As crypto evolves from Ether → Plasma → Matter, the material transmutation must be flawless. We hope this critique helps us get there. At , we’ve been big fans of Mattereum ever since pulled us by the scruff of the neck and told us that “for years, has been talking about CleanApp-type services.” CleanApp Foundation Cryptech Vinay Gupta For a while now, we’ve also been stressing that crypto needs to take a concerted turn towards material cryptonomics . Our reasoning is simple: (1) (& always will dwarf digital assets because people eat fructose & cellulose apples, not silicone apples); (2) developing . the material economy dwarfs digital assets a crypto-material-economy is vital to offset the clear systemic threats posed by crypto-finance We’ve been researching and trying to understand Mattereum’s plan to put physical assets on chain. In addition to , Mattereum’s recently-published “litepaper” (summary whitepaper) — offers a great introduction to one of today’s most audacious plans to bridge the crypto and physical realms. ( !) Mattereum’s website Hat tip to BookLocal for sharing the best insights from DevCon4 The point of this article is to give some initial thoughts on the litepaper, with the express disclaimer that everything here is meant as constructive critique. We have nothing but the utmost respect for the project. we want to give the project the same treatment has gotten from its best critics. That’s why our whitepaper What is Mattereum? For context, let’s start with a screenshot from . Mattereum’s website Here’s what we notice straight off the bat: . What does Mattereum actually do? In our read, Mattereum will serve as a legal layer between a core blockchain (such as Ethereum 4.8.1) and different end-user-oriented blockchain applications. Mattereum is a LegalTech project We’ll get deeper into the shortly. how For now, it’s important to take a moment to appreciate how of the bullet points above is a legal form and/or legal relation. each one Mattereum seeks to crypto-legalize physical assets, and physically-enforce digital legal decrees. Mattereum = LegalTech Please note, we’re not sure whether our characterization of Mattereum as LegalTech squares with how Mattereum describes Mattereum. The project description is far more ambitious (and ambiguous) in scope than our description, so of course, you should read all of these materials for yourself. But in our view, LegalTech is nothing to shirk from. In a way, all of crypto is a big LegalTech enterprise thus far. Even CryptoKitties is in the midst of a massive IP turf war. Crypto projects that acknowledge crypto’s legal genesis blocks (and the imprint of those blocks on the conceptual architecture of crypto) will thrive. Those that continue to labor under the anxiety of legal intervention will eventually have to give way or fold. Mattereum is wisely adopting the path of greatest adoption, which means greater integration with existing legal processes. Kudos. That’s a smart strategy. What’s most remarkable about Mattereum is that it’s orders of magnitude more legalistic than even projects like . At scale, the two may well evolve into fierce competitors (Mattereum as Amazon; OpenLaw as EBay). Like Amazon & EBay (or Westlaw & LexisNexis, for that matter), Mattereum, OpenLaw and other LegalTech players will find plenty of ways to complement one another. OpenLaw The key viability (market-potential and feasibility) question is whether all stakeholders will coalesce around the hyperutility proposition of transaction-level crypto-legal interoperability. To us, the potential gains for all sides are so vast that it’s a no-brainer. But crypto is a very tribal place, so who knows what will happen. Where Is Mattereum? In terms of blockchain development layers, here’s how Mattereum sees itself: In reality, the little red lines need to go to many more boxes. For instance, it’s not clear why Mattereum is saying it won’t be involved in credit management, since the most immediately obvious use-case for Mattereum is collateralization and asset-tracking. Mattereum says as much in its litepaper: As Mattereum extends its services into developing economies, the benefits of collateralizing movable property will become extremely important because it fuels economic growth. And credit management collateralization. When debtors will ask Coinbase to refinance the 3rd equity line of credit on their bicycle, what Coinbase wants to know is: (1) where the moveable collateral is right now; (2) what other collateral can be added to the collateral portfolio to secure the loan that Coinbase will desperately want to approve. is The same is true for advertising. In a Mattereum future of fractional asset ownership, subjective emotional ties to assets like cars and apartments are weakened. Owners will be even more incentivized to monetize their assets in novel ways. So apartments rented out through can have entire walls serve as digital billboards; refrigerators within those apartments can serve as chain-verified market survey mechanisms. So long as everyone consents to the transactional chains, it’s easy to see retailers like Ikea or Amazon demo-ing product lines within short-term apartment rentals. BookLocal If you’re renting a car for a day, and can get a 25%, 50% or higher discount for plastering magnetic placards on your rental (placards that you can remove before you arrive at your destination) — and the ad placements can be securely verified, then . advertisement rights become some of the most valuable property rights in all of crypto It’s not clear why Mattereum limits its own scope. The two examples above — blockchain short-term apartment rentals & car rentals — are plucked directly from the litepaper. We observe in the way Kik/Kinit talk about Kin. the same paradox Who knows; maybe understatement is a new crypto trend. Mattereum Math-ereum The way that Mattereum describes its approach to smart property is essentially assigning a digital identity to the maximum number of physical assets, and then apportioning rights of access to the property by, say, time (like time-sharing). Additionally, Mattereum introduces age-old property law forms — such as the divide between possessory interests, reversionary interests, and titular interests (without using the legal jargon, thankfully). Here’s how the litepaper describes it: An automated custodian becomes an asset’s legal owner and registrar, maintaining the authoritative register of interests in the asset. This enables the unbundling of [1] legal ownership, [2] financial beneficial interest, and [3] possession or use of the asset. Unbundling suggests fractional ownership — the registrar owns 1/3 of the property; the user owns 1/3 of the property; and a financial institution owns 1/3 of the “financial beneficial interest.” In reality, the first thing that the financial institution will do with its “financial beneficial interest” is somehow encumber that financial beneficial interest, whether through existing derivative structures, or through some as-yet-uninvented bit of FinTech wizardry. It’s not just financiers who will try to fragment their stakes in an apartment or car to squeeze more value out of them: owners and users of the property have every incentive to do the same thing. Instead of , what emerges looks more like : fractional ownership fractal ownership Mathematically and biologically, the fractal is an exceedingly elegant and efficient form. To the extent something like can be coded, seems intuitively reasonable: by permitting property cell division into smaller and smaller blocks, the system gives each resulting block the highest likelihood of finding most efficient use. smart property fractal ownership So, returning to the apartment-sharing example from the litepaper, we can imagine the emergence of extremely diverse micro-property markets, with firms paying small amounts to do product placement on micro-property-surfaces (example: displaying a classic Coke bottle or a framed photo of a local bar in a prominent place). Perhaps the reason fractal ownership is not addressed is the fear that it would complicate enforcement of property rights. But enforcement is already complicated by the myriad permutations of “smart property” x “smart contract” rights anticipated by Mattereum. How Are Rights Enforced? This is the biggest conceptual and operational weakness in the paper. Given that enforcement is the fulcrum on which “smart property” v. “smart contract” will perform their balancing act, it’s a big deal. Mattereum knows it’s a big deal. Here’s how the litepaper opens: What if code really did have the force of law behind it? The litepaper states the problem perfectly: today’s crypto legal instruments lack clearly articulated and well-theorized enforcement mechanisms (our restatement of the paper’s core thesis). But the litepaper’s proposed solutions restate the problem, rather than solving it. Here’s how the litepaper claims to solve off-chain enforcement of on-chain arbitral awards: (1) ; (2) (“removing the legal obstacles between an arbitrator making an award and the successful counterparty actually receiving compensation.”). dispute minimization disintermediation The way that Mattereum claims to accomplish #2 is by introducing a novel legal form: (3) an . automated custodian An automated custodian is the perfect legal counterparty to a smart contract. An automated custodian becomes an asset’s legal owner and registrar, maintaining the authoritative register of interests in the asset. Unfortunately, the litepaper does not explain how the automated custodian — a bot whose job is to maintain a micro-title registry — will actually do en-force-ment. Here’s the litepaper again: Being the asset’s legal owner, the registrar [a bot] is in the strongest position to enforce these constitutional requirements in respect of the asset. But the only way a bot can en-force any legal requirements (constitutional or contractual or property) is if the bot has legitimate law en-force-ment authority in the physical realm. That implies RoboCops. Short of RoboCop en-force-ment, Mattereum cannot and should not describe its processes as automated enforcement in the physical realm. If Mattereum means to actualize Szabo’s original “smart property” plans of self-repossessing cars (#autorepoauto) and self-locking apartments, then it must say so and open these important governance and policy questions to public debate. Right now, the litepaper claims that the Mattereum protocol will allow the deployment of “a simple API for the control of off-chain assets.” But as its own graphic makes clear, the actual mechanism of control is not physical control, but actually just another layer of legal rights — (1) transfer rights; (2) collateral rights; (3) IP license rights; (4) insurance rights. In the event of a dispute concerning these rights, arbitration, adjudication, and enforcement would be done off-chain. If parties want to arbitrate, then Mattereum would presumably integrate with an arbitration provider like OpenCourt, providing somewhat greater on-chain control. But at the end of the day, actual en-force-ment would be done in a non-Mattereum enforcement forum. Smart Stradivarius The litepaper uses the example of a rare Stradivarius violin (worth $9m). Mattereum claims that this violin will be the first that it turns into