Meant to send this last night. Double feature today, folks!
This has been a great week to be a content curator. Another great guest post hit my inbox late last night, and I never waste an opportunity to syndicate content from IBM’s Richard (@gendal) Brown, who today walks us through his framework for thinking about smart contracts.
Stay tuned for my BTC Foundation endorsements tonight. Spoiler alert: I’ve already promoted both of them in the past.
For now, enjoy…
"A Simple Model for Smart Contracts" | Richard Brown, IBM
Everybody I ask has a different definition of a “smart contract”; Here’s mine.
I hear more and more people talking about “smart contracts” these days. But when you push them to define the term, the concept often dissolves in their hands.
This isn’t a new observation: Peter Todd made a similar point after sitting through a session at a workshop we both attended last year.
Indeed, I was almost certainly one of the many who failed to impress him that day :)
Now, of course, one answer is to simply point at the intellectual visionaries who foresaw this space decades ago. Nick Szabo’s
Smart Contract piece
from 1997 is a really succinct and helpful overview. And I really like Ian Grigg’s idea of the “
Ricardian Contract”. Szabo’s “vending machine” model is particularly helpful.
But these ideas predate the world of Bitcoin, blockchains and cryptocurrencies and so it’s not immediately obvious for new people in this space how to bridge the gap. Worse, there are multiple platforms out that purport to implement smart contracts. Indeed, you can argue that Bitcoin itself is actually a smart-ish contract platform. So it becomes even harder to distinguish between the concept and a specific implementation.
In this piece, I try to build a motivation for why something like a smart contract might be a nice idea and use that to produce my definition and model.
The Replicated, Shared Ledger
When I think about block chains and distributed ledgers, I start with what I think is the key innovation of Bitcoin: it taught the world how to
transfer value at-a-distance with no trusted third party
. (Yes: I know some people take issue with this and it may not be 100% accurate – but I think it creates the right intuition)
Sure – we could hand physical money to each other face-to-face but, until Bitcoin, there was no way to send value to somebody on the other side of the world without having to trust centralized third parties: the postal service, banks and so forth.
It’s as if the traditional money-movement infrastructure of
banks and payment systems
had been reimagined as a flat peer-to-peer network of actors. Perhaps moving from the picture on the left to the picture on the right:
Bitcoin opened the possibility of peer-to-peer electronic value transfer, in contrast to
today’s system of banks, central banks and payment systems
. [I use these Banks merely as examples; I’m not trying to imply they’re doing anything in this space!]
But what this (very naïve!) picture misses is precisely how systems like Bitcoin achieve their claims.
The answer is that Bitcoin-like systems are built on things that I’ve started calling “replicated, shared ledgers”. That is: every full participant in the network has a full copy of the transaction ledger and the “magic” of the system is in how it makes sure that everybody’s copy stays in step with everybody else’s.
So, perhaps the correct picture is this one on the right below, where each participant is shown as having access to the same shared, replicated ledger:
The trick of Bitcoin and other decentralised consensus systems is in how they ensure everybody has a copy of the ledger that they know is in step with everybody else’s.
Great – leaving aside questions of scalability and so forth, we can see that this architecture can work: if everybody has the same copy of the ledger as everybody else then you no longer need central entities to keep track of who owns what (or who owes what to whom). Instead, you know that when your ledger gets updated to record a change of ownership of an asset then everybody else’s does too.
We need to distinguish between what the ledger records and how it does it
A great deal of the debate and competition in this space is focused on how this ledger is structured and secured. Bitcoin’s mining algorithm? Ethereum’s system? Ripple’s consensus algorithm? What these debates often miss is that these are all “how” questions: how is the ledger secured? How does the consensus process work? How are bad guys kept at bay? And they’re all different because the platforms make different assumptions about the nature of the threat they are likely to face.
But, for this article, it’s useful to forget that side of things for now and, instead, ask yourself: what does this ledger record? What is it used for?
What does this ledger record?
In one of
my recent posts
, I explored how this concept of a “shared, replicated ledger” could have application well beyond currency. My point was that once you know for sure that your view of the world is the same as everybody else, it opens up new possibilities in entirely unrelated areas, perhaps even accounting. Ian Grigg
has written about thi
s
and firms such as
triplentry
are exploring it today.
One of the driving thoughts here is: if I know that everybody “sees” the same things as me then perhaps I don’t need to spend so much money building my own custom ledgers and perhaps I don’t need to spend so much money auditing and reconciling with everybody else… the ledger does it for me.
OK – so perhaps a shared, replicated ledger could take cost and duplication out of today’s commercial systems.
