This essay informs on why Salutary is implemented the way that it is.

Incentives can exist onchain, enforcement cannot. Enforcement is not an onchain construct nor will it ever be, it exists in the realm of atoms, not bits. This essay will explain why blockchains solve many problems, but they do not solve all of our problems.

The following applies to all property rights and the game theory behind enforcement of binding asset transfer.

There is a well-known maxim in crypto: “code is law”.

This means what the code executes and what happens on the blockchain is final. It's the cypherpunk way of saying "The purpose of the code is what it does".

The system produces the outcomes it’s supposed to via code it rigidly follows. When I say “code is law”, I’m referring to this philosophy.

If It Happened Onchain, Did It Happen In Real Life?

Nearly everything is reversible except death or disfigurement.

The permanence of an outcome directly correlates with the legitimacy of the entity who decided it. Legitimacy is simply a more dignified proxy for force. Might makes right, because might dictates the rules; if it follows the rules, then the decision is legitimate. If a rule is imposed only by asking nicely, then it is neither imposed nor a rule. A law is only as good as its enforcement.

What does enforcement look like? It means you have to do it, otherwise there is physical retaliation…. “Violence is the supreme authority through which all other authority is derived.”

Laws are created by the violence monopolist. If there is no violence monopolist, then there are competing laws; this creates schisms, fighting, instability. Peace through strength is very real; when there isn’t overwhelming strength, there is less peace, because there is constant jostling for who gets to decide what’s legitimate.

Violence is not wrought onchain. This means that if it happened onchain, it didn’t necessarily happen in real life. Let’s unpack what “happening in real life” means, and instances when code can be a default judgement.

Finality

“Finality” in the crypto sense means a transaction was enshrined onchain, and was there long enough to become a canonical part of the chain’s ledger. A blockchain is simply a decentralized database; a ledger that no single entity controls. A corporate database is a centralized ledger that one party controls. “Who updates and maintains the database" is a surprisingly politically-disruptive question!

For common day-to-day crypto purposes, this finality definition is fine. However, in the domain of intense disagreement with many millions of dollars on the line, blockchain finality is not at all necessarily final.

In this situation, the party that gains by defecting to state judgement, will do so. If the state disagrees with what happened, and it can identify the parties involved, it’s getting reversed, and your “finality” was not actually final. If it happened onchain, it didn’t necessarily happen in real life.

The answer to "can it be undone?" is always "yes"; the real question is what degree of coordination effort will it take to revert, or what kind of physicality does it require to retract. Who else opposes the event? Will the state support my side if I raise the issue? If enough people with force behind them agree with you, the transaction is reversible.

Violence is always the final baselayer if fleshy humans are involved. However, violence is costly to impose, and there are practical considerations for inflicting it. Thus, force isn’t necessarily the arbiter of every decision. Namely, when the stakes are low…

High-Stakes and Low-Stakes Lawmakers

If the stakes are low, code is law. If the stakes are high, men with guns is law.

(I know “men” is plural and it should be “are law”, but I like the symmetry of the phrases with both being “is law”)

How do we quantify the “stakes”? The answer to this comes down to the monetary value of the transaction in question. The greater the economic value of a disputed event, the greater the likelihood it will be challenged, physically.

Onchain, in the world of decentralized finance (DeFi, the real domain of crypto), the more trivial the transaction, the more final it is, and the more code is de facto law. Simply because it's not worth physically disputing. Even if your grievance is justified, there are many steps and costs to getting state-backed violence to effect a reversal. Litigation, lawsuits, cross-border enforcement… these are all quite expensive and time consuming.

What constitutes digital permanence for a “high stakes” event is essentially a cost-benefit analysis of what goes into getting your money back, and if the ROI of that effort is positive.

The cost to litigate and enforce is basically the hurdle rate for high-stakes vs low-stakes outcomes and which law it follows. If the onchain transaction is below the hurdle rate, code is law; if it’s above the hurdle rate, men with guns is law.

Even if an event was illicit, if it was for less than several million dollars, or so it’s probably final. Code is law for the small stuff, because it’s not worth the cost and effort to recoup it, so it slips through the cracks. The pragmatics just aren’t there to contest it.

For small-to-medium potatoes, code is law; because code is essentially a default judgement that isn't worth the time for men with guns.

The state has resource constraints. You have cost constraints. When the stakes are low, code decides the outcome, because what are you going to do about it?

Onchain is Not Real Life… When the Stakes Are High

If it can’t withstand physical disagreement, then it didn’t happen in real life, and it doesn't belong to you.

This is fundamentally commentary on property rights, using crypto as the medium. It draws from natural law reflections you’ll find in Property Rights, Toilets, and the Way of the Dog. Property rights are not a legal construct, it is a natural one.

Property is defined by he who decides it's his/yours, and has the means to physically protect it. Whether that's codified in a law book or not, imposed by a judge or a warlord, is immaterial to this natural reality; from the savage to the civilized, property is maintained through the philosophy of a sword.

All animals abide by the law of the jungle: men with guns, or wolves with teeth, always dictate the boundaries. Societal laws are just human-readable guidelines for violence; these guidelines are created by the violence monopolist. To be law, the monopolist must decree it law.

Illegal transactions worth tens of millions or more will inevitably get escalated to the courts. The state will allocate resources to these disputes. Men with guns will get deployed to enforce the real law. It must withstand their judgement to be final.

> “Guys with guns can’t undo an Ethereum transaction, do you even know how crypto works?”

Oh? And where do you live? Onchain with your tokens? Is your house onchain? All your belongings? To get what they want, they don’t need to roll back the state of the chain, they only need to get you.

Picture this proposition: “Those tokens you have, send them back or we stick you in a concrete box for a decade.” Which law do you abide by in this instance? Code law or law law? What is the supreme authority?

Your code will not protect you here. The state doesn’t need to accomplish any feat of blockchain technical prowess to undo a transaction, it just needs to put forward a sufficiently convincing argument with a gun that you should undo what happened yourself. A $5-Wrench Attack, but more decorous. This is how the state imposes finality.

Pricey contentious events, where all parties are known, will eventually be subject to the judiciary when someone gains from its reversal. Because at a certain degree of distress (or financial gain), people will defect from ideological allegiance in the name of self-interest.

There are no atheists in foxholes, and no “code is law” libertarians who lost 20% of their net worth in a hack. Everyone has a number.

$10M+ transactions will not slip through the cracks; if someone feels aggrieved and that the onchain interaction was illegitimate, they will prosecute. The legal system will be their recourse.

If they show it to The System and they agree it's invalid, then the transaction did not happen in real life, even if it occurred onchain, because it will be reversed or neutralized. How it's nullified will depend on how big it is.

Sticking you in a box is an unpleasant way of burning all the tokens in your wallet. If the property has no owner, and it's not able to be owned by anyone else, then it ceases to exist in any functional way.

If The System agrees with the onchain event, then it truly happened in real life. Because now its digital existence is both enshrined onchain and reinforced, physically.

So long as humans are involved in this process, then the physical will inform the digital, because even though your assets are onchain, you are not. True finality for property rights is determined by what can be done to you, not how many blocks have passed since a transaction.

Implications for Crypto Companies

This means any transaction that transfers large amounts of financial value where all parties are identified (like, for example, an M&A event), must be legally pristine, because then it happened in real life. If it works in the most-hostile environment, then it always works. Salutary facilitates and enforces high-stakes transactions for DeFi projects and businesses alike.

Salutary is designed with true permanence in mind. When a Salutary event occurs, it happened in real life.

 This essay was originally published on Dmitry's Substack here and his Twitter here.

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