smart property. The violin is then used to illustrate several aspects of the Mattereum protocol. The litepaper gives several examples of what can be done with the violin, including automated registrar oversight with respect to given custodial instructions. So if the property owners & contract parties wanted to specify that the violin be used in “6 concerts in 3 countries over the course of a year,” the suggestion is that this violin would be used in “6 concerts in 3 countries over the course of a year.” But the key question is — ? How will Mattereum enforce these property+contract hybrid rights? Again, the only conceivable way that this could be done autonomously is if the automated custodian is a robot who is programmed to deliver the violin to each of the 6 concert venues and then bring the violin back to a secure vault somewhere. But even in that scenario, what happens if the violinist at the 5th concert returns a fake? What happens if she refuses to return the violin to the robot? how The key point is that “smart contract” self-enforcement is illusory. It’s an oxymoron. Mattereum elides this problem through two means: (1) by not using self-enforcement terminology ( !); (2) by inventing a third party property law mechanism — the — that will do the enforcement. thankfully automated custodian But that just kicks the can down the road. The automated custodian cannot do enforcement. It is not a law en-force-ment body. “Smart Contracts” v. “Legal Contracts” Even though we’re thrilled to see a major blockchain project consciously move away from “self-enforcement” terminology, Mattereum’s legal architecture is still underdeveloped. The clearest illustration of this is the continuing reliance on “smart contract” terminology despite principled argumentation and clear countervailing trends. against this usage These are not semantic choices, aesthetic considerations, or “opinions.” At this caliber, continued misuse of Legalese after clear corrective signals leads to only one outcome: further conceptual fragmentation and confusion. When Mattereum writes that its “infrastructure [turns] smart contracts into legal contracts that can be efficiently enforced all over the world,” Mattereum’s contrastive frameworks only make matters worse. There’s no conceptual divide in law between “smart contracts” and “legal contracts,” just like there’s no conceptual divide between “legal contracts” and “contracts.” Adding the adjectival “legal” is unnecessarily redundant. A contract is, by definition, a legal form. No clear trade usage attaches to the term “smart contract” or to the term “legal contract.” On the contrary, crypto discourse has far too much inaccurate equivalence between different genres of “smart contract” and variously “self-enforcing” legal contracts. Here’s the actual answer to how “smart contracts” are turned into “legal contracts” — The resounding “maybe” is a far cry from claims that Mattereum contracts “can be efficiently enforced all over the world.” The best thought exercise for moving away from efficient enforcement and getting closer to maybe is to return to the Stradivarius and to imagine a complex provenance dispute -or- a hybrid contract + property + tort dispute arising from damage to the violin occasioned by an angry violinst protesting the onchainization of art, or whatever. It doesn’t matter how clear the chain of title may seem now; in a large stake dispute, it’s impossible to contain the parties to on-chain dispute resolution mechanisms — irrespective of their prior consent to on-chain arbitration. Underneath Mattereum’s Hood Here’s our theory on the actual inner workings of Mattereum’s . automated custodian Mattereum’s automated custodian seems to be a clandestine way of converting a property law form (such as a bailment) into a contract form. Mattereum is doing this type of legal alchemy in order to (property law is quintessentially local; contract law is far more cosmopolitan, with robust international legal mechanisms for enforcement of arbitration awards). internationalize & harmonize property law Conveying property to a centralized or decentralized registrar is an attempt to contract-ize a given asset (to change its legal essence from a property form to a contract form). Despite best efforts to do this (with advice of great lawyers), any claim of ease of enforcement, ease of implementation, and/or easy efficiency gains must be very closely scrutinized. Next Steps We close with several questions and requests for clarification. The Mattereum website states: “Where contracting parties have agreed that their obligations will be secured against registered assets, registrars will recognise and enforce an arbitration award directly against the assets.” Q: What is Mattereum’s preferred arbitration mechanism? In our understanding, the decision to on-chain a Stradivarius is motivated by a desire to chose a high-profile asset with an indisputable provenance. Q: Are you open to prototyping Mattereum with other asset classes, but where title is unclear, and provenance can be disputed ? Thank you to the Mattereum team for blazing a new path forward in the evolution of the broader global blockchain project. Your litepaper’s innovative suggestion to marketize carbon and pollution data is a major milestone in blockchain history. We applaud it wholeheartedly. We see Mattereum’s full potential as custodian protocol of a similar but broader physical asset class: a blockchain embodiment of Open AR Cloud. We’d be honored to share our ideas for integrating blockchain processes with physical assets to unlock entirely new transactional spaces.

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