This article answers the question: what is Decentralized Law. This is a summary of twelve lessons on Decentralized Law.
By the time you finished this article, you have a deep understanding of our legal system, where most current projects go wrong, and how private decentralized legal systems can be created with power in the real world.
This is not just theory. This system is practical, and can be implemented right away. This project is unique because it merges the current legal world with the decentralized one. This has not been done before in this way.
Keep reading if you are interested in how private law systems can be created—it is actually simple.
This article summarizes the main relevant building blocks. For more details and footnotes, there is a link to each individual lesson.
This article is divided into three parts:
- Part I – The Existing Legal System
- Part II – Decentralized Legal Applications
- Part III – Decentralized Legal Frameworks and Governing Laws
Part I – The Existing Legal System
Who Creates Our Laws?
Most people would answer: the government. Obviously, this answer is true. But this is not the entire picture…
There are four sources for the laws governing our lives. These are the following:
- Natural Law
- Governments (Positive Law)
- International Organizations (International Law)
- Private Law
Once we understand how these four sources create law, we understand what Decentralized Law can and can’t do.
Natural Law – Laws of Nature and God
Natural law (Latin: ius naturale, lex naturalis) is a philosophy asserting that certain rights are inherent to human nature. These laws are endowed by nature (or God) and can be understood and observed through human reason.
Natural law is implied to be universal—the same for everyone on earth. It exists independently of government, legislature or society at large. In a sense, natural law is fully decentralized.
In the Middle Ages, the Catholic philosopher Thomas Aquinas revived natural law, and over the years this led to an increasing popularity of the idea of natural laws and natural (human) rights. This let to widely influential legal documents. The most famous examples? The United States’ Declaration of Independence and Bill of Rights, and the Universal Declaration of Human Rights.
Although the study and influence of natural law are interesting, it doesn’t offer a simple or practical roadmap to Decentralized Law.
Positive Law – Law by Government
During the era of enlightenment, natural law was challenged. Some argued that humans alone constructed laws and that they were enforced by the government. This became known as Legal Positivism.
Early Legal Positivists in the 19th century argued that law merely reflects relations of power and obedience between a sovereign and its subjects. As of today, the idea that national governments make laws is hardly ever challenged.
It is unlikely that governments will give up their law-making powers. Nor is there need for this. The following two sections reveal that an erosion of the power of governments is already underway, and that there is still enough freedom for individuals to start creating their own laws.
If you want to know more about the four sources of law, make sure to visit Lesson 1 – Who can Create Law.
Early forms of international law were mainly to regulate the interactions between nations at war. Over the years, developments like international trade, economic cooperation, wars and subsequent peace treaties, and many multinational governing bodies have led to what is known as international law.
International law describes the body of rules and principles that determine the rights and duties of states, primarily in respect of their dealings with other states and the citizens of other states. It also determines what a state is and within what geographical territory they exist.
How is International Law created?
No central authority exists to enforce international law. There is no constitution and no world government that creates it. There are three ways of creating international law:
A) International conventions and Agreements.
B) International custom, as evidence of a general practice accepted as law.
C) The general principles of law recognized by civilized nations.
The first method is straightforward; States sign treaties with one or multiple other states. This creates a body of law that governs their interactions. However, the second and third methods involve the words “accepted” and “recognized” respectively. This implies that international law is accepted over time due to consensus.
There are a lot of famous organizations that create international law, such as the United Nations and the European Union. And there are other organizations that focus on specific areas of economic cooperation, including the World Trade Organization and the International Maritime Organization.
Hard Laws vs Soft Laws
The majority of international organizations, such as the OECD, generally only create rules that are qualified as “soft laws.” Soft laws are rules that do not have any legally binding force, or whose binding force is weaker than the binding force of traditional national laws. The latter are often referred to as “hard laws.”
In order for soft laws to have effect, States must implement them in domestic laws or treaties to become hard laws. They usually do so without delay.
