Evolution of the Smart Contract, Shifting Definitions… and a 'Smarter' Social Contract?

For the Genaro Network’s blockchain, as for other blockchains, the concept of smart contracts is integral to the usefulness of the chain. Without their application there would be no way to guarantee (in any practical sense) the transfers of value that these new networks are powered by. The growing trust of humans in the new world of blockchain would have no solid basis. Yet, as we see from the increasing investment of all sorts of resources in blockchain – money transferred into cryptocurrency for a plethora of reasons, new hiring drives from new companies, attention from a huge audience – elements in the technology are becoming deeply trusted. Core ideas, the smart contract in particular, are moving towards a state of requiring no further proof. In addition, successful applications of the concept are not confined to blockchain.

While different definitions are offered, the smart contract can perhaps best be seen as akin to other forms of automation. For us now living in an age where the delegation of greater numbers of tasks to machines is entirely normal, the smart contract can be thought of as an encoded version of the ancient legal instrument. It engages people with other actors via the digital world economy using protocols and cryptography as a means of guarantee, rather than courts or arbitrage. In their blockchain-oriented version, they do so with decreasing need for intervention from human agents or central authorities – they provide the form for the pillars supporting an emerging ‘decentralized economy’.

The smart contract executes operations under certain conditions, just as a classic legal contract contains terms and conditions, with expectations for parties and consequences for actions taken or not taken by signatories – like other kinds of automation, their adoption promises greater speed for many tasks while opening new opportunities and consequences, including some that go beyond the original purpose of the automatic tool and its creators.

The possibility of smoothly integrating smart contracts into daily activity is the basis for creating a project like the Genaro Network, where having a public blockchain – thus obviating the option of many kinds of top-down intervention – places the emphasis on the cryptographic consensus mechanism and the possibility of reliable smart contracts that will comprise the DNA of future Decentralized Applications (DAPPs).

Hungarian-American computer scientist and legal scholar Nick Szabo is the originator of the concept. However, in his original paper on it (1996, ‘Smart Contracts: Building Blocks for Digital Markets’) he mentions other experimenters in the digital field and also acknowledges standard instruments that represent precedents, from the SWIFT and EDI payment systems for banks and corporations to the standard Point of Sale machines for credit cards. He even focuses on the “humble vending machine” as the chief forerunner: one inserts money into the machine, expecting one of a number of predetermined things to occur. Thus there is a core of simplicity in the idea – one perhaps designed to be the basis of trust at a time when the public still regarded the idea of mixing up personal finance and the internet with a wary eye. In a digital age, he asks, “What parts of our hard-won legal tradition will still be valuable?” The answer he goes on to give is that modern computers can keep secure, and if necessary private, complex encoded versions of legal agreements and principles. (Szabo’s mention of the importance of property rights and their deep influence on civilization is connected to Austrian liberal economist Friedrich Hayek, e.g. The Fatal Conceit)

The elementary outline nevertheless foreshadows immense breakthroughs which could be said to extend beyond the sense of a classic contract. Calling them “contracts embedded in the world,” and defining them as capable of integrating classic contractual clauses in “the hardware and software we deal with, in such a way as to make breach of contract expensive… for the breacher”, Szabo goes on to state that “Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property… controlled by digital means.” This is something of an understatement. In this paper are contained the legal and economic theories that would lead directly to the bitcoin and blockchain revolutions, both of which are ongoing and the results of which are far from certain. In fact, in reading Szabo’s mixture of proposals and Cassandra-like predictions, it is hard not to see shades of other upheavals happening as I write: the internet of things, advancing automation and the hasty penetration of algorithms into the tissue of daily life.

In the Ethereum whitepaper, Vitalik Buterin describes smart contracts explicitly in terms of asset transfers. They are “systems which automatically move digital assets according to arbitrary pre-specified rules.” Immediately following this he introduces what he calls the “logical extension” of the mostly singular, focused and two-way smart contract precedent – the ‘decentralized autonomous organization’ or DAO, essentially a mass of smart contracts intelligently coded to bring an entirely automatic company to life. Here is another definition from Szabo, in a talk given some 20 years later, eight years post-bitcoin: “[A smart contract] is a machine programmed with rules that could have been expressed in a contract but are instead performed by a machine – or a machine verifies performance.” (Szabo, Smart Contracts Symposium Keynote Speech, Chamber of Digital Commerce Dec 2016)

In this keynote Szabo describes how smart contracts are already an active part of life – and have the potential to be embedded more deeply. The last clause in the definition/statement might be a nod towards how blockchain evolved different architectures of verification around different kinds of action, the key one for cryptocurrencies being the transfer of assets. Yet for him the working parts of bitcoin, taken together, should rather be considered a DAPP, rather than a (set of) smart contracts and cryptographic tools. Also smart contracts are embedded in an increasing number of non-blockchain applications, with successful ventures like Uber relying on them as a core component in their management systems. 

