Introduction: There are three things that deserve the most attention in the current international blockchain industry. The first is that digital currencies and digital assets have entered the international political and financial game. The intervention of national power may change the value logic of digital assets such as Bitcoin, and bring technological innovation in this field from "barbaric growth" to "arms race". The second is the major upgrade of mainstream blockchain infrastructure, which may bring a hundred or even a thousand times performance improvement in two or three years. The third is the Web3 revolution. Among these three, we pay more attention to the Web3 revolution. Although this innovation movement has just emerged, it has demonstrated its huge explosive power and potential. We believe that Web3 may lead blockchain applications to "go from virtual to real", and may inspire a new wave of innovation that will sweep hundreds of millions of Internet users and subvert the existing global digital economic landscape.

In the process of in-depth research on Web3, we have gained a new understanding of the well-known technology of smart contracts. We firmly believe that smart contracts will play a key and pillar technical role in the Web3 revolution, but they also have some key shortcomings, and smart contract tokenization should be a must in promoting the Web3 revolution. To this end, we plan to write a series of articles to share our thoughts and findings, and welcome exchanges and advice from all walks of life.

Whenever the market is weak and volatile, people complain that the entire blockchain industry is too speculative and call for the emergence of killer mass applications. Although the total value of the digital asset market once approached 3 trillion US dollars, there is indeed no mass application that can sweep billions of users and is irresistible like email and web surfing. For the digital asset market, killer applications can not only create new star asset categories, but more importantly, provide a huge "utility anchor" that can enable many other digital assets to gain utility and establish a stronger connection with billions of users, thereby reducing the volatility of the entire market. Now, Web3 has become a new focus. People hope to eventually make breakthroughs in new fields such as GameFi and SocialFi, and produce killer applications that will be sought after by hundreds of millions of users.

It is certainly right to look forward, but some treasures are not in front of us, but behind us. They are good ideas that have been thought of before, and even products that have been made. But for various reasons, the potential of these good ideas has not really been realized. Maybe they only need some improvements, and they have the opportunity to become real killer applications.

We believe that smart contracts are such things.

Vitalik Buterin once said in a tweet in 2018 that he regretted using the name "smart contract" and should have used a more boring and technical name, such as "persistent script". In the context, his original intention was to say that because the name "smart contract" is high-end and classy, ​​it has attracted too many political, economic and legal experts to imagine, leading to various discussions such as code is law and cryptographic laws, which have exceeded the capabilities of the technology itself.

Vitalik Buterin tweets

In fact, in a sense, this just shows that the name "smart contract" is too good, and it has a global impact far beyond expectations. But from another perspective, Vitalik probably also sincerely believes that Ethereum's smart contract technology is not worthy of such a high-sounding name as "smart contract".

Smart contracts have the potential to become mass-market applications

Most ordinary people learn about blockchain and digital currency because of various legends of getting rich quickly and showing off wealth. These legends may make some people fantasize and eager to try, while others feel disgusted and sneer at them. However, no matter which reaction it is, it unfortunately conceals the essence of blockchain. In fact, the essence of blockchain is very simple. It is a technology that ensures that all parties keep their promises. Its most simple prototype is the pinky swear between children, and there are only two native applications. One is the distributed ledger, which derives the digital currency application, and the other is the smart contract.

"Contract", also known as "contract" or "covenant", is a legally binding agreement established between several free persons. It is a concept with great weight in the development of human society. As the "Bible commonly worshipped by all factions of the French Revolution", Rousseau's "The Social Contract" points out that an ideal society is built on the contractual relationship between people, which can be said to position the contract as the foundation of modern social civilization. Napoleon's "Civil Code" in 1804 initially established "freedom of contract" as the basic principle of all modern and contemporary civil laws. Today, the contemporary social order and legal system in which most of the world's population lives are built on the basic concept of "contract". The "decentralization" that the blockchain circle talks about is actually just a technical realization of the concept of "freedom of contract".

However, unlike most sophisticated political and legal concepts, "contract" is also a basic tool that each of us uses frequently. From currency, IOUs, tickets, employee cards, coupons and other tickets, coupons, cards, and certificates, to labor contracts, rental contracts, insurance contracts, company charters, investment agreements, user agreements and other agreements, everyone in modern society lives under the constraints of contracts at all times, and often needs to conclude new contracts with others, or show contract evidence to others to obtain certain rights.

The “Ideal” and “Reality” of Smart Contracts

Therefore, if "smart contracts" are really worthy of their name, then first of all, they should be a tool used by the public every day, even to the extent that "people use it every day without knowing it". Secondly, since it is called "smart contracts", it has the advantage of "intelligence". Specifically, smart contracts can interact with the outside world, perceive and confirm the conditional status, and self-enforcing the contract terms according to the conditions. This ability can undoubtedly greatly reduce the execution cost of contracts and improve the efficiency and accuracy of contract execution. People usually say that when a technology increases the efficiency of a certain job by 10 times, it will cause a revolution. But if smart contracts are properly applied, they can increase the efficiency of contract execution by tens of millions of times, so it is undoubtedly hugely revolutionary.