International Law vs Private Affairs
The influence of international law is increasing with every treaty. And there are developments in the creation, enforcement and reach of international law that influence the crypto-space. This becomes clear when we look at the actions of the OECD and FATF. These organizations are responsible for legislation known as KYC (Know Your Customer) and AML (Anti Money Laundering).
Their policies are implemented around the world almost universally. As a result, multinational organizations now regulate (and in many cases restrict) the interaction between individuals and private organizations.
These developments alter the basic concept of international law because they are neither based on treaties, nor acceptance. No, they are enforced in a top-down fashion. Moreover, they expand the scope of international law by getting involved in the rights and duties of private parties.
International law = Decentralized
One could argue that international law is already decentralized. It requires no central authority to be effective. This also means that it, for the most part, is followed voluntarily. This leads to an important conclusion:
There is no need for the involvement of national governments to create law. Once a piece of legislation or a practice becomes accepted and recognized, it eventually becomes part of international law, one of the highest and most influential forms of law in existence.
Given that a group of unelected bureaucrats can create worldwide-accepted regulations why can’t the crypto-community do the same? This question is answered in the next section.
If you want to learn more about international law, and how it works, make sure to visit Lesson 2 0 – How is International Law Created?
How Private Parties Can Create Law
The Romans first created the distinction between Public Law—governing the relationship between individuals and the State—and Private Law—governing relationships between individuals.
Private law deals with such aspects of relationships between individuals that are of no direct concern to the state. There is a variety of areas where private individuals and organizations create their own laws to govern their actions. Examples are copy-right laws, Lex Mercatoria (a private legal system for international trade), and globally active sports organizations such as the FIFA.
Private Law by Contract
Besides these broad forms of widely followed laws, there is a more exclusive form of private law: law by contract. There is a lot of freedom to engage in contracts, they offer flexibility in determining the governing laws, and they are enforceable around the world, especially when subjected to arbitration.
Arbitration is a private court system for resolving disputes. Parties who arbitrate have decided to resolve their disputes outside any traditional judicial system. In most instances, arbitration delivers a final and binding decision, producing an award that is enforceable in a national court.
An arbitration agreement creates a unique body of private law. Those involved consent to be subjected to this body of law by signing the agreement. They can choose those who rules on any dispute, and they can even choose their own governing laws. And thanks to the New York Convention (1958), arbitration awards are enforceable in almost any country in the world.
Building block of Decentralized Law
There is absolutely no reasons why the community should wait for the government to come up with legislation. Private law already streamlines the interactions of (large) groups of individuals around the world. Moreover, forms of private governing laws already exist, and private court systems are created by contract.
The use of decentralized private law is limited to what isn’t regulated, but this still leaves massive areas open to disruption and innovation. Private law (by contract) forms the ideal building block for Decentralized Law.
If you are interested in Private Law, make sure to visit Lesson 3 – How Private Parties can Create Law.
Part II – Decentralized Legal Applications
Decentralized Legal Applications
The invention of Bitcoin revolutionized the idea of digital money. But innovation didn’t stop there. A number of people saw use for these technologies in other areas―including in the area of law.
Not Just Money
Bitcoin is not a like a traditional currency that is sent from one account to another. In fact, Bitcoins always “sit” on the blockchain. What changes hands is the ability to spend them based on their unique access keys. Moreover, the execution of a Bitcoin payment happens based on a script. This script can be programmed.
Due to this fact, systems can be created that spend currency not based on human actions, but on computer code. This allows for systems to be built that can make transactions automatically without a central server, system supervisors, or security systems.
There are endless applications for this; self executing (smart) contracts, token systems used for crowd-funding, arbitration systems, financial contracts, and even new systems of governance.
Four Main Decentralized Legal Apps
As far as legal projects are concerned, they can be divided into four main categories:
- Decentralized jurisdictions
- Decentralized arbitration
- Smart contracts
- Decentralized companies
Below, each development is covered in detail.
