How much consensus? How smart of contracts?

by ~tocwex, published on

Bitcoin is a technology for decentralized consensus about global value allocation; often accompanied by the saying fix the money, fix the world.

Smart contracts are economically-incentivized, programmatically-enforced contract law; thus the saying code is law.

Of course, Bitcoiners yell at the shitcoiners that all the other 'crypto-currencies' are scams or stupid or whatever. As they should, because Bitcoin and everything else are fundamentally different mechanisms and it is important to maintain the distinction. And shitcoiners yell at Bitcoiners that Bitcoin is slow, technologically stunted, can't do smart contracts, blah-blah-blah. As they should, because it doesn't do those things. But really both sides of this yelling match is midwit-tier analysis paired with a base human instinct for tribalism instead of understanding that these things are, and ought to be, different. But this isn't a piece about the Bitcoiners vs shitcoiners. Instead, it is a perspective on how L1 smart contracts should be perceived.

So, lets just take as truth that there is a fundamental difference between Bitcoin and other Layer 1 blockchain protocols, reinforce that Bitcoin as the best 'money' needs to remain, global, permissionless, decentralized, and censorship-resistant; and attest that 'Smart Contract Platforms' (Ethereum, Solana, Cardano, Polkadot, take your pick of L1 networked protocols) may all have different competing use cases which may not need to be global, decentralized, or even permissionless, but that they are not as good of technologies for decentralized conensus about global value allocation. Agreed? Good. Let's continue on the topic of contracts. Specifically, those from the era of quill and ink to today.

What does the current legal contract landscape look like? Supreme Court cases, burdensome regulatory environments, small claims disputes... Sure, thats a part of it. But it is just the tip of the iceberg. The vast majority of the legal contract landscape is dark to the outside observer or anyone not a party to the agreement. IOUs between family members, rental/lease agreements, and even just verbal agreements to transact in goods and services. These are all contracts, most of which are fulfilled, and--even those which don't conclude with everyone fully satisfied-- settled without outside intervention. So what do we know about most of these contracts?

  • No contracts need to be agreed upon by everyone in the world, and very few need to be globally transparent. Why would someone in Malaysia care about the terms of a contract for painting an apartment building in NYC?
  • Conflict remediation is so expensive it is often not worth the effort or cost to pursue a formal judgement against a bad actor, so other mechanisms for dissuading negligent or malicous behavior are needed to reduce cost.
  • Reputational impact in the marketplace is often used instead of formal remediation as an avenue for resolving conflicts.
  • Most modern legal contracts are not globally enforced, rather they will come with a claim of jurisdiction which contains it's own ruleset.
  • Real world contracts often give a lot of leeway to things that are unlikely (but not impossible) to occur.

These things haven't changed in hundreds of years, and while there is certainly room for improvement--whether in precision of agreements, lowering conflict resolution costs, or verifying authenticity of the parties--pushing everything about the contracting relationship into smart contracts isn't going to happen. Nor should it. But muh-blockchain, muh-defi, muh-jpegs! Yeah, yea, yea. We get it, this technology is cool. Global State Machines are cool. I am not contesting that it will do really cool things. Transform finance, upend insurance markets, secure voting mechanisms. Fine. We should go and do all that. But we also need to have some perspective about where economic activity and human agreements occur.

There are ~30M developers in the world, some tiny subset of that who understand developing smart contracts, and they are more expensive than lawyers (rightly or wrongly, and one could argue that they are the lawyers of the digital age). Comparatively, there are 30M small businesses in the US alone which regularly contract with counterparties in billions of different ways. And sorry, but those contracts aren't all going onto the global state machine because the gas / transaction fees alone would be more than the value of 99.9% of the contracts themselves. And for the ones that aren't? Now you'll have to go down into the weeds of auditing code for bugs, figuring out oracles for verifying prioprietary information or work completion, or bickering over specific snippets of code because if you can't get it exactly right, you don't have a contract at all. For the vast majority of contracts that aren't naval gazing finance derivatives, that just isn't going to work. If these are all that smart contracts become, then regardless of claims of 'decentralization', all that these platforms will do is move power from a concentrated group in the legacy system, to a concentrated group in the new system as they will be the only ones able to operationalize ideas through technical expertise and capital while everyone else is stuck on the sidelines.

That isn't to say we can't use modern technology to improve the day to day user experience of contracting. We absolutely should. But it means taking a step back from the hype and understanding the actual use case. So what do most legacy legal system contracts include?

  • References for counterparties within a trusted network of contacts for market level reputational enforcement
  • Generalizable formats from legal expects paired with agreement specific terms from contracting parties
  • Contract execution mutually agreed to, but kept private to the parties, and mutual agreement of fulfillment conditions
  • Jurisdicitonal State level escalation pathways and enforcement mechanisms.

Each of these mechanisms is be reassessed in the world of smart contracts, but the vision of the industry is somewhat clouded by the conflation of Bitcoin & it's properties (namely global consensus) with L1 smart contract platforms and their use cases (currently programmable money and NFTs).

So to state it explicitly: 'Not everything requires global consensus'.

Now, some chains are beginning to address this in a technical sense with sharding/helixes/graphs (take your pick of name or technical nuance), along with off-chain computation, naive rollups, or other tricks. But in the end, current L1 protocols and dApps are really only focusing on the escalation pathways and economic enforcement elements of what legacy contracts entail. They do that enforcement nearly perfectly. But extrapolate that out; what would the world look like if all contracts always needed to go to court, have a jury try facts, and then enforce a judgement? It would be a nightmare, even if assisted by computers and code. Our informal and formal systems of contracting evolved because they were most efficient given the technology of the day. Just because we have new technology, though, doesn't mean we should throw out centuries of learnings about how to create an efficient system for peer-to-peer agreements. What we need to do is build technology and solutions which take one of humanities greatest strengths--Our broadly pro-social behavior and ability to build trusted relationships--and supports that in an technologically advanced manner.

So let's assume enforcement and jurisdictional questions will sort themselves out (at that is what the 'crypto' industry is currently most focused on) and instead look again at the other list items, recharacterizing them slightly in the context of smart contracts.

  • Persistent actors with networked reputations, rather than infinitely generateable unintelligible wallet or account addresses, and lasting reputation and efficiency gains for incentivizing ongoing contractual relationships including channels for publicizing positive and negative reputational information across a given market or community.
  • Templatized contract terms which can be reviewed by professional experts once (lawyer and/or developer), and then have specific terms applied by subject matter experts (such as a sales person or product team) who have Microsoft Office-tier technical skills.
  • 'Off-chain', peer-to-peer contract creation and agreement, with escalation pathways for reputational and potentially economic enforcement of terms, where the contract can be kept off chain if there is no dispute.

As humanity moves properly into the digital age, these are the problems that Urbit will help fix as a clean-slate OS for the 21st century. By providing a lasting and cryptographically owned identity, fundamentally linked to a functional deterministic operating system, with inbuilt peer-to-peer communications and encryption, Urbit offers a path for contract creation and enforcement much more in line with historical human experience and societal evolution. This means the possibility of an intuitive user experience that brings the economic activities of non-technical actors into a digitally native landscape.