28 Apr

Aron van Ammers Smart contracts, now

Smart contracts will change the world.

Or will they? The concept of smart contracts has gained a lot of attention in recent years. A lot of positive and creative attention, and a lot of unsubstantiated hype. It’s my job to build businesses in which smart contracts play an important role. From that perspective I’ll give my vision on what’s possible today and where we’re heading.

Remind me, what is a smart contract?

The concept of what a “smart contract” is, has evolved a bit, and unfortunately this has eroded the meaning of the concept. So here’s a quick refresher. Nick Szabo is commonly accredited with the introduction of the concept, in 1994. This was way before blockchains existed. However, Szabo clearly envisions that cryptography plays an important role in realising them and that access to smart contracts would happen through cryptographic keys. Later he gives an example of a car as smart property. Still in the 90’s, by the way.

Going from Szabo’s original ideas we can take this as a broad definition:

A smart contract is a computerized transaction protocol that executes the terms of a contract.

In the blockchain community, the term “smart contracts” is being increasingly used for a narrower concept, roughly for “computer code that is run on a blockchain”. Both the source and the execution of this code is cryptographically verifiable (the latter, by the way, is a Big Thing), its correct execution is ensured by all nodes in the blockchain network and it can affect changes in the data on that blockchain.

The programs that can be run on the Ethereum blockchain are also officially called “smart contracts”, a choice which was later regretted by founder Vitalik Buterin but was kept anyway for reasons of continuity (and was embraced by Szabo as a second definition). For clarity, I will further use the term “Ethereum smart contracts” when referring to these, including derived technologies like the Eris Industries stack and Rootstock. As a narrower definition we’ll take this:

An Ethereum smart contract is a long-lived piece of code which is stored on a blockchain, triggered by blockchain transactions, which reads and writes data in that blockchain’s database, and of which the source and execution are cryptographically verifiable.

Limitations of Ethereum smart contracts

Recently, Gideon Greenspan of Coin Sciences wrote an informative post on some things people think that Ethereum smart contracts can do, but actually can’t. On the whole, I agree with these and I think they are important for understanding how to build useful products and services based on Ethereum and related technologies. Ethereum smart contracts, on their own, are no good for:

  • Contacting external services or APIs: they can only read and write data on the blockchain where they reside. No API calls. No money transfers outside the blockchain where they live. No interaction with the physical world.
  • Enforcing on-chain payments: they can make payments, but only of funds that they fully hold themselves. Consider them like a smart gold chest: if we put gold in the chest, the smart chest can determine who gets the gold, and under which conditions (again, only looking at data in its own blockchain).
  • Hiding confidential data: they can’t hide any data, because all data in Ethereum smart contracts is unencrypted and transparent. Yes, encryption is used in blockchains. No, the data in the blockchain itself is not encrypted, and is as accessible as the blockchain itself. In popular public blockchains like Bitcoin and Ethereum, that means about as accessible and permanent as any data. Don’t put your secrets in there. Seriously.

If Ethereum smart contracts can’t do any of these, then are they good for anything at all? My answer is a strong “yes”. In my vision and daily reality in the development of our ventures, Ethereum smart contracts are part of a greater whole towards realising Szabo’s vision of smart contracts. However they are like a brain that needs hands and feet to interact with the world, and eyes to see it.

Hands and feet for the shared brain

A “world computer” like the public Ethereum network, or a computing environment that is trusted and verifiable between parties in a smaller group like a consortium blockchain, is a tremendously powerful thing. It is, however, more like a shared brain than anything else. A reasoning, remembering, calculating, very trustworthy and transparent brain, and in the current state of the art a very limited and slow one. Ethereum smart contracts are little computer programs that run on that brain.

From that perspective, how can that brain be given eyes to see the world, and hands and feet to manipulate it? Not unlike a human brain, in fact: using external “sensors” and “limbs” with which it communicates through “neurons”. The sensors are any type of online service that provides data, the limbs are any online service that influences the digital or the physical world, and the neurons are the digital pathways that start or end with a blockchain transaction.

So how do we ensure the data that the brain receives is trustworthy, and that its instructions to influence the world are respected? Just like anything in the blockchain is ensured: by making honest behaviour more attractive than dishonest behaviour. That can be in economic terms, but also in terms of the legal system or reputation.

In a follow-up post, I will go into more detail on methods to give Ethereum smart contracts eyes, hands and feet, and the strategies to ensure their honesty and effectiveness through incentives.

Photo credit: Neil Conway

Categories: Blockchains, Macro Trends

11 Jun

Jamie Burke What can the Blockchain Industry learn from Napster?

