Code is not law

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

‘Code is law’ is a proud crypto proclamation. Some may even regard it as an inviolable creed. Few question it. But occasionally, some brave people do voice doubt. Here is a recent post on Twitter:

“Code is law,” the phrase, is a metaphor which is useful in terms of framing practical realities of the use of smart contract code but is not correct in terms of describing code as a substitute for positive law. – Preston Byrne

I would largely agree with the statement, especially the second half.

But more accurately, I define a so-called ‘smart contract’ as follows:

A smart contract is an automated execution of a change of ‘a state of value’ of a legal contract.

In the above definition, both indefinite articles ‘a’ in ‘a change of a state of value’ are operative, because (1) not every aspect of a legal contract is or involves a ‘state of value’; (2) a legal contract may have more than one state of value; (3) not every ‘state of value’ requires a change that needs to be executed automatically; and (4) further not every ‘change’ of every ‘state of value’ can be fully automated.

With the above definition, it’s clear that a smart contract is not, and cannot be, the ‘law’ in any definitional sense, but only an automatic enforcement of a certain value-exchange aspect of a legal contract, which itself is not even the law but only a specific element of an agreement that complies with and benefits from the law.

Failure to understand the scope of the reality of a legal contract is what led technocrats into a fantastic false belief of the ‘code is law.’

In addition, in the above definition of a smart contract, a ‘state of value’ is local (that is, contract-specific), not global (i.e., systemwide). Failing to understand this important matter is what led to global account-based smart contract systems like Ethereum, which are fundamentally nonscalable due to a permanently flawed design rather than a temporary technical limitation.

In contrast, Satoshi’s UTXO-based Bitcoin blockchain gives us the power to construct an unlimited number of ‘state machines’ which are independent (parallel) from each other but are freely combinational. But equivocation of such parallel state machines and global account-based state machines is what caused the disaster of nonscalable Ethereum and many more nonscalable disasters that come out of it.

What is a contract?

In the same Twitter thread, Ian Grigg wrote:

“The contract is the keystone of the relationship between trading parties, ..you can ignore it, but it won’t ignore you. You can’t build a real system without contracts, so crypto is still mucking around before the stone age, before the arch, and wondering why their buildings keep falling down.”

That is exactly true, but also exactly what the crypto world does not understand.

Specifically, they don’t understand what a ‘contract’ really is.

And that’s why they called an automatic enforcement element of a contract a ‘smart contract,’ not knowing that the enforcement itself may mean nothing when there is no underlying legal contract. But they think that a piece of code itself constitutes a complete legal contract. No wonder people so easily fall for contractless NFTs that have no clear contractual definition of any legal property. They still haven’t learned. If the time is ripe, more waves of contractless NFTs will again catch people’s imagination. Because why not, the code is law, and muh contract is smart.

Watch: Smart contracts are neither ‘smart’ nor ‘contracts’