Problems when Merging Decentralized Systems and Law
Two categories of thinking errors persists with those creating applications:
- Differences between law and technology aren’t understood
- Absence of a legal framework
Differences between Law and Technology
Legal systems are based on ideas and best practices dating thousands of years. They are subject to ever-changing opinions and ideologies. Their outcomes and definitions are uncertain. Legal systems evolve slowly in a non-linear fashion over time and their development and workings are not transparent.
Decentralized technologies are based on hard science, mathematics and cryptography. They are formed by peer-to-peer networks and run by consensus. They provide a cryptographically secure framework that can be trusted to provide a predictable binary outcome. The systems and their development are transparent, open source and can be inspected by anyone.
We must acknowledge that the development of a legal system is not the same as the development of a technology. One cannot just create a piece of code an expect the legal world to adjust to it. Bridges have to be built.
A Legal Framework
One essential question for any legal system is: which laws govern the interactions with the system. As fundamental a question as it is, research for this projects showed that most projects simply ignore it.
As a result, certain projects aim at creating new countries without defining what a country is. Others wish to create a new type of corporation but fail to understand that it is the establishment of a new person. Arbitration systems arise without governing laws or means to enforce rulings. Smart contracts are signed that aren’t binding or enforceable.
In short, the vast majority of these projects lack a legal framework.
What is a Legal Framework?
A legal framework is a broad system of rules that governs and regulates decision making, agreements, and laws. It acts as a top-level umbrella, governing all beneath it.
A more specific example would be the laws applicable when starting a business in Dubai. The main applicable legal framework is the UAE federal law no.2 on Commercial Companies. However, this law delegates some of it’s control to specific free zones. Free zones in Dubai are free to create their own laws regarding companies acting within the free zone (outside the free zones the federal law applies). The individual free zone companies in turn then sign a memorandum and articles of association (M&A) that govern the company.
This framework looks like this:
If you wish to learn about the different decentralized apps, and how they differ from the law, check out Lesson 4 on Decentralized Legal Apps
The concept of jurisdiction is important. After all, how does a system that only exists in cyberspace relate to the real world?
“Jurisdiction” can have two meanings: the authority of a court to rule on a specific case, and the territory in which this authority is limited. Nowadays, it is States that have the right to enforce their laws and punish for non-compliance.
The usual concept of jurisdiction in our legal system is tied to physical locations. This must be acknowledged when we want Decentralized Law to have any meaning in the real world. Luckily, there is a third form of jurisdiction that does not involve a territory; a court can have jurisdiction by consent (or contract).
We already saw in the section on arbitration that contracts can create a private body of law that binds the contracting parties. The question now is, why should there be a limit to the amount of people that sign a contract?
Technology exists for a collective to sign a contract as if accepting the terms and conditions page of any website. This way, a jurisdiction by consensus can be created, where the participants have agreed to cooperate under a certain set of rules.
Consensus Jurisdiction Enforcement
If needed, such a system could even be enforced in the real world. After all, a framework for enforcing private contracts already exists: the New York Convention. Subjecting a Consensus Jurisdiction to this framework is surprisingly simple; it is just a matter of adding a clause to the Consensus Contract explaining that any disputes arising under it are subject to arbitration and said framework.
The jurisdiction that arbitrators would have is restricted to whatever has been agreed upon. In addition, there are significant areas of public law that private contracts cannot “breach,” including family, criminal or tax law.
Therefore, initial use cases are likely to be industry-specific collaborations with a set of guiding principles for relatively standardized recurring transactions. Examples could be found in areas such as decentralized organizations, ICO’s, international trading, e-commerce and international freelancing.
A more detailed explanation of jurisdiction, the concept of the State, and how real world jurisdictions and cyberspace are linked can be found in Lesson 5 – Consensus Jurisdictions.
Decentralized Arbitration Enforcement Framework
One important question has to be answered: what if a dispute arises? After all, Decentralized Law only has value if it can be enforced.
