Bitcoin public chain promotes the smart contract revolution

In this article, Chris DeRose, community director at Counterparty Foundation and a software developer, discusses the potential and problems of smart contracts, which some market observers see as a key application of blockchain technology.

As research around “smart contracts” transitions from academic curiosity to the forefront of FinTech, people are beginning to notice the concept of “smart contracts” that is both strange and familiar, but most market observers still don’t know how this revolution in the field of value transfer works.

Smart contracts are digital agreements for assets that determine where the underlying assets are and how they will be executed. These are all based on events in the network, routed autonomously by the economy, without the intervention of a custodian. The application potential of this financial instrument is huge.

How exactly does smart contracts work? What makes them different from similar financial logic solutions in modern banking systems that we have been accustomed to for decades?

The establishment of the Bitcoin blockchain is the main breakthrough in realizing the technological innovation of smart contracts. Before the blockchain, "programmable money" was just a concept that remained in fantasy and could not be realized.

In the blockchain, only the two parties to the "contract" have access to their funds. When the contract is deployed, the funds will be "allocated" to the contract by the blockchain. During this process, no party can use the funds until the contract expires.

By removing the escrow agent, no party or counterparty can control or manipulate the funds once the contract is in effect and is being executed.

Target Market

Who needs smart contracts? Is anyone willing to use an immutable solution? In fact, for any institution that wants to remove the custody of funds to gain regulatory benefits, the functionality of smart contracts can meet their needs.

On the other hand, the functionality of smart contracts can also make up for the lack of relevant services in many parts of the world, where there is either a lack of fund custodians or, worse still, unlicensed and unsafe custodians.

Currently, there are two types of “blockchains” on the market: public blockchains like the Bitcoin blockchain and distributed ledgers (sometimes called “private blockchains”).

Both systems have shortcomings in their current forms that limit their potential for widespread adoption.

There are several obvious ways that private blockchains lose the efficiency of smart contracts. The main issue is that bearer assets are not supported, so there is no custody of any form of value. This means that although funds are allocated by the "distributed ledger" or "private blockchain", the manipulation issues and regulatory barriers will still exist when funds pass through the existing network.

This begs the question - why don't custodians execute user code on their own servers, perhaps with a password to verify receipts. So far, however, users have not needed this functionality in registered assets, but will there be any efficiency developments here? It is still unclear.

If you believe that “blockchain” is a digital asset-carrying technology invented by Satoshi Nakamoto, then public blockchains must be the implementation form of all smart contract efficiencies. However, these new systems also face some tricky technical obstacles.

Among them, the concept of "fungibility" is still the source of a large part of the obstacles of these systems, because although the holders can determine the distribution of securities, regulators and manipulators can still set up roadblocks in the execution of smart contracts.

So far, only the Bitcoin blockchain is addressing this challenge, offering a potential solution in the form of “confidential transactions” and “coin mixing”.

Another obstacle, and a source of much debate, is the “hash strength” of public blockchains. Simply put, this fuel represents the energy required to maintain a blockchain.

As the revenues of institutions that enforce contracts on public blockchains rise, the cost of disrupting a blockchain will also increase. In the case of Bitcoin, the cost of disrupting a blockchain is about $1 million per day, which is not much for large institutions, but still very large.

By comparison, Ethereum, the blockchain technology considered to be the next generation smart contract platform, has a “hash rate” of about $25,000 per day and is easily disrupted.

More effort needed

While the potential for automation and efficiency in this emerging field is huge, there are some significant shortcomings that are rarely discussed within the technology space and exist in all of our current implementations.

One such drawback in the current state of blockchain design is that the code inside a smart contract needs to be visible to all parties in the network.

For many types of financial transactions, these onerous restrictions mean that after funds have been committed, unrelated parties in the network can actively trade with previously unknown outcomes, which can be detrimental to the parties involved.

This means that non-participants in a smart contract on the blockchain can hoard or sell an asset because they have information that one party is about to end a trade at a loss. In addition, smart contracts are necessarily slow by virtue of their wide network broadcast. Although many private distributed ledgers claim to have faster speeds, they are still slow in the world of current systems for registering assets for transactions.

Smart contracts are likely to have the same user community as Bitcoin in the beginning - people and amateurs who are dissatisfied or lack related services.

While banks may try to move towards this technology as they have with blockchain, they will find that traditional messaging systems are more suitable for the confidentiality of information and the high throughput and reliable transmission required to execute settlement strategies.

Fortunately, blockchain breakthroughs have finally allowed this technology to leave the halls of academia and head to the marketplace. Today, the technology has thousands of the most talented minds in fintech working tirelessly to scale this wonderful innovation to meet the needs of modern financial institutions.

Original article: http://www.coindesk.com/bitcoin-and-public-blockchains-will-power-the-smart-contracts-revolution/
By Chris DeRose
Translator: printemps
Editor: printemps
Source (translation): Babbitt Information (http://www.8btc.com/public-blockch…smart-contract)