Central banks complain today that innovation in cryptocurrency is too quick, and business adoption is too fast, for them to prepare their laws and lay down their rules as Moses did from the high mountain.
Cryptocurrencies’ response was to switch innovation to second gear by inching closer towards the implementation of smart contracts. David Zimbeck announced today the beta version of the “first known two-party electronic contracting system anywhere in the world” which he calls Bithalo for the protocol to be used with Bitcoin, Blackhalo for the protocol to be used with Blackcoin and NightTrader, a decentralized exchange. In a press release David Zimbeck stated that:
“Almost every sector of the economy that involves third parties runs the risk of loss to the consumer. This protocol now gives individuals full control over who they decide to trust and how they decide to structure that trust.”
“Smart Contracts” is a term coined by Nick Szabo in 1993 to describe a conceptual computer protocol which facilitates, verifies and enforces negotiations and the performance of a contract. In the process erasing the need for courts, brokers and other middlemen.
Our society’s solution to the evolutionary problem of cheating has been to create a complex system of laws and regulations enforced by a central authority, which in itself can often be unaccountable, but is generally effective at enforcing relations between two parties where its own interests are not affected. We need therefore to trust a third party, including parliament, the civil service and the courts, to adjudicate independently of their own self-interest. The dream of cypherpunks, the group behind PGP, TrueCrypt, Tor, Bittorents, and Bitcoin, for years, has been to do away with this trust in civil matters by firstly creating a decentralized e-cash and then by supplementing it with self-enforceable contracts, which cannot be cheated.
A Closer Step Towards Smart Contracts
A step was taken today in that direction. In a video tutorial preview of the software, the process is shown step by step, from the making of the offer, counter-offer, acceptance, to the transaction being shown on blockchain.
In an e-mail exchange, David explained a simple transaction of say 1 bitcoin or 1 blackcoin for $600. Firstly, the selling party sends the coins to be purchased, plus a deposit, to the escrow. The buying party in return sends only a deposit to the escrow, followed then by the sending of the 600 dollars. Once the dollars are received, both parties will want their deposits back, and the buying party will want the coins. Therefore ensuring that neither has any incentive to default, while the need for an agreement from both parties to release the funds ensures that neither can abscond with the funds.
In many ways, the implementation is simple, but innovative, as the need for a deposit adds another layer of security, which ensures that neither party has any incentive to cheat. A cheater would instead be punished via the withholding of his deposit; an ancient mechanism now implemented electronically with 100% certainty thanks to the irreversibility of cryptocurrency transactions.
The same protocol can be used for the purchase of goods or services as well as options or derivative trades. The process could erase the need for centralized websites such as Localbitcoins or other middlemen. It is likely to be highly useful in China and other more restrictive countries as it allows peer to peer and anonymous trading without trust, thus facilitating exchange between two individuals despite any existing restrictions.
The Golden Standard
Bithalo, Blackhalo and NightTrader, do not implement the inbuilt script system of bitcoin. A complex framework developed by Satoshi Nakamoto, which allows for the creation of complex smart contracts tied to each transaction. The Script Wikipedia page might seem forbidding to someone not well versed in computer science as it lacks any real world examples of ways the script programming language could be used. It does however detail a number of operations which in combination can limit the way a bitcoin is to be used at each step of a transaction, or if it can be used at all, unless certain conditions are met. In a new paper, researchers argue that:
“The ability to embed scripts [in Bitcoin transactions] is also revolutionary and can set up terms and obligations within the blockchains, since it provides the possibility to enforce certain behaviours and limit corporate greed.”
Unfortunately no one seems to have yet taken advantage of this feature and there remains no fully established attempts to build a user friendly system of smart contracts through the use of the Blockchain technology. A notable project in this sphere is Ethereum, which is still at a conceptual stage but promises a Turing-complete scripting language for smart contracts and uses its own coin, ether, in a way that somewhat differs from Bitcoin. A user friendly implementation of the Bitcoin script system on the other hand, as it pertains to smart contracts, would ensure a much more direct enforcement of a decentralized currency, with no funds risked either via a deposit or escrow, as simple iron coded rules dictate what must happen.
Bithalo, Blackcoin and NightTrader are nonetheless a welcomed first step towards the dream, now made possible by the blockchain, of self-enforcing, non-cheatable, non-univocally alterable, contracts. In this process, we as a community are creating a system of civil governance sans central laws and courts that can often be expensive, slow, at times arbitrary and on occasion unappreciative of the effects of our “one size fits” all decisions.
If you try Bithalo, Blackcoin or Nightrader, please share your experience below.
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