Smart Contracts: Blockchain's Solution for the Underserved

With hype about the blockchain at peak fervor, and excitement about smart contracts growing, it is worth understanding what will drive consumer interest in these still-relatively new innovations.

I believe smart contracts are an immediate solution to the plight of the underserved. Here, I define the underserved not just as lower-income and rural users who lack a mainstream banking association but also the types of markets – such as gambling and predictions sites – that are typically restricted from service due to regulatory risk or other challenges. What is it about smart contracts technology that provides the service for these ventures that incumbent institutions cannot?

One of the principal properties that a smart contract offers is the ability for parties to escrow value without risk of censorship, moderation or theft. With smart contracts, the remitter can hold value directly in the blockchain, with release contingent on an outcome, and without the need of a custodian. The mechanism functions without an intermediary banking institution or other party holding the funds needing to be involved.

For gambling, derivatives and predictions markets the custody of funds is either poorly achieved with banks that face a harsh regulatory environment, or is not achieved at all. With smart contracts, bettors, investors and market participants can be matched in a peer-to-peer capacity with the network itself ensuring the security and availability of funds.

The growing popularity of peer-to-peer markets provides fertile ground for smart contracts technology to spread even further. As smart contracts mature, web browser, forum and chat software will begin to offer seamless integrations for their users. It can be expected that users of these platforms will be able to engage in more customized value exchanges merely by communicating across information providers, and without the need for funds to be deposited in a banking institution. And with the reduction in overhead associated with many forms of financial control and regulatory compliance, users can be expected to receive service with a corresponding reduction in the overhead that was previously required to facilitate the exchange of value in these markets.

For example, it can be expected that international remittance needs will be serviced between users in ways that bear little resemblance to the current world of remittance and payment transfers. Actors without the means of filling out the appropriate business registrations and filings germane to a centralized remittance system will be free to engage in commerce with nothing more than a smart contract that executes a value exchange based on a deliverable ordered by computer code.

Some projects already underway harness the peer-to-peer and blockchain frontiers to service derivative traders. The Veritaseum project uses smart contracts to match derivative traders with each other without the need for a custody holder to manage or control the traders' funds. This project facilitates the matching of peers and announces the "winners" in a derivative trade merely by broadcasting market information between the parties, leaving the winning party to redeem value off the blockchain by way of this announcement. Other companies facilitate similar peer-to-peer value transfers but for purposes besides than derivatives settlement. For example, Streamum enables users to pay for video content in one-second increments. More ambitious still is the company Joystream, which uses peer-to-peer file transmission to award payments by an announcement of bytes that have been transferred between users.

Smart contracts also hold promise for the expansion of "microtransaction" services, which use cryptocurrency to execute payments of less than a dollar and as low as single-digit cents. Incumbent systems are far too difficult and inefficient to navigate for those who wish to work with small amounts of money. Blockstream is leading the way in this field, with its highly anticipated Lightning Network. Once complete, this network will allow for content producers to send small amounts of money over the bitcoin network quickly, and without custody risks, by leveraging a complex network of interconnected accounting hubs across the Internet at speeds much higher than the bitcoin network currently allows. The ultimate potential of this approach remains to be seen, but integration into web browsers will likely make this function frictionless and commonplace.

Though some companies are announcing bold steps in the realm of smart contract technology, success outside the world of bitcoin has thus far has been limited. Many providers are stopping short of the smart contract technology's real potential in servicing the underserved by omitting the ability to transmit value. Examples of such companies include Eris, R3CEV and Digital Asset Holdings. These firms aim to provide programmatic applications to account for value but without actually delivering any value. Whether this approach offers any efficiency for the underserved appears dubious as the registered assets being traded on their platforms will be entirely subject to the pressures that prevent incumbent systems from serving such customers.

It remains to be seen what functions in the smart contract environment will be serviceable through private ledger networks under our current regulatory guidelines. By contrast, there is no shortage of public network offerings for underserved markets being developed by clever programmers. Their success is only expected to grow.