Trustless Trusts — What if Assets can be Passed Between Parties without Trust?

Rules against perpetual virtual machines

First Published on LexDAO substack here on December 21, 2021

There have been numerous debates over Ethereum style smart contracts. Are they smart? Are they contracts? What is clear, is that these computable commitments are able to run on “turing complete” blockchains deploying code “smart contracts” to serve and mimic legal structures. In other words, they are able to remove human intermediaries and offer predictable and programatic patterns of governance over assets. Traditional legal systems, in our zone of familiarity, with require intermediaries and/or judges to adjudicate the assets’ ownership.

In this article we will use existing platforms to mimic various properties of a trust using NFT’s and decentralized finance. Probably need a better name than trustless trusts, but that leaves open the possibility of calling them T&Ts.

What is a Trust?

One definition is “an obligation arising out of a confidence reposed in the trustee or representative, who has the legal title to property conveyed to him, that he will faithfully apply the property according to the confidence reposed, or, in other words, according to the wishes of the grantor of the trust.”

So in simplest terms you have the giver of the property the “Settlor”, who gives property into a Trust to a “Trustee”, in charge of managing the trust, for the benefit of a third party, the “Beneficiary”.

Typical ways of making trusts are:

1. a written trust instrument created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or living trust);
2. an oral declaration or promise;
3. the will of a decedent, usually called a testamentary trust; or
4. a court order (for example in family proceedings) See also #FreeBritney

Not all trusts are so controversial, but for our purposes we will be exploring replacing and mimicking the first example of a written “trust agreement” with smart contracts, code, using an NFT. For comparative purposes, we look toward English common law for trusts which follow the “three certainties”. In the United States many states have passed versions of the Uniform Trust Code for statutory trusts. Either way the idea is whether a system that is based on “trusted” intermediaries can be mimicked to match the purpose of “trusts” where assets can be passed using distributed code on a blockchain. One is of law, and one is of code. The law has rules against perpetuities, the code has immutable code and infinite games.

The three certainties.

1. Certainty of Intent
2. Certainty of Subject Matter
3. Certainty of Objects

Can the three certainties be met using smart contracts and transactions on a blockchain such as Ethereum?

This is theoretical, but in this exercise we will go through some motions to see what a smart contract trustless trust might look like when trying to mimic the properties of a legal trust agreement while using code to remove intermediaries.

The Certainty of Intent

The intent prong seems fairly easy to meet. The singular actions speak louder than words may be enough to signal intent. For example, if we sign an Ethereum transaction that moves tokens into a contract, that benefits another Ethereum address. That would seem to be fairly clear prima facie evidence of intent. Lawyers would likely want to frame the actions with words in the form of a written agreement. The written “code deference” trust agreement could be referenced in an NFT as part of the metadata. Or even through a signed statement through products like EthSign, Openlaw, or Signator.

The Certainty of Subject Matter

Similarly this prong is more about separateness of the property intended to be held in the trust. Through the action of telling the smart contract, which other private key or smart contracts have approval to move the assets it is easy to mimic the complete separation of property similar to putting it in a digital vault. In other words, these digital assets can be segregated to the point that only certain other permissioned parties (if any) can effectuate a transfer or spend of the digital property. Therefore, the assets can be segregated for all intents and purposes similar to physical assets such as gold or cash.

Certainty of Objects

This prong is a little messier as it generally requires certainty of the beneficiaries of the trust being known. In our example the beneficiary would be the holder (or holders) of the private keys associated with a blockchain wallet. Therefore it is possible in the case that the keys are irretrievably lost that a trustless trust would vapor lock the assets and they would be immutably lost, similar to buried and lost treasure at the bottom of the ocean. Many modern trusts have the ability to appoint some discretion into the trust for the trustee to be able to carry out the intent of the trust. This is obviously useful for new found children that arise after the original trust, but not expressly written into the agreement. Similarly, with a trustless trust, one could maybe see a disparate DAO used as a multisig to retrieve, manage and disperse trust assets in accordance to any written instructions. In other words, disputable safety rails can be programmed into the pattern that would may be able to intervene in certain edge cases.

Example for Making a “Trustless Trust” pattern.

Now that we covered some basics, no need to recreate the wheel and develop smart contracts from scratch. There are fascinating possibilities of using NFT’s and defi tokens bundled together to carry out the intent of parties in computationally certain and predictable ways. To learn a little about a smart contract protocol that can be used, check out this article from Charged Particles platform.

In order to tease out the ideas of what happens when digital assets are lost and rediscovered I wrote a piece of immersive fiction as described here. On the surface it is a story about rummaging through the ghosts of the past, but hopefully it will bring up questions of purpose and adventure as well. Not many things last and what happens to digital artifacts will be as fascinating as excavating Egyptian tombs.

We use the special mechanics of Charged Particles and DeFi to direct the rewards from Aave tokens to a charity Web3 address. The idea is simply to have a NFT that is converted to a “digital wallet” that can store any ERC20 token. To the extent that a token is AAVE supported with a lending pool, then the ERC20’s are deposited and converted to aTOKENS that are earning yield from the Aave protocol. To oversimplify, the tokens will have a portion that looks like “principal” and then will accrue rewards that look like “interest”. The idea of calling it tokenized spawn has not taken off, so I will use the imperfect nomenclature of principal and interest from here on.