The expansion of possibilities and the shifting definitions of terms are important. In the intervening years, and especially in the last 4-5 as blockchain has developed post-Ethereum, ‘smart contract’ has come to be used in a broader way. All of the complex working elements of blockchains and DAPPs create an ‘ecosystem’ that rises above the original sense of an explicit coded pact between parties. In some ways the wider community has appropriated the term. In usage it now describes – according to Wikipedia – the “general purpose computation that takes place on a blockchain or distributed ledger.” In some ways the mechanisms governed by smart contracts begin to resemble the famously “implicit” terms of the ‘Social Contract.’ (‘Social Contract’ being the idea that an individual citizen and his or her state are bound together by tacit rules and responsibilities).

 What Comes Next: Further Decentralization… Universality?

Doubts swirl around the viability, value and even hazards represented by decentralized projects. Yet consider the evolution of bitcoin and blockchain over the past near-decade. Early adoption by enthusiasts was overshadowed by the controversy of silk road which was then superseded by the intense second phase of tech development and a swelling community of users and makers. The launch of Ethereum and a new generation of cryptotokens and startups fueled a speculative frenzy and added to intense volatility in the price of bitcoin. As this situation continues, a steadier upswing in actual real-world adoption has also been happening: ‘top-down’ adoption by powerful interests in fintech and logistics, and ‘bottom-up’ adoption by individuals, most interestingly in the developing world, where value transfers may be kept safe from corrupt or antagonistic governments or third-party entities that charge high fees. Meanwhile a baffling diversity of legislative responses from the world’s governments keep many imagining extreme outcomes for the entire phenomenon.

In the midst of blockchain excitement and unpredictability, smart contracts keep a steady movement through to normalization. Szabo encourages us to remember that Uber and food courier company Deliveroo have been setting a powerful precedent in algorithmic management. If the decentralized blockchain+smart contract expansion continues, he advises, then decentralized versions of services like this that distribute profits among the core service providers may well be possible. Similar arguments are being made about potential disruption to social media giants. Decentralized blockchain+smart contract structure has a number of commanding reasons to become the dominant model, in Szabo’s view – especially when one considers that MT Gox and Bitfinex hacks were made possible by the centralized nature of the exchanges.

A Proposal: Can Blockchain Use Smart Contracts to Build a ‘Smart Social Contract’?

Finally, consider the failure to live up to the Social Contract by banks and other entities that ushered in the 2007 crisis, precipitating the launch of Bitcoin. In a scandalous series of developments, many national banking giants were able to ‘decentralize’ or offload the losses arising from their own poor judgement on the citizens of their nations (having centralized the profits); they counted on being ‘too big to fail’. The farcical interaction of national governments with financial and international bodies was painful to watch: in my own country of Ireland, the leadership agreed with little negotiation to accept loans totaling more than a hundred billion euro to prop up previously private banks upon which European banks were leaning for repayment of investments, leaving a population of 4.7 million with some of the highest debts in the EU. The credibility of financial regulators and politicians was deeply compromised, and few consequences fell upon the banks themselves. Robust reforms to prevent such an occurrence from happening again are still absent. 

What about writing those reforms into code? A smart contract, designed to liquidate the assets of a bank if that bank were to fall below a certain capitalization, could be a sobering instrument. It would not require the bureaucratic tap dance that the last crisis provoked – and would leave the regulator with credibility intact and the overall system unshaken. In Ireland, the government eventually created a new entity to handle the assets inherited by the state following the banks’ and their customers’ insolvency. (NAMA) was itself mired in corruption accusations later – such as properties sold back to the original owners years later at artificial prices. An alternative to the ‘liquidation’ protocol could also take the form of a ‘tokenization’ whereby capital would be converted to digital tokens backed up by other assets such as the notorious properties retained and (mis-)managed by NAMA. If that example seems too parochial, remember that mounting debts, regulatory confusion and expensive bailouts are problems for economies around the world. The 2007 catastrophe was concentrated around debts in the west, but the next big debt crisis might occur elsewhere, perhaps among the ‘developing’ BRIC behemoths.

One fact is undeniable: despite the large hacks and historic failures, millions of people now trust that when they execute a blockchain operation, certain results will follow and will be verified and recorded on a permanent ledger. The effectiveness of this and other transactions is due to the smart contract idea and the years of effort that developers and supporters gave over to it – and in a collective determination to try an alternative system, something that perhaps already implies a new ‘Social Contract’.