More importantly, smart contracts are a technology that takes "integrity" as its core value proposition, and "integrity" is highly respected in the mainstream value system of all civilized societies in the East and the West. If smart contracts can be widely used, combined with the trustworthy and tamper-proof account and data management capabilities provided by DLT technology, it can greatly increase the difficulty of default, reduce the cost of law enforcement, standardize business and social collaboration, eliminate the vast majority of fraud, and make subsequent investigation and knowledge very easy. For a society ruled by law, smart contracts are nothing less than a technology at the level of civilization leap. People may have various concerns about private digital currencies for various reasons, but it is difficult for anyone to find any legitimate reason to oppose the application of smart contracts unless he is willing to openly admit that he wants to obtain improper benefits through default.

Considering all this, if we go back to 2016, when Ethereum smart contracts were just becoming available, it would be a very reasonable expectation to think that smart contracts themselves would become a killer application and the rising star of the entire blockchain application. By 2022, this application should have captured hundreds of millions of users and entered many industries. For example, merchants and individuals should use smart contracts to generate IOUs, warehouse receipts, create tickets, discount cards, coupons, leases, passes, property certificates, etc. Financial institutions should launch a large number of financial products based on smart contracts, artificial intelligence manufacturers should develop equipment and machines that can be managed by smart contracts, and enterprises should use smart contracts to manage office space and organize departmental collaboration.

But as we know, this did not happen. Until early 2022, in second-generation blockchains such as Ethereum, smart contracts were mainly used as a technical component (building blocks) by developers to create and use. Ordinary users and even professionals were very far away from smart contracts, let alone putting them into daily use as a tool.

Of course, we can say that the development of decentralized finance (DeFi) is a little comforting. Over the past two years, DeFi has grown more than 200 times and has become the only bright spot in smart contract applications. There is a reason for this. The special feature of financial business is that its core product is financial contracts, and there is nothing else. Therefore, it is just right for smart contract applications, and it is reasonable to be the first to land. Leading projects in DeFi such as Uniswap, Aave, Compound, and Curve are actually a group of smart contracts at their core, and their business is to "sell" these contracts. Therefore, it can be said that the success of DeFi just confirms the judgment that "smart contracts should become the killer application of blockchain."

But even DeFi has achieved very limited success, with only 4 million users involved, and only a few hundred thousand active users. Many well-known DeFi products have only a few hundred active users per day. And due to the particularity of financial services, the entire DeFi community is built on the passion of "obtaining high returns", swinging greatly between greed and fear, and cannot provide a strong "utility anchor" for the entire industry. More importantly, although many technical mechanisms of DeFi should be able to be used in traditional finance, there is no sign of this so far.

In short, although smart contracts have the potential to become killer applications in theory, they have not really achieved such market success in more than five years of practice. On the other hand, this has also hindered the Web3 revolution, making it difficult for a large number of Web3 applications to be implemented immediately or to demonstrate their huge competitive advantages.

External friction and decisive internal factors

What is the problem? What is preventing the large-scale application of smart contracts?

The first reason that most people can think of is definitely the limitations of external infrastructure, supporting equipment and insufficient applications, as well as the cost issues caused by these limitations, such as:

• The performance of blockchains such as Ethereum is not enough to support large-scale consumer applications;

• Gas fees are too high and fluctuate wildly;

• The imperfection of large-scale decentralized storage technology;

• Consumer-level apps such as mobile wallets are not widely used, etc.

In addition, the lag in relevant legislation and supervision has also seriously restricted the pace of smart contracts entering traditional fields, such as:

• Major economies around the world have not yet launched legal digital currencies on blockchain, nor have they given existing digital assets on blockchain a clear legal status;

• None of the world’s major economies has developed a rule system for putting assets on the blockchain;

• None of the major economies in the world have promulgated supporting laws and regulations to protect the rights and interests of on-chain digital assets.

As a result, smart contracts are like a housewife without rice, and their unique skills are useless in traditional industries.

The above reasons are indeed important. But if we look closely, we will find that these factors can be summarized as "external friction", or external factors. Either the infrastructure is not strong enough, or the legislation and supervision are sluggish. In short, the problems are external and the faults are others'.

Common sense tells us that external factors are certainly important, but internal factors are often more decisive. Is there a deeper problem that has caused the application of smart contracts to fail to develop as it should? Is it because the design and technical implementation of smart contracts themselves still have important defects that have prevented them from stimulating external consensus and support, and failing to form a situation where "many hands make light work"?

We believe that such internal factors do exist. The current mainstream implementation of smart contracts does have some shortcomings, and perhaps these shortcomings are the key factors that hinder the large-scale application of smart contracts.

