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Many Smart Contract Use Cases Are Impossible (2016) (coindesk.com)
134 points by flaviojuvenal on Aug 7, 2017 | hide | past | favorite | 36 comments



This article outlines the basic problem. If you want smart contracts that do anything off chain, there have to be connections to trusted services that provide information and take actions. If you have trusted services available, you may not need a blockchain.

The article points out that you can't construct an ordinary loan on chain, because you have no way to enforce paying it back short of tying up the loaned funds tor the duration of the loan. Useful credit fundamentally requires some way of making debtors pay up later. It's possible to construct various speculative financial products entirely on chain, and that's been done, but it's mostly useful for gambling, broadly defined.


"If you have trusted services available, you may not need a blockchain" assuming you can actually trust those services. In the U.S., among people in lower economic strata, this is not actually the case.

Matt Taibbi's recent book The Divide has a chapter on the abuses of our credit collections system. People are getting taken to court of debts they never actually owed in the first place, or already paid off. The lender has sold the loan to someone else, the records are lost, the borrower get "served" at an old address and never actually hears about the case, then loses to a default judgement for not showing up at court...and finds out about it when wages are garnished.

Here's a simple idea I came up with to fix that:

http://www.blunderingcode.com/ethereum-credit-cards/

It still uses the courts to enforce payment, but it uses the public blockchain to stop this nonsense about lost records and fraudulent attestations that they exist, while still protecting borrower privacy.


A lot of the issue with this is that people don't often know their rights. In most of these cases the person being sued can turn the tables and extract penalties from the debt collectors because they violate all sorts of laws that provide statutory penalty. Unfortunately no one reads the law until it affects them and often not even then.


I'm not a huge proponent on smart contracts, and I agree that it's a big problem enforcing payback, but that's no worse than regular loans. At least the ownership/transfership and payback of loans could be tracked, which is a far cry from the current method of debt ownership. It's extremely common for spreadsheets full of loans to be passed from owner to owner with no real ownership trail, accounting, etc, which I find disgusting.

Often fighting these loans is as simple as asking the owner to show proof of the loans in court, at which point they often evaporate, however it can be a long winding road to get there and often people just don't show up in court, or don't know, and get judgements against them that they might not otherwise owe. If the debt status was easily verifiable, it would be better for all sides (other than the bad actors) when it ends up in court.


> but that's no worse than regular loans

If the blockchain isn't enforcing payback, then it's just a normal transfer of money from one party to another. There's no smart contract needed.


it's not needed, but transfers using smart contracts could be more convenient than in other ways. It doesn't have to be a zero or 1 proposition. It's like saying cloud is not needed because we can do it on the desktop


> it's not needed, but transfers using smart contracts could be more convenient than in other ways.

Can you provide an example of this?


ok, so say I need to distribute payments. If I transfer money to a wallet and then a smart contract automatically takes care of sending the right amounts to the right wallets, it could be more convenient than current payment distribution solutions, no?


I think that's a poor example for the following reasons;

* if it's a one off payment to all recipients, why not just send it manually? * what happens when you need to add or remove recipients? Compared to just phoning up the bank to amend a standing order. * what happens if you accidentally pay someone the wrong amount? * what happens if you lose your wallet and you can't continue paying?

I would rather have a bank handle all of the edge cases and provide the consumer protections I want out of a payments/account system than some random script that I (or someone I have to pay) has to maintain that could be responsible for vast amounts of funds.


Sure, you can use the bank. Internally, the bank could do this on the chain though and give you all those protections, so you don't even need to do know the details


But why would the bank use the chain, the financial web of trust is already there and doesn't need to use a chain to facilitate internal or external transfers of monies. It would be a huge time sink with no real benefit to the consumer or the shareholders.


And yet banks are experimenting with blockchains, no?


They do, it's just that the way they do that has nothing to do with ETH or BTC http://www.r3cev.com/blog/2016/4/4/introducing-r3-corda-a-di...


Say this smart contract is aware of interest rates, and due dates, and minimum payments, ... and it will prioritize payments according to interest rate?

I wrote a program to help me do this with my student loans, that does sound useful.


You still need to be able to transfer the loan from party to party, and allow parties to prove ownership of the loan. That's not a complex contract obviously, but it's important.


OK, that makes sense. Just using it as a ledger for a blob of text about the loan


But a loan documented on the blockchain is just as assignable as one documented on paper, and a lender has no more incentive to agree to a clause prohibiting off-chain assignment than a clause prohibiting assignment without the borrower's knowledge or consent.


On the face of it, the lender has no more incentive, but having an unforgeable trail of ownership and payment may improve the value of the loan as it passes from hand to hand.

That all said, a blockchain is not really required. Better standards and a trusted third party would do fine.


Provenance is one of the 3 cases he recognizes in the opening section. Isn't the problem you describe provenance? His loan discussion focuses moreso on them being zero risk. Risk in loans is a feature, otherwise there's no point to paying interest and thus no point to the transaction.


"If you have trusted services available, you may not need a blockchain."

I would observe, though, that the word "trust" here does not mean universal trust. Two signatories to a contract may agree to trust a given oracle without affecting anyone else on the blockchain, or trust a combination of oracles, or etc. etc. If the trusted service is simply pushing "the price of tea in China" into the blockchain, then the blockchain may still be doing "real work" for your contract which involves other things.

"Decentralization" doesn't mean that every single contract won't ever use a central authority. It means there's no mandated one.


"If you have trusted services available, you may not need a blockchain."

You mean the way people should trust their governments.

"Paul Kagame re-elected president with 99% of vote in Rwanda election" https://www.theguardian.com/world/2017/aug/05/paul-kagame-se...


