Bitcoin evangelist, public speaker and community director of the Counterparty Foundation, Chris DeRose is also a journalist and software developer.
In this feature, DeRose examines both the promise and problems related to smart contracts, the autonomous financial products that some market observers see as a key application for blockchain technology. As the study of ‘smart contracts’ went from strange academic curiosity to the cutting-edge of FinTech, most market observers are still wondering just how this revolution in value transfer works.
Smart contracts, for those who still don’t know, are small bits of code attached to an asset, which determines where and how the underlying asset will perform based on events in the network. The promise of financial instruments that are routed through the economy autonomously, and without need for intervention by a custodian, is immense.
But exactly how does such a technology work? And what makes a smart contract different from similar solutions for financial logic that have been commonplace for decades in our modern banking system?
The creation of the bitcoin blockchain was the principal breakthrough that has enabled this innovation, and which is chiefly responsible for renewed excitement. Before the blockchain, the notion of programmable money was a feeble promise.
After all, any programmable money was ultimately overridden by the custody holder of the funds involved, and this meant that incumbent routing restrictions would override all network functions. Incumbent systems are necessarily designed so that the holder of the funds is the agency through which any programmatic logic would be applied.
This escrow restriction leaves little room for the development of features that have removed middlemen or enabled regulatory arbitrage.
With a blockchain, only the two parties involved in a ‘contract’ have access to their funds, and when a contract is deployed, these funds are determined by the blockchain to be ‘allocated’ […]