Separation of the Principal from the Interest

Let’s say we;

1. First mint this NFT from Esto Perpetua. To properly view you must be on the Polygon blockchain.
2. Deposit or have a 3rd party deposit micro donations. For example, Matic or Dai is wrapped into Aave and deposited into amWMATIC or amDAI respectively. These tokens then go into the lending pools on Aave.

Now we have a NFT that is holding principal and accruing interest. From this point, there are many interesting legal engineering things that can be done. Only a little imagination and digital elbow grease is required.

1. The NFT can be time locked. What this means is that the owner of the NFT can’t remove the ERC20’s for a fixed amount of time. This ensures that the token will accumulate interest for a timeframe without dispersal of the corpus (the principal).
2. The interest stream can be separated from the principal and assigned to another address.
3. This assignment under the current smart contract has some dependencies. One the owner of the NFT is the party that can call, discharge and release the interest to the beneficiary.
4. The current max assignment is 35%, but it is possible to ramp this up to 90%.
5. Let’s start a DAO. In about 20 minutes we go to DaoHAUS and use their nifty front end to make a DAO with a charitable purpose. We added some members to govern the assets and we have HiroDAO. Hiro is the character from the story (and Snowcrash) and the charity is for Herro Rats that are trained to sniff out unexploded landmines and tuberculosis.
6. Note that the DAO has a controlled wallet of its own here, a “Minion”, that serves as the HiroDAO non rage quit-table wallet. We called this Alpert from the story Esto Perpetua.
7. For open finance fans, it is neat that the treasury and transactions are very transparent and open in real time. Wish I could say the same of many other larger charities.
8. We use this wallet address for the Minion as the assignee. So now “Alpert” is the beneficiary of 35% of the earned interest from the NFT.

WHAT DOES THIS LOOK LIKE ON THE BLOCKCHAIN

Currently there are only a few donated Matic that were wrapped into interest generating Aave tokens. Below in the image, it is clear that there is a time lock until September 15, 2022. In other words, the principal/corpus cannot be removed by the NFT owner until then. Also, there is some incremental interest that has accrued in the NFT. We will click the discharge button and the interest is split and will follow the assignment 35% to the Minion and 65% to the Owner of the NFT.

Next we check the Alpert wallet, and in fact that discharge is split, though with an infinitesimal amount of value.

To recap and put into trustless trusts terms, we have a Settlor that donated something of value (a “Corpus”) to a smart contract. This smart contract wraps the ERC20’s into yield generating assets and splits the Corpus into its Principal and the Interest income that is generated. The trustee smart contract can be time locked to prevent exhaustion of the Corpus (no loss) donations. Then the interest can be split and assigned to a charity non-profit DAO (the “Beneficiary”), that is controlled by a multisig that is also on chain and open where anyone can view the transaction history and balance of the HiroDAO charity and expenditures.

What Next?

Hopefully we can start exploring the bluesky that this T&T model allows for having no-loss charity. There are additional smart contract patterns that are ripe for the picking. Examples:

1. Immutable Charity, where the income from the NFT is directed to a charity 100% and the NFT is “burned”; this would mimic a perpetuity where the income for better or worse is permanently directed. In other words an irrevocable enDAOment.
2. More customizable options, that allow splitting of the interest stream amongst multiple beneficiaries.
3. Timelocks that are longer than 1 year to allow for longer term faith that the corpus will be untouched.
4. Oracle dependent releases of “discharge” or release functions. One could easily have a database that would only release the corpus upon a certain event, such as death. The future might be such keeper bots scouring the oracles looking for keys to transfer assets. Basically the keeper bots would fund nonprobate transfers of assets on predetermined events.
5. Nesting and stacking and waterfalls. What if a Charged Particle NFT is used to send interest to another Charged Particle NFT until it reaches a certain threshold and then redirects the stream to another NFT. This could be almost like an automagic redirecting charity.
6. Trusts that blend defi and permissions that grant parties the rights and obligations to serve as trusted intermediaries. For example, the NFT could be held by a DAO that awaits written instructions from a wallet on the blockchain to disperse interest or release corpus.

THE ASK

I really like the idea of no loss altruism that enables doing good with only the opportunity cost of valuable things. Hopefully people will enjoy the low transaction costs to demonstrate micro transactions that are really only possible on Polygon/Matic and other side chains. The fiction story that is referenced in the NFT is split into three parts. The first I am releasing here. I hope you like it and if we are able to get $1,000 worth of defi wrapped into the charity NFT (that benefits HiroDAO) then I will release the second part. The NFT is on Matic, so even donating 1$ or 2$ in tokens will add up and is possible with cheaper transaction costs.

Either way, give it a read and let us know what you think.

Special thanks to Nick Rishwain for providing feedback.

About LexDAO

LexDAO is a non-profit association of legal engineering professionals that brings the traditional legal settlement layer to code, and coded agreements to the masses. We believe that everyone deserves access to justice provided in a quick and efficient manner. If legal services were easier to use, verify, and enforce, we could live in a fairer world. Blockchain technology offers solutions to many problems in the legal space. Our mission is to research, develop and evangelize first-class legal methods and blockchain protocols that secure rules and promises with code rather than trust. We do this by training LexDAO certified legal engineers and building LexDAO certified blockchain applications. We strive to balance new deterministic tools with the equitable considerations of law to better serve our clients, allies, and ultimately citizens.

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