(Not So) Smart Contracts

Monday, August 07, 2017

A couple of years ago, I commented on how implausible-sounding to me it was that "unbreakable" blockchain contracts could see widespread application. As it turns out, even some of the less hyped-up aspects of the idea are impractical, as someone who understands blockchains far better than I points out. I'll quote the Gideon Greenspan, CEO of Coin Sciences, on the matter of guaranteeing payment at a certain time, since that was an aspect of the example I considered back then:

Here's another proposal that we tend to hear a lot: using a smart contract to automate the payment of coupons for a so-called "smart bond". The idea is for the smart contract code to automatically initiate the payments at the appropriate times, avoiding manual processes and guaranteeing that the issuer cannot default.

Of course, in order for this to work, the funds used to make the payments must live inside the blockchain as well, otherwise a smart contract could not possibly guarantee their payment.

Recall that a blockchain is just a database, in this case a financial ledger containing the issued bond and some cash. So, when we talk about coupon payments, what we're actually talking about are database operations which take place automatically at an agreed time.

While this automation is technically feasible, it suffers from a financial difficulty. 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. And if you think about it, this is a completely obvious outcome.
That's hardly the only difficulty the idea of smart contracts encounters due to the nature of blockchains. So I guess we will have to wait a little while for cryptolawyers...

-- CAV

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