Tag: decentralization

Smart Contracts: Mission Possible

In the last article for 2021, I shall touch on one of the exciting topics in technology for the last decade. For sure, with its novel approach, blockchain technology managed to change and shape our technical landscape during that period. These days crypto is brutally adopted, and many people use cryptocurrencies every day. Additionally, we could see the mass adoption of NFT and how it changed the art industry. We saw many platforms making ICO as a replacement for IPO. All of these would not be possible without blockchain.

But what is blockchain? Essentially, blockchain is an append-only database system in which every transaction is cryptographically signed. Your digital identity is presented by a pair of public/private keys. The algorithms use these keys to encrypt/decrypt and sign/verify the data coming into and out of the database. These same keys are used to identify your wallet in the standard crypto-currencies world. However, a traditional key/value database system is not enough for real-world usage, which is why almost all blockchain networks now offer smart contracts. 

Every smart contract is a programming object with a lifecycle happening in the blockchain network. Additionally, every interaction with it is recorded and cryptographically signed with the same set of public/private keys used for your digital wallet. With such capabilities and a way for sending money, the blockchain networks offer pretty exciting opportunities:

You can see a standard workflow of using a smart contract on the diagram. The seller and buyer provide data to the code deployed in the blockchain, and it is executed to fulfill the contract
  • Replacement of standard contracts: In one ideal World, crypto would dominate people’s legal operations. It has all the tools for doing that, and many platforms, including IBM’s Hyperledger, offer such capabilities. Instead of signing on paper, people use digital signatures, and the system’s distributed nature ensures that no malicious modification can happen.
  • E-voting: Many people believe that we could replace the standard paper-based voting system entirely with the progress of zero-knowledge proof protocols. Indeed, the technology is promising and could offer genuine authenticity during the voting experience in the future. However, its current state (aka not supporting actual programming language experience) is hardly helpful for anything other than checking a simple boolean expression.
  • Decentralized Economy: In our current capitalism-based world, the parties issuing the money control the market. With the rise of crypto, that’s no longer true because now everyone can start issuing tokens and dictating how the market operates. And this is extremely helpful for smaller communities, which can detach themselves from the centralized issuing authority.

In conclusion, blockchain is quite existing technology, but unfortunately, it is still not mature enough for mass adoption. The main concern is that it is still possible to track the money transfers and identify the real people behind the public/private key pairs despite being anonymous. The same is true for smart contracts and e-voting – for sure, no one is going to be happy if people have access to her/his real estate’s notarial act or know for whom he/she voted. 

How cryptocurrencies can help small communities?

One of the things I like the most about the cryptocurrencies model is that it gives an alternative. An alternative to the standard financial model, where you have a centralized certification authority and issuer, which issues new coins, banknotes, or whatever is the name of the payment object for the payment system. One big problem with that system is that it leads to centralization and naturally converts the places with issuer rights (aka central banks) into cosmopolitan districts. The traditional banking system gives them much more economic power than the smaller and more rural communities.

In comparison with cryptocurrencies, everyone can open a bank. We even can choose whether to have a distributed or centralized issuing model. In Bitcoin, for example, the issuing model is a distributed one, and this choice regularly leads to significant fluctuations in the exchange rates with the standard fiat-based currencies. Additionally, there is a cap on the number of Bitcoins, which can be issued, and this way, there is no realistic option for fighting inflation or even speculations. Having that in mind, I think we could agree that the Bitcoin model is far from ideal and could only play a digital alternative for gold, which automatically means that Bitcoin is not a currency in the traditional sense.

On the diagram, you can see a standard blockchain architecture, where the ledger is distributed, leading to distributed transaction signing and verification

Let’s analyze what will happen with the other model of a centralized issuer and no cap for issuing new coins. Still, it is essential to note that the transaction verification will remain distributed, such as in Bitcoin, but we will centralize only the issuing part. For sure, the model will need a legal way to inject itself into the standard fiat financial model and play nicely with it. At the same time, if we want to increase the local communities’ economic power, we shall need a solid local legal government-based entity doing the coin generation. And such a legal entity is the local area municipality.

Such an idea will effectively transform every municipality into a local central bank issuing new coins based on the economic stats for the metropolitan area governed by it. Additionally, at the moment, all the taxes are sent to the centralized bank. Once per year, the government decides how to distribute these taxes to all different city areas’ budgets. As an alternative, with the proposed model, we could choose to receive 30% of our income in the local municipality cryptocurrency and even pay our taxes on this 30% to the local municipality-based bank. Furthermore, the municipality could use this money to plan its budget.

In conclusion, cryptocurrencies can give us quite interesting financial alternatives. For sure, the exchange rates system between the different local municipality-based currencies will be an exciting problem to solve. However, we should keep in mind that we are already solving this problem globally, and we could take inspiration from how it is already solved. Some smaller cities and towns already tried issuing their cryptocurrencies. But, without the local taxes part, such endeavors are not economically viable and will not lead to any mass scale change.