Capability-Based Financial Instruments

Every novel cooperative arrangement of mutually suspicious parties interacting electronically — every smart contract — effectively requires a new cryptographic protocol. However, if every new contract requires new cryptographic protocol design, our dreams of cryptographically enabled electronic commerce would be unreachable. Cryptographic protocol design is too hard and expensive, given our unlimited need for new contracts. Just as the digital logic gate abstraction allows digital circuit designers to create large analog circuits without doing analog circuit design, we present cryptographic capabilities as an abstraction allowing a similar economy of engineering effort in creating smart contracts. We explain the E system, which embodies these principles, and show a covered-call-option as a smart contract written in a simple security formalism independent of cryptography, but automatically implemented as a cryptographic protocol coordinating five mutually suspicious parties.