Smart Contracts: The Shocking Truth Behind Their Hidden Dangers
Smart Contracts: Not as Smart as You Think
Renowned security expert Bruce Schneier has long been skeptical about smart contracts, and for good reason. If we humans can’t always get our agreements right with traditional contracts, why would we expect computers to magically fix these issues? This question cuts to the heart of the problem with smart contracts.
The Never-Ending Cycle of Smart Contracts
Smart contracts are often just digital versions of old-school paper contracts. They don’t really bring anything new to the table in terms of how agreements are carried out, just a new way to record them. As Albert Einstein once said, doing the same thing over and over and expecting different results is the definition of insanity. So, are smart contracts just spinning the wheel without getting anywhere?
The Complex Reality of Contracts
Contracts are more complicated than they seem. They’re not just about the medium they’re written in; they’re like a voting system where parties rank their preferences. Here’s the thing:
- Contracts always involve more than just two parties.
- They’re inherently unfair because of the number of parties involved.
- All contracts can be gamed and manipulated.
That’s why we have judges and juries—to step in when things go wrong. But smart contracts want to cut out these middlemen, which should be a huge warning sign. It means that fraud could go unresolved.
The Ranked-Order System and Arrow’s Impossibility Theorem
A ranked-order system is where parties rank outcomes based on their preferences. The outcome is unknown beforehand because it depends on performance, and there’s no value left after an outcome is reached. This system is subject to the General Possibility Theorem, also known as Arrow’s Impossibility Theorem.
Back in 1950, economist Kenneth J. Arrow proved that no voting system can be completely fair and rational at the same time. This led to social choice theory, which looks at how individual preferences can be combined to make group decisions. These decisions form the policies, contracts, and agreements that bind parties together.
The Crucial Role of Independent Arbiters
In math and information theory, the Church-Turing thesis shows that a complex deterministic system can’t be proven to halt. This is one reason why we need independent arbiters, like judges and juries, for contracts. They provide a way to resolve disputes and ensure fairness.
The Bottom Line
Smart contracts might be innovative, but they’re not a cure-all for the problems that come with contractual agreements. They might offer a new way to record agreements, but they don’t tackle the big issues of fairness, manipulation, and the need for independent arbitration. As we keep exploring smart contracts, it’s important to keep these limitations in mind and remember the need for human oversight.
For further reading, check out Bruce Schneier’s blog post on the problem with smart contracts.
