenario is definitely worrisome. I’m pretty sure it also happens all the time in the real world, just with the definition of “entity” being family or friend group. [1] https://blog.kleros.io/kleros-vs-cat-in-the-snow-the-escrow-leading-case/ https://blog.kleros.io/kleros-vs-cat-in-the-snow-the-escrow-... - this is the Kleros side of the story, couldn’t find the claimant’s. But the reasoning shows that the jurors and Kleros have little to no training in legal interpretation
  - geofft 5y ago
    Wow, the substance of that dispute is... this is why people incorporate in Delaware. Nobody thinks the caselaw of Delaware is some sort of divinely ordained ideal corporate law. But it's predictable and thorough, which means you can write contracts in that framework and know what's going to happen. It seems theoretically possible to me that you could encode all of that in a smart contract library, but I am very curious to see if you actually could. (One of the things you get in Delaware and many many other meatspace jurisdictions is the doctrine of contra proferentem, i.e., ambiguous clauses are read to the detriment of the person who wrote the contract and made the other person sign it. In this case, there is clearly an ambiguous clause, at least in the sense that the parties disagree on it, and clearly one party wrote it and the other party had no ability to negotiate it. This rule incentivizes people to a) write unambiguous contracts and b) not play stupid games where they try to invent interpretations of their own contract so they don't have to do the thing they said they would.) Anyway, to the meta-level of the arbitration / escrow - if I'm reading right, the only reason it went to arbitration is Kleros voluntarily put up 50 ETH, the entire amount under dispute, into a new cryptographically-binding arbitration contract, and the two parties had a verbal agreement that the result of that arbitration would end their dispute? Which is to say, if Kleros said "We're happy to go to arbitration but we're not going to lock up 50 ETH while it's being disputed," the process would be stuck? And especially if Kleros said "There's no reasonable argument here, we're right," arbitration wouldn't actually be binding on them? (It seems they only entertained the dispute to show off their arbitration product....) And also, if it went to arbitration and the claimant lost, nothing would prevent the claimant from saying "I never agreed to this, and I still have a dispute with you"?

sbierwagen 5y ago

"Simply" is carrying a lot of weight there.

rmbyrro 5y ago
If you compare to the weight it carries in the traditional legal and financial markets, I'd say it's pretty balanced, or even in favor of blockchain.
amscanne 5y ago
Fully intended as a joke :)

geofft 5y ago

Do you have an example of how you might do this? Can you encode "and we have recourse to the Delaware courts" into a smart contract? I thought you could only encode statements about things that happen on the smart contract's blockchain, but I'm not very knowledgeable about this. If you do not have access to real-world courts, in the case of fraud, how do you recover your money? That is, suppose that investor A invests a bunch of cryptocurrency in pseudonymous founder B according to a smart contract, for a certain project, and B uses the funding to hire engineer C to help with the work. However, B and C are actually the same entity, who had no intention of doing any work at all, and B pays a generous "salary" to C and then comes back to A a few years later and says "Yeah we ran out of runway, we're gonna shut down, sorry" and A says "Yeah it happens to the majority of startups, it's fine." Then A hears a rumor about what really happened. How does A go about substantiating that rumor and getting their money back? The only solution I can see involves B putting up collateral in the smart contract equal to the amount A invests in B, and that can only be released when some decision is made some years later that indeed B was non-fraudulent (let's imagine, for the sake of argument, there was a smart-contract court of chancery that could evaluate whether B was working in good faith and had subpoena powers, although I'm also curious about how that could work). That way, in the case of fraud, A could recover the amount they invested because exactly that much money is locked into the contract for this very purpose. But the market for venture capital where the founders already have as much money as they are raising, and are willing to lock up use of those funds while they work on their startup, is extremely small - such founders are necessarily capable of bootstrapping themselves. So I'm genuinely trying to understand how it can be done or better yet whether anyone has done it. (Smart contracts are generally public, right? So if this has been done, it should be visible?)

analyte123 5y ago
A protocol / organization called Kleros is one attempt to solve this problem. A group of addresses that they attempt to verify as real people look at “evidence” and arbitrate disputes - those who vote in the minority lose money. Like most of these solutions (including escrow contracts) there’s a lot of uncertainty whether they will work in the long run. There was already a pretty bad case where Kleros ran some competition to “prove” their arbitration system worked and it arguably failed [1]. Your first scenario is definitely worrisome. I’m pretty sure it also happens all the time in the real world, just with the definition of “entity” being family or friend group. [1] https://blog.kleros.io/kleros-vs-cat-in-the-snow-the-escrow-leading-case/ https://blog.kleros.io/kleros-vs-cat-in-the-snow-the-escrow-... - this is the Kleros side of the story, couldn’t find the claimant’s. But the reasoning shows that the jurors and Kleros have little to no training in legal interpretation
- geofft 5y ago
  Wow, the substance of that dispute is... this is why people incorporate in Delaware. Nobody thinks the caselaw of Delaware is some sort of divinely ordained ideal corporate law. But it's predictable and thorough, which means you can write contracts in that framework and know what's going to happen. It seems theoretically possible to me that you could encode all of that in a smart contract library, but I am very curious to see if you actually could. (One of the things you get in Delaware and many many other meatspace jurisdictions is the doctrine of contra proferentem, i.e., ambiguous clauses are read to the detriment of the person who wrote the contract and made the other person sign it. In this case, there is clearly an ambiguous clause, at least in the sense that the parties disagree on it, and clearly one party wrote it and the other party had no ability to negotiate it. This rule incentivizes people to a) write unambiguous contracts and b) not play stupid games where they try to invent interpretations of their own contract so they don't have to do the thing they said they would.) Anyway, to the meta-level of the arbitration / escrow - if I'm reading right, the only reason it went to arbitration is Kleros voluntarily put up 50 ETH, the entire amount under dispute, into a new cryptographically-binding arbitration contract, and the two parties had a verbal agreement that the result of that arbitration would end their dispute? Which is to say, if Kleros said "We're happy to go to arbitration but we're not going to lock up 50 ETH while it's being disputed," the process would be stuck? And especially if Kleros said "There's no reasonable argument here, we're right," arbitration wouldn't actually be binding on them? (It seems they only entertained the dispute to show off their arbitration product....) And also, if it went to arbitration and the claimant lost, nothing would prevent the claimant from saying "I never agreed to this, and I still have a dispute with you"?