DAOs Are Not Scary, Part 1: Self-Enforcing Contracts And Factum Law
Smart Contracts: The Future of Self-Enforcing Contracts
Smart contracts have been around for several decades, but it was Nick Szabo who gave them their current name and brought them to the public's attention in 2005. The concept is simple: a smart contract is a contract that enforces itself. Unlike traditional contracts, which rely on a judge to order a party to send money or property to another party under certain conditions, a smart contract is a computer program that can be run on hardware to automatically execute those conditions.
The Vending Machine Analogy
Nick Szabo uses the example of a vending machine to illustrate the concept of a smart contract. A vending machine is a contract with a bearer, where anyone with coins can participate in an exchange with the vendor. The machine takes in coins and dispenses change and product according to the displayed price. The vending machine is a self-enforcing contract, where the internal mechanism of the machine ensures that the conditions of the contract are met.
Smart Property
The vending machine is an example of smart property, where the contract is embedded in the physical hardware. This is the oldest and most obvious solution to enforcing smart contracts. However, physical property has limitations, such as security and scalability. It is difficult to do anything interesting with more than a few tens of thousands of dollars with a smart-property setup.
Smart Money and Factum Society
To overcome the limitations of physical property, we need a new kind of money. Fiat money is put into existence and maintained by a government, while factum money just is. Factum money is a balance sheet with rules on how the balance sheet can be updated, and it is valid among a set of users that decide to accept it. Bitcoin is the first example of factum money, but there are more. Colored coins are an alternative rule that states only bitcoins coming out of a certain genesis transaction count as part of the balance sheet.
The Promise of Factum Money
The main promise of factum money is that it meshes well with smart contracts. The definition of the money or balance sheet is the result of executing all the contracts. This is a much more revolutionary development than it seems at first. With factum money, we have created a way for contracts and law to work and be effective without relying on any mechanism to enforce it.
Smart Contracts in Action
Smart contracts are effective for financial applications and swaps between two different factum assets. One example is a domain name sale, where a domain is a factum asset and money can be factum as well. Selling a domain is a complicated process that often requires specialized services, but in the future, you may be able to package up a sale offer into a smart contract and put it on the blockchain, and if anyone takes it, both sides of the trade will happen automatically.
Limitations of Smart Contracts
However, there are places where smart contracts are not so good. Consider the case of an employment contract, where A agrees to do a certain task for B in exchange for payment of X units of currency C. The payment part is easy to smart-contract-ify, but verifying that the work actually took place is impossible, since blockchains don't have any way of accessing the physical world.
Judges as a Service
Fortunately, there is a moderate solution that can capture the best of both worlds: judges. A judge in a regular court has unlimited power to do what they want, but in a cryptographically enabled factum law system, being a judge simply requires having a public key and a computer with internet access. Judges can specialize in determining whether or not a product was shipped correctly, verifying the completion of employment contracts, or appraising damages for insurance contracts.
The Future of Smart Contracts
The next part of this series will talk about the concept of trust and what cryptographers and Bitcoin advocates really mean when they talk about building a "trust-free" society. But for now, it's clear that smart contracts have the potential to revolutionize the way we do business and interact with each other. With the ability to create self-enforcing contracts, we can automate many processes and reduce the need for intermediaries. The future of smart contracts is exciting and full of possibilities, and it will be interesting to see how they develop and evolve in the years to come.
Implications
- Smart contracts have the potential to revolutionize the way we do business and interact with each other.
- Factum money and smart contracts can work together to create a more efficient and secure financial system.
- Judges can play a crucial role in verifying the completion of employment contracts and other tasks that require human judgment.
- The future of smart contracts is exciting and full of possibilities, and it will be interesting to see how they develop and evolve in the years to come.
Real-World Applications
- Smart contracts can be used to automate the process of buying and selling domain names.
- Factum money can be used to create a more efficient and secure financial system.
- Judges can be used to verify the completion of employment contracts and other tasks that require human judgment.
Technical Details
- Smart contracts are computer programs that can be run on hardware to automatically execute certain conditions.
- Factum money is a balance sheet with rules on how the balance sheet can be updated.
- Judges can specialize in determining whether or not a product was shipped correctly, verifying the completion of employment contracts, or appraising damages for insurance contracts.