As discussed, international arbitration provides the ideal framework for the enforcement of private Decentralized Law:
Important! The New York Convention requires contracting States to recognize and enforce arbitration awards made in other contracting States. This refers to a physical location. For this to work, a “Seat of Arbitration” is required in one of the participating States.
Luckily, online arbitration already exist. An example is the service offered by the Hong Kong International Arbitration Centre, which offers a completely online arbitration procedure.
Other Ideas on Enforcement of Rulings
Some of those working on decentralized arbitration are of the opinion that governing laws and enforcement through existing legal systems are not needed. Those engaged in small transactions might not need the backing of a legacy legal system. But those performing large transactions or listed multinationals do.
A logical solution would be a two step system, with fully decentralized arbitration first, and international arbitration only when the first step has not resulted in a favorable outcome.
More on this discussion in Lesson 6 – Decentralized Arbitration Enforcement Framework.
Smart Contract Considerations
A primitive ancestor of a smart contract is a vending machine. It works by detecting the insertion of a quarter and then executes a sale. Smart contracts take this principle to the next level. They can handle complex transfers of property as long as they are controlled by a digital means.
With the transfer of property, there are legal implications. Unfortunately, a smart contract cannot be considered a legal contract. Moreover, real world projects rarely result in binary outcomes. For example, the Ethereum whitepaper talks about a crop insurance that automatically pays out in case of a storm. But the harvest might only partially be ruined, or the crops might already be harvested once the storm hits. Smart contracts are to rigid to govern reality. They need to be merged with a normal contract.
The Smart Contract Block
A simple and way to create a bond between a legal contract and a smart contract is often overlooked; at the start of a human language contract―in the clause identifying the parties―a hash or link could be included corresponding with the appropriate smart contract.
To simplify the human language contract, existing terms and conditions can act as a legal framework for the human language contract, which in turn is linked to a smart contract. This could be called a Smart Contract Block.
One main benefit of this approach is standardization. Smart Contract Blocks could become reliable after being used and tested over time. With them, users can simply pick the “Block” most suitable for their transaction and fill in the details relevant for their transactions―like selecting an App in the Appstore!
Widely used Blocks that contain a proven enforcement framework could become valuable assets when licensed by their creators. At the same time, they are much cheaper to use than uniquely drafted contracts for each transaction.
More on Smart Contract Blocks and some practical examples are found in Lesson 7 – Smart Contract Blocks.
There are two types of decentralized companies. A first example would be the decentralized corporation. A second example is the Decentralized Autonomous Organization (DAO).
The Decentralized Corporation
A few characteristics make the “corporation” unique. First of all, it is the creation of a fictional legal person, separate from its owners. As a result, a corporation has the right to own property, hire people, take on loans and engage in contracts. It can sue and be sued. A second important aspect of a corporation is that it limits the liability of the owners. It is thus a great way for investors to invest capital without risking bankruptcy and without the need to be part of day-to-day management. This division of roles and responsibilities is another important characteristic of corporations.
The work done so far on decentralized corporations completely ignores all this. Moreover, it doesn’t address what is needed in order for a decentralized corporation to be recognized as one by the law. And in order for it to be recognized, it needs a physical place of registration.
Decentralized Corporation Nexus
Existing laws allows for two different kinds of registration for decentralized corporations:
- PE (Permanent Establishment) Registration
- Nexus Registration
The Decentralized Autonomous Organization
When looking at a Decentralized Autonomous Organization (DAO) from a legal perspective, it is clear that it is neither a corporation, nor any other type of existing legal personality. It doesn’t have a registered office and has no physical place of business or registration. There are no shareholders or managers.
As a result, it cannot perform many of the tasks commonly attributed to it, like owning property or engaging in contracts. Moreover, participants in a DAO should take precautions if they want to be shielded from liability or taxes. For example, by accessing the DAO through a corporation.