I have been saying this for quite sometime on this forum - contracts have to deal with ambiguous circumstances and expressly contemplate being resolved in courts. Ambiguity of contracts is a feature, not a bug, as it is in the interest of both parties to be able to argue about certain unanticipated events when they occur.

Quoting my own comments from a while back:

> The vast majority of contracts do not have syntactically testable conditions. They just don't. Whether the conditions in a contract have been met is very often a matter of huge debate - this is what "law suits" are about. Unless you can create a condition that is testable by code, you cannot have a contract that self-enforces with the block chain. The conditions set forth in contracts are extremely complex and reasonable people can differ. I cannot imagine how you would have a contract be triggered on the insolvency of a privately held corporation - good luck defining insolvency and good luck getting access to the underlying books. Copyright infringement is also a preposterous idea - the amount of semantic judgment that must be made to determine if a work is infringing is enormous. Only the very simplest of conditions - comparing numbers, checking the time, can be reliably automated, and if you are getting a lawyer to write your contracts, odds are there is substantially more complexity in the agreements than this, which is why you hired the lawyer in the first place. In addition, a fair portion of contracts that can actually be set up to work this already are - and the blockchain is not necessary. They are things like credit cards and they work pretty good without the blockchain.


Don't worry, if the developers don't like the ways contract turned out for them, they can always for the chain and revert it. Which is sort of like a court, right?


/s


That's why a strongly advocate for using Ricardian contracts over smart contracts in most cases. R contracts can contain standard legal prose while delegating specific clauses or portions to embedded smart contracts (embedded by hash or bytecode).


Even for things that smart contracts are capable of doing, the cost of doing them on a decentralised blockchain is often prohibitively expensive. For instace the Oraclize service, that does get external data into the contract, costs around $0.02, per API call. Which isn't much on its own, but they add up when compared to the number of API calls an average 'centralized' application makes.

I've often found that for quite a few applications, the cost of executing the contract on a blockchain outweigh the benefits of decentralisation.


This article is dated Apr 2016. "Oracles" seem to be the way now to inject external data. Oraclize[1] can apparently be provably kept trustable. Anyone with deeper knowledge of this?

[1] http://www.oraclize.it/


To summarize what oracles appear to do, they capitalize on information served via https and the verified status of the certificates used by sites, to have an independent party (the "notary") declare that the information was indeed produced by the party. So the signed statement is of the form -

   Entity E verified by certificate C said statement S on date D 
You can also get, for example, the TLSNotary [1] to sign a secure page's contents for you without sending over the contents to the service.

To me, this seems to form enough of a trust network to enable injecting external world data into blockchains, with certificate authorities as the linchpins.

Appreciate if any security folks here can take this apart and explain/validate/trash in detail.

[1] https://tlsnotary.org/pagesigner.html


I have not figured out how this would solve the problem of on-blockchain debt:

"If the funds used for coupon payments are controlled by the bond's smart contract, then those payments can indeed be guaranteed. But this also means those funds cannot be used by the bond issuer for anything else. And if those funds aren’t under the control of the smart contract, then there is no way in which payment can be guaranteed.

In other words, a smart bond is either pointless for the issuer, or pointless for the investor."


> I have not figured out how this would solve the problem of on-blockchain debt

There really is no problem, unless you have unrealistic expectations as to what a blockchain can do.

There’s essentially no difference between lending a company money, with which it purchases machinery, and lending this machinery directly to the company. Believing a blockchain can ensure that when I lend you my car (a form of machinery) I will get it back without a scratch, is simply unreasonable.


I don't know if you have a valid argument in general, but your specific example seems to be a bit off the mark. If I buy a conventional bond issued by a company and hold it until term, and the company does not default, I am owed coupon payments and a return of the principal. I am taking interest-rate, inflation and default risks, but not depreciation.

I expect an on-blockchain contract would have to allow for default (which I suppose it could, given a way to signal external events.) Currently, of course, this is handled through negotiation, arbitration, or ultimately the bankruptcy courts. It would certainly seem unrealistic to expect that to be replaced by smart contracts anytime soon.


You’re right. Only if we ignore depreciation of capital goods are the two examples equivalent.

But I was trying to convey the fact that money is just a replacement for physical goods, such that if the lender doesn’t purchase something with the lent funds, the loan would be meaningless. And as soon as the lender spends the lent funds, there’s a risk that it won’t be able to recover this cost. In other words, riskless credit makes no sense, since the presence of risk is why there’s a potential return for the lender in the first place.


It's one of the reasons why the use of the term contract is a misnomer and leads to awkward expectations as to what is possible.

Legally speaking, a contract is merely a promise enforceable in court.


The writer is lagging way behind bleeding edge blockchain research.

>1. Contacting external services ..Often, the first use case proposed is a smart contract that changes its behavior in response to some external event. For example, an agricultural insurance policy which pays out conditionally based on the quantity of rainfall in a given month.

The imagined process goes something like this: The smart contract waits until the predetermined time, retrieves the weather report from an external service and behaves appropriately based on the data received.

This all sounds simple enough, but it’s also impossible. Why? Because a blockchain is a consensus-based system, meaning that it only works if every node reaches an identical state after processing every transaction and block.

(see https://github.com/ethereum/wiki/wiki/Sharding-FAQ)

>3. Hiding confidential data ..Because even if one smart contract can’t read another’s data, that data is still stored on every single node in the chain. For each blockchain participant, it’s in the memory or disk of a system which that participant completely controls. And there’s nothing to stop them reading the information from their own system, if and when they choose to do so.

(see https://blog.ethereum.org/2017/01/19/update-integrating-zcas...)


This is a really good article to give to my clients who want the blockchain to do the impossible.


(2016)




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