DevCon1: Nick Szabo says smart contracts substitute an army of lawyers and accountants

Cryptographer and legal expert Nick Szabo charted a historical course to today's Ethereum smart contracts which can substitute and army of lawyers, accountants and policemen. His keynote speech at DevCon1, History Of The Blockchain, drew upon an eclectic range of source material including the novelist Ann Rynd, economist Friedrich Hayek, sealable police evidence bags and Aztec gold.

The overarching theme was security: how this has been deployed at physical and virtual bottlenecks and the shift to decentralised models like secure cryptocurrencies, leading to the enabling of automated smart contracts.

Szabo began with a mention of Ayn Rand – "I've never actually finished one of her books" – and Hayek, who were both "big political and philosophical inspirations to the cypherpunk movement".

Rand's philosophical system Objectivism supports autonomous institutions albeit based on some questionable ethics; the 2008 financial crash spurred interest in her work. Hayek's studies in classical liberalism delved into "the basic protocol layer underlying society – property and contracts" and how these are secured.

Szobo said radio broadcasting and railways are good examples of historically very centralised systems. The vulnerability of such systems was clearly shown when the Communists took over in Russia; they only had to gain control of some newspapers and the railways.

In the history of physical wealth, he pointed to the Aztecs, whose gold was looted by the Spanish, who then battled with Francis Drake and English piracy for it. Jumping ahead to the Second World War, German U-Boats sunk British ships, preventing the transport of gold and the causing the collapse of the Gold Standard.

In the present day, Szabo said the cypherpunk approach has been to "protect yourself with cryptography – that can be your shield.

He said: "Try to secure as much as possible. With original cryptography you are just trying to secure one narrow thing - say communications and you are trying to secure it from a third party. But you can't secure it from the party you are talking to if they forward your email; it doesn't matter how well your email is encrypted. So traditional encryption is trying to solve one narrow problem."

Szabo touched on ecash conceived by David Chaum as anonymous electronic money using cryptography, as he charted the path to crypto today and systems like Ethereum. He said: "So David Chaum tried to make the transfer of money private and he solved the privacy problem but what he didn't solve was the centralisation problem. And so there was a bunch of digital cash startups but they either failed or they became centralised like PayPal."

Szobo also pointed out how security provider Verisign has basically made tens of billions of dollars on the basis that it owns this bottleneck in the system of cryptography.

He said: "Bitcoin and Ethereum and cryptocurrency have really secured that now. Taking decentralisation further in computer science and it's much more automated and secure. So if we take an Ethereum blockchain and put some smart contracts on it – we can substitute a small fraction of the army of accountants, armies of investigators, police officers, armies of lawyers. Even substitution of a small fraction, the cost difference is so high, especially natural borders.

"Just about all IT just now is very insecure. Although people don't always tell you about it, attacks happen all the time." JP Morgan, for example, in the end have to emphasise that it has a strong partnership with law enforcement, noted Szabo.

He went to say traditional finance has a thing called separation of duties – a degree of decentralisation in other words. But what is lacking in this case is independence. He said: "You want each of the nodes to be as independent as possible."

Referring to a map of Ethereum nodes distributed across the globe, Szabo said the important thing to look at is to look on the map and see the diversity. He said: "You have got a node there in the middle of the Indian Ocean, you've got Singapore, you've got somewhere in Vietnam - those are best nodes because those are most likely to be independent."

Szabo invoked a traditional definition of smart contracts, which act like a contract with automated performance and verification. He went on to make a distinction between wet code (what lawyers practise) and dry code (operations confined to and executed by computers).

He said: "There's a strong distinction to be made between dry code smart contacts and wet code's physical law. So law is based on our minds, our wetware - it's based on analogy. The law is more flexible, software is more rigid. Various laws tend to be batched in jurisdictional silos. Software tends to be independent. And lawsuits are very expensive especially across borders."

The projects that Szabo has worked on include a scheme for smart property which he called "proplets". He said: "What proplets do is they look to the blockchain to see who owns them; they are kind of like SIM cards today - they know where they are at. And one of the applications of this is automobile locking where you use your physical device as security for a loan."

Szabo said he is working on financial assets on the blockchain, "the first generation which I invented in 1998", using trust minimised transfer of tokens, in some ways akin to the coloured coins concept.

He also talked about social tipping: "an architecture I designed for more decentralised version of tipbot which can do more than tipping, more than paying - it can actually do some smart contracts, negotiated from social networks."

Like many cryptographers, Szabo understands security comes before economic questions. Summing up, he reiterated his initial point: "Lets try to secure everything."