More details on the challenges and opportunities of decentralized organizations is found in Lesson 8 – Decentralized Corporations and the DAO
Part III – Legal Frameworks and Governing Laws
Definition Decentralized Law
We have covered all the components that make up decentralized law. Before we continue, we must come up with a definition.
We have to accept law in the broadest sense of the word. Having said that, only private law allows for practical decentralization. As a result, decentralized laws must be recognized by the participants since there is no central authority to enforce it. And finally, we learned that it has to be build on decentralized infrastructure and be controlled by distributed political structures.
The definition of Decentralized Law is as follows:
A set of voluntarily accepted private law systems of which the control is distributed both politically and technologically.
For a detailed explanation of how this definition was reached please visit Lesson 9 – Decentralized Law Definition
The Decentralized Legal System
This section introduces the Decentralized Legal System (DLS), the first complete framework for Decentralized Law.
It is a system not enforced by an individual or elite group of powerful individuals organized in a government, but accepted and created by a public and open source process. A system that exists in cyberspace, but has force in the real world. This framework can govern all four types of decentralized legal applications.
From a technology standpoint it can best be compared to WordPress. In this case the DLS works as the open source framework, the themes as the different jurisdictions and arbitration systems, and the plugins as the different smart contract blocks. And just as WordPress uses the existing infrastructure of the internet, the DLS can use the existing law enforcement infrastructure. And while the overall structure is similar for each WordPress website, each end product is unique.
The DLS Framework
The DLS consists of an:
- Enforcement Framework (green)
- A set of Governing Laws (blue)
- A set of Decentralized Legal Applications (orange)
It is worth repeating that most of the components of the DLS already exist today. First of all, the enforcement and governing frameworks (blue and green layers) are already in place.
Work on decentralized jurisdictions is currently being done, and it would be easy to transform them into consensus jurisdictions (as simple as it is to accept the terms and conditions of companies such as Google or Facebook). And finally, creating a contract to govern the use of a technology (smart contract) is also a piece of cake.
The only challenge (and main benefit) comes from combining all of this in an easy to use (open source) system that any group of like-minded individuals can use to create bottom-up fair and transparent rules to govern their interactions.
A more detailed explanation and a practical example are provided in Lesson 10 – The Decentralized Legal System.
How to Create Decentralized Law
In previous lessons, we saw the common practice of using English Law as governing law. However, these governing laws could be replaced (partially) by Decentralized Law.
Decentralized Law would have to be proposed, created, codified, and accepted/implemented. Existing technologies could help with this.
Using a BIP to Propose Law
In order to create Decentralized Law, we must overcome two hurdles. The first is a model for the creation of laws and regulations. The second is a model to publish and accept these laws. A way to create laws could be taken from the best practices in decentralized open source software development proven effective by Bitcoin: the Bitcoin Improvement Proposal (BIP).
Bitcoin is a fully decentralized system. As a result, no one developer is responsible for its mechanisms. Adjustments to the protocol start when someone makes a proposal for an amendment to its code, known as a BIP. The BIP is scrutinized and either accepted of rejected by the community. This process has worked well, and can be applied to law creation as well.
Using Github to Create Law
Github is an interesting tool that is used for open source processes, including BIPs. It is a website that allows software developers from around the world to cooperate on open source software development projects. It is based on software known as “Git.”
Git is a version control system for tracking changes in computer files and coordinating work on those files by multiple people. It is primarily used for source code management in software development, but can be used to keep track of changes in any set of files. Given its success in the software community, this process could also be adapted to create law.
Using a “Legal Wiki” to Codify Law
The public Wiki is another existing technology that lends itself perfectly to the codification and publication of Decentralized Law. Wikis are extremely applicable here as they are both lightweight and easy to use, and familiar to the general public. They are perfect for hosting large bodies of text. In addition, it is easy to hyper-link to relevant clauses within the law, to important rulings or to higher laws. This makes them more accessible and usable compared to the current system consisting of random selections of constitutions, books, rulings and separate laws created over time.
