DAOs Are Not Scary, Part 2: Reducing Barriers

at Last part of this series, we talk about what a “smart contract” (or, more precisely, a “self-executing contract”) is, and go into detail about the two main mechanisms by which these contracts can have “enforcement”: smart assets and “true” currencies. We discussed it. . We also discussed the limitations of smart contracts and how smart contract-based legal systems can combine human judgment and automated execution to achieve the best results. But what is the point of this contract? Why automate? Why is it better to have our relationships regulated and controlled by algorithms rather than humans? These are the difficult questions we want to address in this article and the next.

A tale of two industries

The first and most obvious benefit of using Internet-based technologies to automate anything is exactly what the Internet and Bitcoin already offer in the areas of communications and commerce. That means increasing efficiency and lowering barriers to entry. One very good example of this effect delivering meaningful benefits in the traditional world is the publishing industry. In the 1970s, if you wanted to write a book, there were a lot of opaque, centralized intermediaries you had to go through before it got to the consumer. First, you need a publisher who also handles editing and marketing and provides quality control to consumers. Second, the book must be distributed and ultimately sold in individual bookstores. Each section of the chain is cut into large pieces. Eventually, you may be lucky enough to receive royalties of 10% or more of the revenue generated from each copy. Note the use of the term “royalties.” This means that you, the author of the book, are simply another external part of the chain. that much Without the most important people, the book wouldn’t have existed in the first place. Things are much better now. Now we have separate printing companies, marketing companies and booksellers, each with clear, defined roles and plenty of competition in each industry. If you don’t mind keeping it purely digital, you can publish it on Kindle and get 70. %.

Now let’s consider the example of a very similar, but completely different industry: consumer protection, and more specifically, escrow. Escrow is a very important function in commerce, especially online commerce. When you buy something from a small online store or an eBay seller, you’re participating in a transaction where neither party has a decent reputation, so there’s basically no way to be sure that you’ll actually be successful when sending money. Actually get whatever you have to show. Escrow provides a solution. Instead of sending money directly to the seller, you first send the money to the escrow agent, and the escrow agent will wait until you confirm that you have received the item. If you confirm, the escrow agent will send the money along, and if the seller confirms that they cannot send the item, the escrow agent will return the money to you. If there is a dispute, the adjudication process begins and the escrow agent decides which side is more advantageous.

However, as it is implemented today, escrow is handled by a centralized entity, along with numerous other functions. In the online marketplace ebayFor example, Ebay provides servers on which sellers can host product pages, product search and price comparison capabilities, and a rating system for buyers and sellers. Ebay also owns Paypal, which actually moves money from sellers to buyers and acts as an escrow agent. Essentially, this is exactly the situation in book publishing in the 1970s. But to be fair, Ebay sellers get more than 10% of their money. So how can we create an ideal market using cryptocurrencies and smart contracts? If you want to take it to the extreme, you can use a model like Diaspora, where sellers have access to specialized sites, their own servers, or Decentralized Dropbox implementation, use a system similar to Namecoin for merchants to store their identity and maintain a web of trust on the blockchain. However, what we are seeing now is a more moderate and simpler goal than separating the escrow agent’s function from the settlement system. Fortunately, Bitcoin provides a solution: multi-signature transactions.

Introduction to multi-signature

Multi-signature transactions allow users to send funds to an address that has 3 private keys, so you need 2 of those keys to unlock the funds (multi-signature could also be 1/3, 6/9, etc, but in reality 2/3 is most useful. Applying this to escrow is simple: create a 2/3 escrow between the buyer, seller, and escrow agent, have the buyer send funds to it, and then when the transaction is complete, the buyer and seller Sign the transaction. Complete escrow. If a dispute arises, the escrow agent will choose which side has a more compelling argument, sign the transaction, and send the funds. A bit complicated on the technical side, but fortunately Bitrate We’ve created a site that makes the process very easy for the average user.

Of course, Bitrated in its current form is not perfect, and there isn’t much Bitcoin commerce that uses it. The interface probably isn’t as easy as it could be. Especially since most people aren’t comfortable with the idea of ​​saving specific deal-specific links for weeks on end. It would be much more powerful if integrated into a full-featured interface. Seller Package. One design is Cryptokit-Similar to a web app, it displays a “public” list of purchases and sales to each user and provides each user with “Confirm”, “Accept”, “Cancel”, and “Dispute” buttons. Users will then be able to interact with the multisig system as if it were a standard payment processor, but after a few weeks they will receive a notification to confirm or dispute the purchase.

But what will Bitrated achieve if it gets its interface right and starts to see mass adoption? Once again, the answer is lower barriers to entry. It is difficult to break into the consumer escrow and arbitration business today. To become an escrow service, you essentially need to build an entire platform and ecosystem so that consumers and sellers can operate through you. Also, you can’t just be the person who escrows the money. First of all, you must also be the person transferring the money. Ebay needs to have and control Paypal for even half of its consumer protection to work. With Bitrated, everything changes. Anyone can be an escrow agent and mediator, and marketplaces such as Ebay (perhaps CryptoThrift or coming Ego) may have a rating system for buyers and sellers as well as moderators. Alternatively, the system could handle arbitration in the background, similar to how Uber handles taxi drivers. Anyone can become a moderator after going through a screening process, and the system automatically rewards moderators with good ratings and fires those with bad reviews. The fees will be much lower than the 2.9% charged by PayPal alone.

smart contract

Smart contracts typically take this same basic idea and take it much further. Instead of relying on platforms like Bitfinex to hedge your Bitcoin holdings or speculate in either direction with high leverage, you can use blockchain-based financial derivatives contracts with decentralized order books to avoid central parties taking fees. The ongoing costs of maintaining an exchange, complete with operational security, server management, DDoS protection, marketing and legal costs, can probably be replaced by the one-time effort of creating a contract in less than 100 lines of code, without having to do another task. can. -Time and effort to create a pretty interface. From that point on, the entire system becomes free, excluding network costs. File storage platforms like Dropbox could similarly be replaced. But hard disk space costs money, so the system won’t be free and will likely be much cheaper than it is now. It also helps level the market by making it easier to participate on the supply side. Anyone with a large hard drive or a small hard drive with extra space can make money by simply installing the app and renting out the unused space. .

Rather than relying on legal contracts using costly (and particularly inefficient in international settings and poor countries) court systems, or on moderately costly private arbitration services, business relationships are governed by smart contracts that require that part of the contract. can be. Human interpretation can be separated into several specialized parts. There will be judges who specialize in determining whether a product can be delivered (ideally by the postal system itself), judges who specialize in determining whether a web application design meets specifications, and judges who specialize in deciding certain kinds of property insurance claims for a $0.75 fee. can. We will have contract writers who are skilled at reviewing satellite imagery and integrating each image intelligently. Specialization has its advantages, which is why societies have gone beyond chasing bears with stone clubs and picking berries. However, one of the weaknesses of specialization was the fact that it required intermediaries to manage and function, especially intermediaries to manage the relationship between two people. middleman. Smart contracts will almost completely eliminate the latter category, lowering the barriers to entry within each now-reduced category while allowing for a much higher level of specialization.

But these efficiency gains are only one piece of the puzzle. The other part, and perhaps the more important part, has to do with diminishing trust, a topic that is important to many cryptocurrency advocates. We’ll cover this in the next installment of this series.