So where else do we have duplication?
One area is in business logic. There are countless examples in business where two (or more) parties to a contract each independently write computer systems that model the terms of that contract. I sometimes get accused of only talking about banking examples so here are some non-banking examples of what I mean:
Large online retailers probably have a system that checks the bill they receive from their delivery companies is correct: have all the negotiated discounts been applied?
Large grocers negotiate complicated rebates from their suppliers, based on volumes in a period and plenty of other factors. You can be pretty sure that both sides of those contracts have developed very sophisticated models of the contract in computer code
A surprisingly large number of consumer insurance policies in the UK are sold through brokers. These brokers typically use software platforms provided by third party firms. These third-party platforms usually have their own implementations of each insurer’s pricing model: it is not unusual for a single insurance product to be represented in three or more completely independent code bases!
What unites these scenarios and countless others like them is that each party needs an independent means to calculate the value owing (or owed) under the contracts. They can’t realistically trust the other side. So logic dictates that they each have to build their own system. This might be wasteful and drives a need for reconciliations and so forth.
But think back to what I said above: a replicated, shared ledger has the property that everybody knows that everybody else is seeing the same thing without one side having to trust the other side to be scrupulously honest.
So imagine, now, that your ledger could also run computer code. Here’s what you could do:
When you negotiate an agreement with somebody, you also agree on a representation of that agreement in computer code
You agree what information sources it will use for external data and how disputes will be resolved
You both examine the code in detail to confirm there are no secret backdoors or sneaky loopholes. And you perform testing to check it yields the right answers for the various inputs your provide to it.
Satisfied that it does what you want it to, you both sign it and deploy it to the ledger.
And now you have something really interesting: neither of you have to go to the effort of reimplementing the terms of the contract in your own systems: you both know that this single piece of code satisfies both your purposes. And because it is running on this shared, replicated ledger and using it as its source of information, you can both be sure that whatever the program outputs will be the same for both of you.
Indeed, supervisory authorities, in time, may come to insist that this is how some business is done.
But we can go even further
So far, I’ve outlined a fairly mundane scenario: a computer program that represents the agreement between two or more parties.
But remember: we’re imagining a world where this program runs on the shared, replicated ledger…. the shared, replicated asset ledger.
What if this program could interact with that ledger? The program could take control of assets on the ledger and you could even send assets to the program. So it’s no longer just a computer program, it’s an economic actor in its own right.
Imagine we’re in the grocery scenario: you could imagine the grocer paying its suppliers by sending payment to this computer program. The program could calculate how much rebate is likely to be due, send the difference to the supplier as payment for the goods but temporarily hold on to the rebate – since we’ll only know for sure at the end of the month what the true discount percentage should have been. At this point, the contract could send the right amount of remaining funds to each party.
It’s as if this program isn’t just a computer program: it’s an actor in its own right. It responds to the receipt of information, it can receive and store value – and it can send out information and send out value.
It would be just like having a human who could be trusted to look after assets temporarily and who always did what they were told.
And this idea is what I think people mean when they talk about Smart Contracts.
The diagram below is my model for this: a piece of code (the smart contract), deployed to the shared, replicated ledger, which can maintain its own state, control its own assets and which responds to the arrival of external information or the receipt of assets:
My mental model for a smart contract: a computer program that runs on a shared, replicated ledger, which can process information, and receive, store and send value.
So much for the theory
So that’s the essence of it, I think. Perhaps more formally, my definition might be that:
A smart-contract is an event-driven program, with state, which runs on a replicated, shared ledger and which can take custody over assets on that ledger.
But that’s just my working definition. And there are lots of conceptual issues. I summarise some of them here, merely as signposts for further study (and future posts)
Injecting Real-World State
Smart contracts rely utterly on the quality of the information which is sent to them. “Oracles” and “n-of-m” schemes can help. But where I think additional thought is required is in what happens when things change: what happens if information sources go away, if previously independent sources merge, if new and better sources emerge?
Modelling
There may prove to be examples of business problems that can be modelled in multiple ways – e.g. directly as assets on a ledger or as contracts. Perhaps good practices need to emerge for the “right” way to model different types of real-world phenomena
Dealing with bugs, errors
Have you ever written a computer program without bugs? So how would one fix a smart contract once deployed if the bug is clearly in the favour of one of the parties?
Could this also be the early days of a new profession? Just as lawyers can earn big money finding loopholes in contracts, will there be a cadre of “engineer-lawyers” looking for loopholes in smart-contracts?
Liquidity
If assets are under the custody of a smart contract, they are, by definition, not available to anybody else. This could change the economics of various businesses.