Publishing and Accepting Decentralized Law
Next, the proposed legislation must become law. This can simply be achieved by publication and subsequent acceptance. Ideally, its publication is subject to acceptance. This way, only widely supported legislation may become a part of law as we saw in the BIP process. Some ideas on how to publish and accept Decentralized Law are:
1) Static Publication
3) On a Blockchain
4) Prediction Markets
Amending Decentralized Law
Laws change. Although they are written with the best intentions, they may become outdated as time passes. Decentralized Law could address this via the introduction of an amendment process guided by mathematical restrictions, called a Rule Based Legal Wiki.
The rules could allow for periodical amendments to be made. A restriction could be placed on the amount characters or words that can be changed, such as the total amount of words is only allowed to increase by 10%. This stimulates writing clearly and removing unnecessary and difficult words. Such a process leads to orderly, accessible and simple legislation that can be understood by anyone. It also prevents out of control legislation by limiting what can be added.
For more details on how Decentralized Law can be proposed, created and amended, view Lesson 11 – How to Create Decentralized Law.
The Future Governed by Centralized Law
As is clear, the ideas so far presented are based upon private law. The private arbitration framework based on private contracts is a good example of this as well as the creation of frameworks for specific industries and private Consensus Jurisdictions. Some may ask however, how does this relate to the world of law making at large?
The creation of public law is the domain of governments. In most countries, this is subject to a democratic process. This process is generally founded on the principle of separation of powers.
An alternative system could be an executive branch that manages the government, a judiciary branch that enforces justice, and a decentralized process for the creation of law.
This process could be completely decentralized, or managed by legislators and involving the public at large. For some, this sounds radical. But remember that this is already happening.
Not only do public policies affect private affairs; private affairs also affect public policy. This process can be observed in the real world too. An example is the refugee crisis in Europe, where judges determine the cases of asylum seekers based on reports from NGOs; reports written in support of the plight of the asylum seekers.
Once large groups of people create standards for their interaction it will influence the legal world. It doesn’t exist in a bubble.
The Benefits of Decentralized Law
Legislation created in this matter will be fair and readily followed as participants create it in a bottom-up fashion. There are lots of areas where Decentralized Law could step in and regulate the interaction of large groups of people. In fact, there is no use in waiting for government legislators to act.
Politician simply don’t understand the crypto-spcae and just impose Anti Money Laundering legislation to pretend they are useful. The time is now for others to start working on functional frameworks of Decentralized Law.
Once a new standard emerges, it is a safe and popular bet for governments to incorporate this in their legislation. As far as enforcement goes, judges are supposed to be independent and base their judgment on the law. For them, there should be no difference in how the law is created. They might even feel more comfortable in ruling based upon widely supported and accepted Decentralized Law than top-down enforced public law.
The Future of Law?
We have endured a long and hard battle for power with our rulers for the establishment of individual freedoms under laws that equally apply to everybody. However, as the creation of law still sits in the hands of government and is applied in a top-down manner, we are still subjected to centralized law.
Using the Decentralized Legal System, we can immediately start creating bodies of private law based on consensus with force in the real world. In addition, these laws can supplement centralized law in areas where it falls short, and perhaps gradually start replacing some of its processes.
These developments are in fact a very logical next step in the continuing trend of decentralizing power structures that has been going on for centuries. From gods to kings and from kings to States. The next target for decentralization might well be the State and their multinational organizations. It requires a shift in thinking, and will not happen overnight. But it is coming, and cannot be stopped.
It can be assumed that not everybody in the government will welcome this idea.
But neither did the king…
Vires in Numeris!
More details on legal reflexivity and how decentralized law can replace public law, visit Lesson 12 – The Future of Decentralized Law.
Cite this article
Thysse W., “What is Decentralized Law,” (Decentralized Law Lessons, December 28, 2019), available on: https://decentralizedlegalsystem.com/law/
If you wish to join the journey towards Decentralized Law, leave your email here:
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