To see the shortcomings of current smart contract technology, let us first imagine what functional features an ideal smart contract mass application should have.

First of all, as the protagonist of this application, the smart contract should be a concrete and visual digital object, just like a digital document with a graphical interface that can be interacted with by fingers, keyboard and mouse. Concreteness and visualization may be the most critical step for smart contracts to move towards mass application.

Second, an ordinary user without any programming training should be allowed to create and customize the smart contracts he needs in a very intuitive way, and the complexity of the operation should be lower than that of spreadsheet software such as Excel.

Third, ordinary users can easily create safe and reliable smart contracts without having to worry about the risks and losses caused by code vulnerabilities and hacker attacks. They can get double protection in key processes. For example, transactions can be rolled back under certain conditions, or arbitration can be used to mediate and adjudicate complex disputes, etc.

Fourth, users can easily discover, verify conditions and connect with each other, allowing parties to enter into contracts with confidence through simple digital signatures.

Fifth, it is necessary to ensure that smart contracts can be accurately and reliably executed automatically.

Sixth, the holder of the contract has the right to transfer or sell the contract if permitted. After the contract is transferred, the relevant rights and obligations are automatically transferred to the new holder.

Seventh, under the premise of being allowed, the holder of the contract can freely financialize the contract. The concept of financialization is relatively abstract and has different meanings in different application scenarios. For example, in some cases, financialization means that the contract can be securitized, fragmented, and homogenized, while in other cases, financialization means that it can be used as collateral. In the context of DeFi, this also means that contracts as an asset should be able to enter various mainstream DeFi protocols.

Eighth, smart contracts should also provide some assistance for things beyond their capabilities. For example, they can obtain off-chain data immediately through "oracles". Another example is that they can generate legal documents in natural language, using the judicial mechanism of the real world to make up for the lack of code capabilities, and so on.

Summary: Current smart contract flaws

Smart contracts are a key innovation in the second-generation blockchain represented by Ethereum. After several years of development, it can be said that the deterministic, automated, and precise execution of smart contracts (Article 5 above) have achieved universally recognized achievements, and the current status of contract signing (Article 4) and off-chain data acquisition (Article 8) is also basically satisfactory. However, in terms of ease of use and liquidity, today's smart contract technology does have major flaws, which are specifically manifested as follows:

No concreteness, no graphical interface : Today’s smart contracts are a piece of virtual machine bytecode stored in the blockchain. They have no standardized appearance and can only be interacted with by writing a DAPP program or using professional development tools. This excludes ordinary users from using them. The direct consequence is what we often observe in practice: even under professional guidance, ordinary users are trembling and treading on thin ice when operating smart contracts through wallets or DAPPs. Moreover, they will forget what they have done after a period of time, which leads to a very poor user experience.

High difficulty and high risk in creation : Creating smart contracts should be a common function for ordinary users, but in the current blockchain, it must be implemented by professional developers through programming. And because loopholes and errors in smart contracts often cause huge economic consequences, smart contract codes usually have to go through a rigorous testing and auditing process, making the creation of smart contracts a difficult, high-risk, and high-cost task that ordinary users cannot master at all.

No ownership, no transfer : Ethereum and almost all mainstream second-generation blockchains implement smart contracts as independent, ownerless on-chain code objects, similar to "executable programs" and "dynamic link libraries" in traditional computer operating systems. Smart contracts can make detailed provisions for execution permissions based on user signatures, but they themselves have no ownership, that is, they do not belong to any other account. Therefore, smart contracts are not assets and cannot be transferred. In real life, contracts of course have owners. People sign and hold contracts, and can transfer the ownership of contracts to realize contract transfer. In this regard, the implementation of smart contracts is obviously counterintuitive.

Inconvenient for financialization : Financializing smart contract rights and interests and connecting them to the entire DeFi network is an important advantage of smart contracts over traditional contracts. The key innovation of Uniswap and Compound is to tokenize the LP contracts or savings contracts held by users and transform them into financial assets. However, the financialization of smart contracts does not exist by default, and there is a lack of relevant norms and agreements. Each DAPP must write specific code to implement it. This is a difficult task.

No ability to provide natural language contract text : Ordinary users will obviously need to obtain the accuracy and automatic execution capabilities of smart contracts for a long time, while retaining the advantages of natural language text contracts that are familiar, understandable, and can be connected to the real-world legal system. However, no blockchain smart contract currently implements this function, and no mainstream blockchain system even regards this as an important goal.

It can be said that today's major blockchain infrastructure innovators have not considered how to lower the threshold for using smart contracts, optimize the user experience, and connect to the external environment from the perspective of ordinary users. This may be the key internal reason why smart contracts themselves have failed to become the killer application of blockchain. We believe that if these problems can be well solved, the Web3 revolution will be quickly detonated. We will elaborate on this issue in the next article.