Legal validity
Does a smart contract have the same legal force as a “real” contract? What happens if the output of the contract is incompatible with law or a court finds it to conflict with the English-language version of the agreement? Does it depend, in part, in how the ledger is secured?
Privacy
Most shared, replicated ledgers are public. I don’t know many retailers who want their deals with their suppliers to be public knowledge
Technical
Does the underlying technology work satisfactorily? Does it scale? And so on
… and much more
But I’m pretty sure smart people in the community are looking at all of these things. So perhaps the real test is: what are the compelling business scenarios that will drive adoption/experimentation in this space?
If you’ve reached this far, well done. I’d urge you to study the writings of Szabo, Grigg and countless others on this… they’ve covered this space so much better than me…
For Entrepreneurs
The MIT E-Lab is a well established (20+ year) program that helps startups by matching them with MIT & Harvard business school students for a semester. The E-Lab is now looking for cryptocurrency related startups at various stages, so apply if you think this could help your efforts. (You don’t need to be local, but a c-level exec has to be in Cambridge frequently.) To apply, or for more info on E-Lab visit http://elab.mit.edu/.
Events
Inside Bitcoins Conference and Expo - Berlin (Mar. 5-6), and New York (Apr. 27-29) Inside Bitcoins is the largest bitcoin and blockchain technology focused event series worldwide. At each event you’ll hear about the latest challenges, trends, and opportunities in the industry from experts including Chris Odom, Co-Founder and CTO, Monetas; Marshall Swatt, Chief Technology Officer and Co-Founder, Coinsetter; Dan Morehead, Founder & CEO, Pantera Capital Management; Gil Luria, Managing Director, Wedbush Securities; and more. Plus, TBI Daily readers get 10% off the
Berlin
and
New York
events with code TBIDAILY. See you there!
Jobs, Jobs, Jobs
Bitnet, San Francisco, Belfast, London (VC-backed)
-Leading digital commerce platform & former Visa team.
-Open positions: Engineering (Customer Success, Lead UI, Product, DevOps), Sales Director (EMEA), Sales Engineer (San Francisco)
-Check out Bitnet (https://bitnet.io/careers.html) and email jobs@bitnet.io
Coinbase, San Francisco (VC-backed)
-Largest “universal services” bitcoin company.
-Open positions:
Security Engineer
,
Software Engineer
(2-3 years mobile product development),
Regulatory Compliance Investigator
, (1 year conducting SAR investigations)
-Check out Coinbase (https://www.coinbase.com/careers/)
BitGo, Palo Alto (VC-backed)
-The leading Bitcoin multi-sig security company
-Open positions: Back-end / Front-End / iOS / Security Engineers, UX Designer
-Check out BitGo (www.bitgoinc.com/jobs) and email jobs@bitgo.com
Bolt, San Francisco (VC-backed)
-Stealth startup focused on consumer applications of Bitcoin.
-Open positions: Security Engineer, Ruby Engineer, UI/UX Designer, Executive Assistant.
-Check out Bolt (bolt.com) and email jobs@bolt.com.
Elliptic, London (VC-backed)
-Vault and enterprise digital currency services.
-Open positions: Data Scientists and Front-end developers.
-Learn more and apply at elliptic.workable.com
Today’s Tid Bits
MyCoin Customers Report $8.1 Million Losses to Hong Kong Police
http://www.coindesk.com/mycoin-hong-kong-police-8-1-million/
MyCoin, the now defunct bitcoin exchange, is now the center of an preliminary investigation conducted by the Hong Kong Commercial Crime Bureau (CCB). According to estimates by the CCB, the total consumer loss from the exchange is around $8.1m. Local media reported Monday that the total losses could have been as high as $387m, but this is inaccurate. Hong Kong lawmakers are now urging the government to impose a ban on bitcoin.
Bitcoin Blazes New Trail in Emerging Market
http://techcrunch.com/2015/02/11/bitcoin-blazes-new-trail-in-emerging-markets/#spF9z4:KCk
Emerging markets appear to be the new focus for the bitcoin industry. Kenya, Uruguay and Panama are just a few of the countries hosting major bitcoin companies that are looking to tackle regional payments challenges by providing trusted, financial services for the unbanked. In Kenya, for example, over 75% of the adults use a digital currency called M-Pesa. BitPesa, a bitcoin company focusing on remittance services, is based in Kenya and is looking to eliminate fees and make it easier for Kenyans to transfer their digital currency. The firm
received $1.1m
this week to expand its operations. Bitcoin is proving to be on the forefront of financial technology innovation in emerging markets.
