In the last part of this series, we discussed what “smart contracts” are and how they can be used to create self-fulfilling agreements. We looked at the two main mechanisms – “force” and “factum” – that can be used to create these contracts. We also discussed the limitations of these contracts and how they can combine human judgement with automated execution to yield the best results. But what is the main purpose of these contracts? Why use algorithms instead of humans to regulate our relationships? These questions will be addressed in this article and the next one.
One industry, two stories
The first and most obvious advantage of using internet-powered technology to automate anything is the same as what we saw with the internet. Bitcoin already provides services in the areas of communication and commerce: it increases efficiency and lowers entry barriers. The publishing industry is a good example of this effect, which has major benefits for the traditional world. In the 1970s, before a book could be published, there were a number of middlemen involved. First, you would need a publishing company to do the publishing and marketing, as well as provide quality control for the consumer. Second, the book would need to be distributed, and eventually sold in every bookstore. Each part of the chain would get a huge cut. You would be lucky to receive more than ten percent of the revenue from each copy of the book as royalties. Notice the use of the term “royalty” – this means that you, the author, are just another part of the chain, who should be given a small share instead of being cut out. The most important person without whom the book wouldn’t exist in the first place.
Now let’s look at another example, but with a totally different industry: consumer protection or, more specifically, escrow. Escrow is a vital function in trading, especially online trading. When you buy a product online from either a small merchant or an online store, participating in a transaction in which neither party has a significant reputation, you can’t be certain that you will ultimately get something back. Escrow is the solution: instead of sending money directly to the merchant, you send it to an escrow representative. Once the agent confirms that you have received the item, the agent waits for the money to be sent. If you confirm, the escrow agent sends the money. If the merchant doesn’t want to ship the item, then the agent returns your money. If there is a dispute between the parties, an adjudication procedure begins and the escrow agent decides who has the better case.
However, as it is currently implemented, escrow management is done by central entities and is bundled with a host of other features. On eBay, for example, the seller can host their product page on a server. eBay also provides a search and price comparison facility, as well as a rating system to help buyers and sellers. eBay also owns PayPal, which acts as an escrow representative. This is the same situation that book publishing found itself in in the 1970s. eBay sellers receive a little more than 10 percent of their cash. So how can we create a perfect market using cryptocurrencies and smart contracts? If we were to be extreme, we could decentralize it using a model similar to Diaspora, allowing vendors to host their products on their own dedicated website, their own server, or a shared hosting site, using a system such as Namecoin to store their identities and maintain trust through the blockchain. However, we are now looking at a more simple and moderate goal: to separate the functions of the agent and the system. Fortunately, Bitcoin multi-signature transactions offer a solution.
Introducing Multigrade
Multi-Signature transactions allow a user to send funds to an account with three private key addresses. You will need two of those keys to unlock the funds. However, multi-signatures can also include 1 of 3, 6, or 9, or any other combination, but 2 of 3 is the most effective. It is easy to apply this to Escrow: set up a 2/3 escrow between buyer and seller. Have the buyer send funds. Once the transaction is completed, both the buyer and seller sign the transaction to complete the security deposit. If there is a dispute, an escrow agent will choose which side has the strongest case and sign a transaction to send the funds to them. Technologically, this is not an easy task, but it is possible. Bitrated is a site that is simple to use for most users.
Of course, in its current form Bitrated may not be perfect. It is used for trading and the interface is arguably not as easy as it could be
