Bitcoin and Criminal Smart Contracts

In the early 90’s Nick Szabo, coined the term “smart contract.” The computer scientist and legal scholar explained the basic idea of a contract using a vending machine as an example, “anybody with coins can participate in an exchange with the vendor. The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas.”

“Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means. Smart contracts reference that property in a dynamic, often proactively enforced form, and provide much better observation and verification where proactive measures must fall short.”
— – Nick Szabo

Smart contracts are a major part of cryptocurrencies, and there are many companies developing their own interpretations of how they can be implemented. Ethereum is one such company and recently raised just over $18M USD, in a sale of it’s own cryptocurrency, Ether.

When Stephan Tual, Ethereum CCO and Ursium Founder, was asked for a simple explanation of Ethereum, he stated “it’s a really, really big computer made of many computers around the world that check each other’s results. Anyone can run programs on it, paying only for what they use.”

Ethereum’s decentralized platform also runs smart contracts, “without any possibility of downtime, censorship, fraud or third party interference,” states Ethereum’s site.

"Ethereum can be used to codify, decentralize, secure and trade just about anything: voting, domain names, financial exchanges, crowdfunding, company governance, contracts and agreements of most kind, intellectual property, and even smart property thanks to hardware integration."
— – Ethereum

A group of graduate students and faculty members at Cornell University and the University of Maryland have also taken an interest in smart contracts, particularly Ethereum’s interpretation. The group consists of Ahmed Kosba, Andrew Miller, Elaine Shi, Zikai Wen and Charalampos Papamanthou.

In a recently published paper, Hawk: The Blockchain Model of Cryptography and Privacy-Preserving Smart Contracts, the group highlights that current smart contract platforms built on top of Bitcoin’s blockchain lack privacy. “All transactions, including flow of money between pseudonyms and amount transacted, are exposed in the clear on the blockchain.”

The group designed Hawk in response to this issue, claiming in the paper that their software could potentially be superior to Ethereum. “We present Hawk , a decentralized smart contract system that does not store financial transactions in the clear on the blockchain, thus retaining transactional privacy from the public’s view.”

The Hawk software is yet to be released, but proposes both a private contract and public contract, allowing the users to choose who can access the information. “Our work preserves the most important aspects of transparency; in particular it is efficiently and publicly verifiable that the balance of all coins are conserved. It is also possible to engineer the cryptography to make other properties publicly auditable too if needed. In general, it is well known that cryptography allows one to achieve privacy and transparency simultaneously.”

“A Hawk programmer can write a private smart contract in an intuitive manner without having to implement cryptography, and our compiler automatically generates an efficient cryptographic protocol where contractual parties interact with the blockchain, using cryptographic primitives such as succinct zero-knowledge proofs.”
— – Hawk

Ari Juels, Professor at Cornell Tech, worked with two members of the Hawk software project,  Ahmed Kosba and Elaine Shi, on another recently released paper, The Ring of Gyges: Using Smart Contracts for Crime. “Ours is among the first academic treatment of smart contracts in distributed cryptocurrencies. It is worth emphasizing our belief that smart contracts in distributed cryptocurrencies have numerous promising, legitimate applications, such as a spectrum of new over-the-counter (OTC) financial instruments. Banning smart contracts would be neither sensible nor, in all likelihood, possible. The urgent open question raised by our work is thus how to create safeguards against the most dangerous abuses while supporting the many powerful, beneficial applications of smart contracts in distributed cryptocurrencies.”

“Criminal activity committed under the guise of anonymity has posed a major impediment to adoption for Bitcoin. Yet there has been little discussion of criminal contracts in public forums on cryptocurrency and the launch of Ethereum took place in July 2015.”
— – The Ring of Gyges

In the paper the trio propose ways in which criminals can utilise platforms such as Ethereum for illicit use, in what they call Criminal Smart Contracts (CSCs). “Our proposed contract PublicLeaks and its private variant can be efficiently implemented in Serpent, the Ethereum scripting language and are thus imminent possibilities. Similarly, KeyTheft would require only modest, already envisioned opcode support for SNARKs; our experiments have shown that zk-SNARKs for this contract are well within reach. Calling-card CSCs will be possible given a sufficiently rich data-feed ecosystem. Many more CSCs are no doubt possible.”

The proposed anonymity of Hawk, paired with potential CSCs, could enable the growth of the criminal ecosystem. However, the positives of smart contracts certainly cannot be ignored. “Our results illuminate the scope of possible abuses in next-generation cryptocurrencies. They highlight the urgency of creating policy and technical safeguards and thereby realizing the great promise of smart contracts for beneficial goals.”

“By recognizing and protecting against CSCs early in their lifecycle, we hope to see the great promise of distributed smart contract systems fully realized.”
— – The Ring of Gyges