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In the The final installment of this seriesWe talked about what “smart contracts” are (or perhaps more accurately “self-executing contracts”), and discussed in detail the two main mechanisms through which these contracts can have “power”: smart ownership and “real” currencies. . We also discussed the limits of smart contracts, and how a legal system based on smart contracts can use a combination of human judgment and automated execution to achieve the best possible results. But what are the benefits of these contracts? Why automate? Why is it better for our relationships to be regulated and controlled by algorithms rather than humans? These are the difficult questions that this article and the following aim to address.
A tale of two industries
The first and most obvious benefit of using Internet-based technology to automate anything is the same benefit we’ve seen the Internet, and Bitcoin, already provide in the areas of communications and commerce: it increases efficiency and lowers barriers to entry. A very good example of this influence providing meaningful benefits in the traditional world is the publishing industry. In the 1970s, if you wanted to write a book, there were a lot of arcane, central intermediaries you had to pass through before your book reached the consumer. First, you’ll need a publishing company, which will also handle the editing and marketing for you and provide a quality control function for the consumer. Second, the book must be distributed and finally sold in each individual bookstore. Each part of the series will take a significant cut; In the end, you’ll be lucky to get more than ten percent of the revenue from each copy as royalties. Note the use of the term “royalties,” which implies that you, the author of the book, are just another weird part of the series that’s worth a few percent as a cut instead of, well, the The most important person without whom the book would not have existed in the first place. Now the situation has improved dramatically. We now have distinct printing companies, marketing companies and libraries, with a clear, defined role for each company and a lot of competition in each industry – and if you’re OK with keeping it purely digital, you can just publish on Kindle and get 70%.
Now, let’s consider a very similar example, but with a completely different industry: consumer protection, or more specifically warranty. Escrow is a very important function in commerce, especially online commerce; When you buy a product from a small online store or from a merchant on Ebay, you are engaging in a transaction where neither party has much reputation, so when you send money virtually, there is no way to be sure that you will do so. Actually get nothing to show for it. Escrow provides the solution: Instead of sending money to the merchant directly, you first send the money to an escrow agent, and then the escrow agent waits to confirm that you received the item. If you confirm, the escrow agent will send the money, and if the merchant confirms that they cannot send the item, the escrow agent will refund your money. If there is a dispute, the adjudication process begins, and the escrow agent decides which side has the better case.
However, the way it is implemented today, escrow is handled by central entities, and is integrated with a large number of other functions. In the online market eBayFor example, Ebay provides a server for a seller to host their product page on, a search and price comparison function for products, and a rating system for buyers and sellers. Ebay also has Paypal, which transfers funds from seller to buyer and acts as the escrow agent. Essentially, this is exactly the same situation as book publishing was in the 1970s, although to be fair sellers on Ebay get just over 10% for their money. So how can we create an ideal market for cryptocurrencies and smart contracts? If we wanted to be extreme about this, we could decentralize the market, using a diaspora-like model to allow the seller to host their products on a specialized site, on their own server or on a website. Decentralized Dropbox implementation, used a Namecoin-like system for sellers to store their identities and maintain a network of trust on the blockchain. However, what we are looking at now is a more moderate and simple goal: separating the function of the escrow agent from the payment system. Fortunately, Bitcoin offers a solution: multi-signature transactions.
Introducing Multisig
Multi-signature transactions allow a user to send funds to an address using three private keys, so you need two of these keys to unlock the funds (multi-signatures can also be 1 of 3, 6 of 9, or something else, but in practice, 2 Of 3 is the most useful). The way this applies to escrow is simple: create a 2 of 3 escrow between the buyer, seller and escrow agent, have the buyer send them the money and when the transaction is complete, the buyer and seller sign the transaction to complete the escrow. If there is a dispute, the escrow agent chooses the side that has the most convincing case, and signs a transaction with them to send them the money. On a technological level, it’s a bit complicated, but fortunately Bit I have come up with a site that makes the process very easy for the average user.
Of course, in its current form, Bitrated is not perfect, and we don’t see a lot of Bitcoin trading using it. The interface is arguably not as intuitive as it could be, especially since most people aren’t used to the idea of storing specific links for each transaction for a few weeks, and it would be much more powerful if it were integrated into the entire merchant package. One design may be A Cryptokit– Similar to a web application, it displays to each user a list of “open” purchases and sales and provides a “Finish”, “Accept”, “Cancel” and “Dispute” button for each; Users will then be able to interact with the multisig system just as they would a standard payment processor, but will then get a notification to terminate or dispute their purchases a few weeks later.
But if Bitrated can improve its interface and start seeing widespread adoption, what will that achieve? Again, the answer is to reduce barriers to entry. Currently, getting into the consumer warranty and arbitration business is difficult. To be an escrow service, you basically need to build a complete platform and ecosystem, so that consumers and merchants can work through you. You also can’t be the one to guarantee the funds – you also have to be the one to transfer the funds in the first place. Ebay needs to own and control Paypal for half of its consumer protection system to work. With Bitrated, all that changes. Anyone can become an escrow agent, arbitrator, and a marketplace similar to Ebay (and maybe… CryptoThrift Or coming selfishness) can have a rating system for arbitrators as well as buyers and sellers. Instead, the system could handle arbitration in the background similar to the way Uber handles taxi drivers: anyone can become a reviewer after the vetting process, and the system will automatically reward reviewers who get good reviews and fire those who don’t. They got bad reviews. Fees will be lower, likely much lower than the 2.9% that PayPal alone charges.
Smart contracts
Smart contracts generally take the same basic idea, and push it much further. Instead of relying on a platform like Bitfinex to hedge one’s Bitcoin holdings or speculate in either direction with high leverage, one can use a blockchain-based derivatives contract with a decentralized order book, leaving no central party to bear any fees. The ongoing cost of maintaining the exchange, complete with operational security, server management, DDoS protection, marketing, and legal expenses, can be replaced by a one-time effort to write a contract, likely in less than 100 lines of code, and another – the effort to create a beautiful interface. From that point on, the entire system will be free except for network fees. File storage platforms like Dropbox can be similarly replaced; Although hard drive space costs money, the system will not be free, and will likely be much cheaper than it is today. It would also help balance the market by making it easier to participate on the supply side: anyone with a large hard drive, or even a small hard drive with some extra space, could simply install the app and start making money by renting out the empty space. used. .
Instead of relying on legal contracts that use expensive (and often inefficient, especially in international circumstances and poor countries) judicial systems, or even rather expensive private arbitration services, business relationships can be managed through smart contracts where needed. Those parts of the contract to human interpretation can be divided into many specialized parts. There may be judges who specialize in determining whether a product will be shipped or not (ideally, this will be the postal system itself), judges who specialize in determining whether web application designs meet specifications, and judges who specialize in adjudicating certain categories of claims. Property insurance for a fee of $0.75. By examining satellite images, there will be contract writers skilled at integrating each intelligently. Specialization has its advantages, and is the reason why society has moved beyond chasing bears with stone clubs and picking berries, but one of its weaknesses has always been the fact that it requires intermediaries to manage and operate, including intermediaries specifically to manage the relationship between intermediaries. Smart contracts could eliminate the latter category almost completely, allowing a greater degree of specialization, along with lower barriers to entry within each category that have now been reduced.
However, this increase in efficiency is only one piece of the puzzle. The other, and perhaps more important, part relates to a topic that many cryptocurrency advocates hold dear: reducing trust. We’ll cover that in the next installment of this series.
