As far as digital currency has come, the passing of bitcoin for purchases is still a relatively primitive transaction.
But what if you could program such transactions to occur at pre-ordained times, under set circumstances, and even involving a preregistered group of multiple counterparties? Scanning your groceries triggers paying the grocer. A football score automatically leads to movement of funds between anyone who bet on the game.
And what if you could use similar technology to pre-program transactions such as the payout of a derivative or other security, all done through a public ledger system such as blockchain without the risk of intervention or the inefficiency created by the involvement of an intermediary counterparty agent?
To a certain extent, that day is already here through the development of “smart contracts” – a concept that predated bitcoin itself. The term – first coined by one of bitcoin’s alleged creators, Nick Szabo, in 1993 – essentially means “programmable money” or self-automated computer programs that can carry out the terms of any contract. The finer points of what programmable money is are still being worked out by enthusiasts, but most agree that it is a financial security held in escrow by a network that is routed to recipients based on future events, and computer code.
The original technology around smart contracts was mostly a thought exercise that sat dormant for over a decade until programmers could find a useful medium in which smart contracts could exist. That medium was finally available through the world’s first blockchain in 2009. Unknown to most people, all bitcoin transactions are smart contracts. Many institutions, which are increasingly exploring the use of blockchains for value settlement, have been similarly dabbling in the application and uses of smart contract technology.
But the potential benefit of smart contracts has only scratched the surface. The nature of bitcoin’s design is such that most of these transactions are limited to the mere passing of bitcoin itself, without much consideration to the world outside of the bitcoin network. The principal feature that bitcoin lacks, and which is needed by most financial institutions, is called "Turing completeness.” Named for famed mathematician Alan Turing, such completeness allows computer language to carry out a wider array of more precise instructions – to simulate all conditions in the natural world.
A growing number of public blockchains have explored ways to harness smart contracts for
So why did the original bitcoin network stop short of enabling Turing completeness? It was omitted from bitcoin not because of limitations in the understanding of computer science concerns but instead due to the economic incentives that such power would create. Supporting such a powerful ability for programs to execute transactions exposes the blockchain to the risks of economic forces, which may compromise the blockchain's security. Enabling a blockchain to process the economic value of high-valued assets increases the profit that could be captured by bad actors who would seek to disrupt market activity by disrupting the blockchain's performance. However, competitors to bitcoin haven't been nearly as bashful when offering competing designs.
Chief among these competitors is the so-called
In the public blockchain space, only the
Other small steps in expanding smart contract options through the public blockchain space have come through announcements by firms such as
Much like the other projects in the blockchain and distributed ledger space, it would be expected that private blockchains will remain a staging ground for corporations to prototype their contracts as public networks reach maturity. However, as firms quickly realize that far more robust financial platforms for algorithmic processing already exist in trusted environments, smart contracts on these platforms will likely be relegated to that of mere curiosities as the medium of trustless public settlement fully develops.
Chris DeRose is the community director of the