May 8, 2023
3 min read
A Succinct Intro to Web3
For the first time in history you can use a cryptographic network to enforce complex sets of rules and reach consensus between multiple parties, with validity assurances provided by the base layer’s consensus engine.
Society operates on trust. A human’s perception of reality is subjective, driven by bias. Thus, when multiple parties fail to reach an agreement, third parties are summoned.
Loan origination, margin calls, dispute arbitration are three of many such examples of processes that involve trust in arbitrary, “certified” third parties that suffer from the same biases as beings of flesh and blood, but ideally who were trained to be as neutral and objective as possible. A properly specified smart contract has no such biases. An account will get margin called and liquidated if a predetermined set of conditions agreed upon are met. Nuance is a social construct. In the world of cryptographic agreements, code is law, and the law is enforced by the blockchain’s consensus engine and its validators.
Liquidity risk audits and other forms of state of the art accounting and reporting advisory techniques are made obsolete by smart contracts where data is available on a continuous basis. Risk can be managed autonomously, and the preconditions audited by anyone. Thus, to use a set of smart contracts is to implicitly agree with its preset risk parameters and conditions. The notion of being governed by laws you consented to is extremely powerful, as legitimate authority can only be derived by consent, and this is one of the many reasons blockchain technology has created a cult like following, captured viral growth, and continues to excel in Customer-Led Growth.
We have explored some of the use cases smart contracts excel in, and while they show enormous potential to reduce friction and reduce inefficiencies, there are times where trust cannot be eliminated in its entirety. For instance, if one wanted to put a fulfillment system on the blockchain, it would require an arbitration system. What if a package was never delivered and the two participating parties failed to reach consensus on the delivery status or the validity of the item received?
Trust cannot be completely avoided, but it can be minimized through the use of blockchain technology. In this example, one could outsource arbitration to a random set of on-chain “arbitrators” and, through game theory and cryptography, incentivize them to reach consensus anonymously, therefore sourcing the wisdom of the crowds in an impartial manner. An under/uncollateralized loan is yet another example of a scenario in which trust cannot be eliminated, and there are certainly many others, but in every case these systems can be made fairer and far more transparent than their legacy counterparts.
And although the main reasons for the success and popularity of this technology lie in their transparency, fairness, composability, and programmability, many C-Suite executives fail to harness its power and needlessly spend resources on pilots that bear no fruit, solve imaginary problems, and are out of touch: built on permissioned blockchains with centralized validator sets and without the security assurances that come with more mature solutions like Ethereum and its rollups. The reasons cited have little merit and indicate a lack of understanding of what is possible with Distributed Ledger Technology.
This article explored smart contracts, contracts whose rules are enforced by blockchain technology. In subsequent articles, we will zoom in on particular use cases and how you can harness this technology to not only improve the fairness and transparency of your company’s operations and processes, but also power Customer-Led-Growth.