Blockchain, smart contracts and DAO A few words about blockchain governance Maciej Jędrzejczyk, Karolina Marzantowicz (IBM) In school they used to tell us that mathematics was the queen of the sciences. The development of distributed ledger technologies (DLT) shows how true this is. One of the main advantages of this technology is the decentralised trust written into the source code of the IT programme. With this, in the age of the digital economy, we can move from a state where central persons, institutions and organisations serve as trusted third parties, to a state where their role is assumed by algorithms of decentralised consensus, i.e. mathematics. One form of DLT is blockchain. The network (numbers of participants) within the blockchain technology is leading the growth of main roles that will be involved in the information systems and digital commun- implemented process served by the function- ications in the direction of large-scale ing network. This has to do particularly with decentralisation. The human factor is mini- “miners,” who solve increasingly difficult mised, and trust and accuracy of transactions mathematical tasks in order to take part in the are ensured through cryptography. process of verifying transactions and entering With the significance of this technology, it a block in the ledger. The person who solves needs to be examined in terms of the the task first is rewarded by adding the appro- governance under which new business models priate value in bitcoins to his wallet. and sectors of the economy will arise. This will The proof-of-work algorithm assumes that the allow us to identify the fundamental accumulation of resources in the network will characteristics and risks of solutions based on not exceed 51%. But as the degree of the tasks public and private blockchains. rises, miners group together into “mining Public blockchain, or creeping pools” in which each miner solves only part of oligarchisation the problem and the reward is divided among all of them. Currently the four largest mining A characteristic feature of a public blockchain pools include over 65% of all miners involved is the lack of components for managing this in solving problems in the Bitcoin network. If solution. This influences the functioning and one entity took control over the majority of maintenance of the whole system. Decentral- the resources verifying transactions, it could isation and distributed architecture counteract exploit these resources to dictate conditions to the concentration of power that could be the rest of the network. gathered by a single person, role or organisa- tion. This also increases the reliability of the The increasing number of mining pools is system because of the lack of critical a serious threat to decentralisation and the components (no single point of failure). fundamental principles of a public blockchain. A group (or organisation) possessing most of Unfortunately, this solution does not exclude the resources performing proof-of-work grouping and accumulation of resources of the calculations could manipulate the value of 12 verified blocks (insert false transactions or management of privacy is required. A private throw out true transactions). This is not just or “permissioned” blockchain provides the a hypothesis, as demonstrated by the recent possibility of extending DLT to include unsuccessful attack on the Krypton network, components such as management of where the attackers relied on computing participants and privacy. A private blockchain power rented in the cloud to interfere with the is most often created by a consortium or integrity of the blockchain and the state of defined group of participants. They determine holdings of the cryptocurrency KR. who can function in the network and under Moreover, public networks cannot choose what rules. Moreover, a network in which the who decides on consensus, or expose and participants are not anonymous can use algorithms other than proof of work for monitor the identity of the nodes. For many business organisations subject to strict regula- distributed verification of transactions, such as tions this rules a public blockchain out of their Practical Byzantine Fault Tolerance. consideration. An example is the open project Hyperledger, Anonymity and privacy – the fundamental realised by the Linux Foundation. In the difference between public and private proposed Hyperledger Fabric architecture, blockchain governance there are functioning components responsible A public blockchain affords participants in the for management of the participants and their network anonymity secured by cryptography. privacy and for issuance of certificates used for The irreversible ledger may be a repository for signing transactions and smart contracts so documents, contracts, title deeds and other that the details are visible only to the parties to assets. Blockchain may be used to place the given transaction. The functions of information and instructions with a wide range verifying node and passive node have also of applications. The potential applications of been separated, enabling greater oversight of this technology extend far beyond actors participating in the consensus and cryptocurrencies like Bitcoin. The fields of holding a full copy of the register based on the application of the DLT paradigm are blockchain. As transactions are recognised potentially countless, because it enables only after authorisation at numerous levels decentralisation of verification and storage of (signing of certificates, authentication of transactions of all kinds between parties on identity), “membership services” generally a global scale. permit controlled access to the network, thus eliminating the anonymity of the nodes. At the But in many sectors of the economy where the same time, this type of service can guarantee blockchain technology could have the privacy of transactions by distribution of applications, the participants cannot remain anonymous. transaction certificates which encrypt a confidential transaction between two specific When conducting business or providing public parties, rendering it illegible to others. It services, we typically know (and want to know) should be pointed out that all these features our supplier and customer. Anonymity is are integrated with the traditional advantages neither necessary nor desired. In solutions that of the distributed ledger and consensus are divided and distributed among all algorithms. participants in the network, appropriate 13 Business logic entered in blockchain, or Other problems should also be mentioned, smart contracts arising out of the ability of business One of the new features popularised with the organisations to comply with existing legal Ethereum project is the concept of smart regulations, which often require that certain contracts, i.e. compiled programming code specific behaviours be included in the business a copy of which is entered in the blockchain process, such as disclosure of the parties to the ledger and whose content represents the rules contract, the privacy of transactions, or for executing transactions between the parties. regulated access to data. Once distributed in the decentralised network, Smart contracts in public and private the smart contract is launched on all nodes as blockchains an executable programme, and the specific In the case of networks based on a public function provided for by the author is blockchain, the correctness of the transaction launched. between the parties is determined exclusively It can thus be said that a smart contract is by the consensus of the network. The a digital representation of the rules or influence of organisations making up the processes functioning within a given business membership of the given network is negligible, organisation that regulate the execution and and without obtaining a supermajority of the course of transactions. The blockchain capacity of the network (e.g. 51% of the hash technology serves here as an irrefutable ledger rate in the case of networks based on proof- of contracts governed by smart contracts. This of-work consensus) there is no practical context also raises the possibility of instant possibility of recognition of certain (and practically cost-free) execution of transactions or agreements executed by smart transactions between parties seeking to main- contracts as defective or invalid. This problem tain anonymity, resolution of disputes without lay at the heart of the incident of The DAO in involving a trusted third party but relying on June/July 2016. The discovery of a smart the transparency of the blockchain, and even contract susceptible to an attack by hackers automatic conclusion of contracts without (and exploitation of that susceptibility by an involvement of the human factor. unknown perpetrator to drain over USD 60 New technology, new problems, new million in cryptocurrency) caused a battle challenges lasting several weeks for agreement on what remediation (if any) should be applied. The irrefutability of contracts unfortunately A problem in and of itself was to achieve the does not eliminate potential legal problems. As agreement of the entire community, which in the case of any entity operating in displayed irreconcilable interests. Without commercial life, fundamental aspects of a process in place for dealing with an incident a comparative analysis of public and private of a defectively written smart contract, a blockchains in this context include: decision was taken for direct intervention in Clear identification