I recently watched Downloaded, a great documentary on the story of Napster. It really brought home how much the p2p / decentralisation movement owes to Napster and how much the Blockchain Industry can learn from its story.

 

Initially Napster was simply a free algorithm that allowed people to share their music libraries through a peer-2-peer network of computers with pseudo anonymity.

 

After over 30 million users a month and exponential growth it eventually ran into legal issues around copyright infringement. Something many people always said was a fundamental flaw that was its inevitable downfall. But in fact it was ultimately an email from Sean Parker from its very beginnings which acknowledged it knowingly enabled its users to commit piracy. It was semantics that brought it down.

 

Like Napster, many Blockchain startups will play in a legal grey area about what they will enable users to do in a p2p environment. You can think of these environments as regulatory sandboxes with ‘dark markets’ as the extreme case that will go on to challenge and redefine today’s laws.

 

Let’s say you create an entirely decentralised bank that uses crypto-currency only. In the UK do you need an FCA license? Probably. But only if you are marketing a financial service. So it’s the semantics of your offer. The same thing that killed Napster.

 

Let’s think of the similarities;

• Facilitation of peer to peer transactions / transfer
• Regulatory / business model sandbox
• Centralisation of servers was the legal weakness
• Napster legal case attacked Roles & Responsibilities (something still undefined with DAOs)

 

Like Napster it might take a couple of attempts to get new DApp (Decentralized Apps) models right. Barriers to entry have never been lower, with almost all blockchains being totally open source. The likelihood is, like Napster, the guys that will bring about the next disruption will likely have zero formal knowledge of, or experience in, the industry they are disrupting and certainly no contacts they would be wise to involve.

 

Yes, Napster disrupted the music industry forever, but it was iTunes that turned that disruption into a business model and Sean Parkers 2nd attempt with Spotify built on direct engagement with labels. As the documentary humbly points out it was the experienced ‘deal makers’ like Jobs that commercialised the opportunity. So history shows us that it’s less likely that a mature blockchain industry will be ran to the libertarian agenda of its early adopters from the hacker community and more so by those ‘deal makers’ that are able to involve incumbents in its evolution.

 

More renovation than disruption. More reformation than revolution.

 

Saying that, whilst the incumbent industry killed Napster and law enforcement agencies have killed Pirate Bay it was only because they had degrees of centralisation to attack. You can’t fight a totally decentralised entity and that’s what blockchains can potentially do. What if innovators where generous to release work purely for the social good which can then have its own life online. Much like The Web or the Bitcoin Blockchain. But if it’s totally decentralized then what’s the business model? It can’t be the code because thats open source. It’s not data because that’s public. So it’s got to be a service based model based on convenience or ancillary services.
Actually Napster, as argued in the documentary by musicians who backed what it represented, can be said to have brought music and the single back to its original roots as a promotional tool, not a form of revenue. It was only the mass industrialisation of music that centralised it into a controlled supply-chain and turned it into a form of revenue to protect. How many industries and markets will blockchains and cryptos rewind?

 

The obvious one is the financial services industry. Perhaps bringing banking back to more cooperative, member led vehicles with the consumer at the centre. It’s no wonder its coops like Fidor Bank that are becoming more relevant in a digital age.

 

Categories: Blockchains

9 Mar

Jamie Burke BITCOIN; PEOPLE POWERED? & WHAT UTORRENT TEACHES US ABOUT MINING ECONOMICS

When we think of bitcoin & blockchains ‘people power’ usually comes to mind but with bitcoin mining economics in question perhaps ‘people powered’ may be the answer.

Bitcoin Mining largely doesn’t make sense. The economics of which mean on the one hand it’s something that’s only commercially interesting at an industrial scale, in opposition to Bitcoin’s decentralised character. But on the other hand as economies of scale are won the algorithm, in direct response to these efficiencies, alters the risk vs reward mechanism in order to secure the network.

In other words it’s deliberately wasteful. Which is unsustainable both from a financial and ecological perspective. At this centralised level, with the cost of running a rig fixed in real world fiat currency, the risk vs reward algorithm working against me and the reward in volatile cryptos, its a very risky long-bet. As we have seen with recent documentaries on mining farms in China you can see where this is heading. In other markets where there was a natural pressure to reduce costs and increase output we got sweat shops. These artificial pressures unique to Bitcoin put that scenario on steroids bringing serious ethical considerations too.

 

Which begs the question what is the true price of current Bitcoin Minings success and why should we support it?

Continue reading…


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