Circle’s Bitcoin Bank Comes to Android Wear
http://www.engadget.com/2015/02/11/circle-bitcoin-android-wear/
Following a series of tweaks to its mobile apps, Circle, the Boston-based bitcoin company, allows users to now use NFC-based payments with your Android smartphone or on your Android Wear device. In addition, iPhone users can now keep tabs on the bitcoin’s price from inside the Notification Center and even scan in a credit card straight from your camera. All apps are free.
Bitcoin Transactions Will Double by 2017, Research Finds
http://www.coindesk.com/juniper-research-bitcoin-transactions-double-2017/
The number of bitcoin and altcoin transactions will more than double by 2017 to 56 million, up from 24.7 million in 2014, according to a new report from Juniper Research. However, the market intelligence firm also predicts that the value of all bitcoin and altcoin transactions will fall by 58% in 2015, to just over $30bn. The entire report can be found
here
.
New York City Councilman Proposes Bitcoin Payments for Fines and Fees
http://www.coindesk.com/new-york-city-bill-bitcoin-fines-fees/
Mark Levine, a New York City Councilman, has announced that he will introduce a bill tomorrow that, if adopted, would allow New York citizens to pay for fines and fees in bitcoin. Parking tickets and court fees would be among the items included. Levine is a democrat representing in the 7th District in Northern Manhattan, and is particularly passionate about the digital currency. Levine is also a member of the city’s finance, education, housing and buildings, government operations, and rules committees.
Good News for Overstock: Utah Considers Bitcoin Payment for State Services
http://cointelegraph.com/news/113476/good-news-for-overstock-utah-considers-bitcoin-payment-for-state-services
A proposed resolution put before lawmakers in Utah could lead to the state legitimatizing bitcoin as a legal payment method. The in depth details regarding the resolution have not yet been released. It should be noted that Overstock.com, the flagship Bitcoin-accepting business, has its headquarters in Salt Lake City, Utah.
Mycelium’s Bitcoin Wallet Suspended form Google Play Store
http://www.coindesk.com/myceliums-bitcoin-wallet-suspended-google-play-store/
Mycelium, a bitcoin wallet provider, had it’s bitcoin wallet app removed from the Google Play store yesterday. Google emailed Mycelium stating that the app was a “violation of the paid and free provision of the Content Policy and section 3.5 of the Developer Distribution Agreement.” Most believe the fee Mycelium charged bitcoin traders may have resulted in the removal of the app. Current users of the app will not experience any problems.
BitX Brings its Bitcoin Services to Indonesia
http://newsbtc.com/2015/02/10/bitx-brings-bitcoin-services-indonesia/
BitX, a bitcoin company focusing on emerging markets, has recently opened up office in the capital of Indonesia, Jakarta. Most believe Asia is becoming the prime arena for bitcoin adoption. BitX raised nearly $1 million in funding in August and is now expanding its operations.
Coinbase Discontinues its Bitcoin Tipping Services, Backs ChangeTip
http://newsbtc.com/2015/02/11/coinbase-discontinues-bitcoin-tipping-services-backs-changetip/
Coinbase, the popular bitcoin wallet and exchange, announced today that it will discontinue its bitcoin tipping services as of April 1st. Coinbase has decided to support ChangeTip instead, which they believe “has some better traction and done a great job at pushing the tipping ecosystem forward.” Many believe that Coinbase’s tipping services was also a waste of the company’s resources against other core focuses.
Trucoin Expands; 31 States Now Covered
http://newsbtc.com/2015/02/11/trucoin-expands-31-states-now-covered/
Trucoin, a bitcoin company that allows its users to buy bitcoin instantly using a MasterCard or Visa, has announced that six more states have been added to its roster. Customers from California, Pennsylvania, Delaware, Utah, Nevada and Missouri will now be able to buy bitcoin from Trucoin. The company has also announced that it has increased its daily buy limit to $1000. Trucoin now serves a total of 31 states.
Meet the 13 Candidates Running in Next Week’s Bitcoin Foundation Election
http://www.coindesk.com/13-candidates-bitcoin-foundation-election-2015/
Elections for the Bitcoin Foundation are set for February 13th to the 19th. The February election will aim to fill the two individual membership seats currently held by outgoing executive director Jon Matonis and current chief scientist Gavin Andresen. The 13 candidates vying for these two spots include Jim Harper, Bruce Fenton, Theo Chino, Michael Perklin, Jeremy Gardner, Cody Wilson, Dima Starodubcev, Olivier Janssens, Francis Pouliot, Vinny Lingham, Scottg Morgan, Bayan Towfiq and Colin Gallagher.
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