Smart Contract Tokenization and Web3 Revolution (1): Why Haven’t Smart Contracts Become the Killer Application of Blockchain?

Introduction: There are three things that are most worthy of attention in the current international blockchain industry. The first is that digital currency and digital assets enter the international political and financial game, and the intervention of state power may change the value logic of digital assets such as Bitcoin, and bring technological innovation in this field from “barbaric growth” to “arms race”. The second is the major upgrade of the mainstream blockchain infrastructure, which may bring a hundred or even thousand-fold performance improvement within two or three years. The third is the Web3 revolution. Of the three, we are more concerned with the Web3 revolution. Although this innovative movement has only just emerged, it has already demonstrated its enormous explosive power and potential. We believe that Web3 may lead the blockchain application to “get away from the virtual and turn into reality”, and may inspire a new wave of innovation that sweeps hundreds of millions of Internet users, subverting the existing global digital economy pattern.

In the process of in-depth research on Web3, we have a new understanding of smart contracts, a well-known technology. We firmly believe that smart contracts will play a key and supporting technical role in the Web3 revolution, but they also have some key shortcomings, and Smart Contract Tokeniaztion should be the key to promoting the Web3 revolution a required option. To this end, we plan to write a series of articles to share our reflections and findings, and welcome the exchange of ideas from all walks of life.

Whenever the market is weak and volatile, people complain that the entire blockchain industry is too speculative, calling for the emergence of killer mass applications. While the total value of the digital asset market was at one point close to $3 trillion, there really hasn’t been an irresistible mass application like email and web surfing that can sweep hundreds of millions of users. For the digital asset market, killer apps can not only create new star asset product categories, but more importantly provide a huge “utility anchor” that enables many other digital assets to gain utility and connect with hundreds of millions of users Forging stronger connections, thereby reducing volatility across the market. Now, Web3 is the new focus. People hope to eventually make breakthroughs in new areas such as GameFi and SocialFi, resulting in killer apps that are sought after by hundreds of millions of users.

It is certainly right to look ahead, but there are treasures that are not ahead, but behind us. They are good ideas that have been thought of before, and even products that have been made. But for a variety of reasons, the potential of these great ideas hasn’t really been realized. Maybe with just a few improvements, they have a chance to become a real killer app.

We believe that a smart contract is one such thing.

Vitalik Buterin once said in a tweet in 2018 that he regretted using the name “smart contract”, but should have used a more boring and technical name, such as “persistent script (persistent script)”. Judging from the context, his original intention was to say that due to the high-end atmosphere of the name “smart contract”, it attracted the imagination of too many experts in political, economic and legal sciences, resulting in various such as code is law, password law, etc. discussion, beyond the capabilities of the technology itself.

Smart Contract Tokenization and Web3 Revolution (1): Why Haven't Smart Contracts Become the Killer Application of Blockchain?

Vitalik Buterin 推 文

In fact, in a sense, this just shows that the name “smart contract” is too good to have a global impact far beyond expectations. However, from another point of view, Vitalik may also sincerely believe that the smart contract technology of Ethereum is not worthy of the name of “smart contract”.

Smart contracts have the potential to become mass adoption

Most ordinary people know about blockchain and digital currency because of various legends about getting rich and showing off their wealth. These legends may make some people dream and be eager to try, while others are nauseated and sneered, but no matter what. Either response, unfortunately, obscures the essence of blockchain. In fact, the essence of blockchain is very simple, it is a technology to ensure that all parties keep their promises. Its most simple prototype is the pinky swear between children, and there are only two native applications, one is a distributed ledger, which derives a digital currency application, and the other is a smart contract.

“Contract”, also known as “contract” and “contract”, is a legally binding agreement established between a number of free people, and is a very important concept in the development of human society. As the “commonly admired Bible” of all factions of the French Revolution, Rousseau’s “The Social Contract Theory” pointed out that the ideal society is based on the contractual relationship between people, which can be said to position the contract as the foundation of modern social civilization. . Napoleon’s Civil Code in 1804 initially established “freedom of contract” as the basic principle of all modern civil law. Today, the contemporary social order and legal system in which most of the world’s population lives is based on the basic concept of “contract”. The “decentralization” that the blockchain circle is talking about is actually just a technical realization of the concept of “freedom of contract”.

However, unlike most advanced political and legal ideas, the “contract” is also a basic tool that each of us uses regularly. From currency, IOU, tickets, employee cards, coupons and other tickets, coupons, cards, certificates, to labor contracts, rental contracts, insurance contracts, company articles of association, investment agreements, user agreements and other agreements, in modern society Everyone lives under the constraints of contracts all the time, and often needs to conclude new contracts with others, or show others contract evidence to obtain a certain right.

The “ideal” and “reality” of smart contracts

Therefore, if the “smart contract” really lives up to its name, then it should first be a tool that is used by the public every day, even to the extent that “the people use it every day without knowing it”. Secondly, since it is called “smart contract”, it has the advantage of “smart”. Specifically, smart contracts are capable of interacting with the outside world, sensing and confirming conditional states, and self-enforcing contract terms based on conditions. This capability can undoubtedly greatly reduce the execution cost of contracts and improve the efficiency and accuracy of contract execution. Often people say that a revolution occurs when a technology makes a job 10 times more efficient. However, if smart contracts are properly applied, the efficiency of contract execution can be increased by ten million times, so it is undoubtedly a huge revolution.

More importantly, smart contract is a technology with “integrity” as its core value proposition, and “integrity” is respected by the highest standards in the mainstream value systems of all civilized societies in the East and the West. If smart contracts can be widely used, combined with the credible and tamper-proof account and data management capabilities provided by DLT technology, it can greatly improve the difficulty of breach of contract, reduce law enforcement costs, standardize business and social cooperation, and eliminate the vast majority of fraudulent behaviors. , and makes it very easy to trace and know after the fact. For a society ruled by law, smart contracts are nothing less than a civilizational transition-level technology. People may have concerns about private digital currencies for various reasons, but it is difficult for anyone to find any legitimate reason to oppose the application of smart contracts unless he is willing to openly admit that he wants to obtain undue benefits by defaulting .

Taking these into account, if we go back to 2016, when Ethereum smart contracts just became available, it is a very reasonable expectation to think that smart contracts themselves have become a killer application and the star of hope for the entire blockchain application. . By today in 2022, the app should have captured hundreds of millions of users and entered many industries. For example, businesses and individuals should use smart contracts to generate IOUs, warehouse receipts, create tickets, discount cards, coupons, leases, passes, real estate certificates, etc. Financial institutions have launched a large number of financial products based on smart contracts, and artificial intelligence manufacturers can use Devices and machines managed by smart contracts, enterprises use smart contracts to manage office spaces and organize departmental collaboration.

But as we know, none of that happened. Until early 2022, in second-generation blockchains such as Ethereum, smart contracts are mainly created and used by developers as a technical component (building blocks). Ordinary users, and even professionals, are very far from smart contracts, let alone put them into daily use as a tool.

Of course, we can say that the development of Decentralized Finance (DeFi) is a little comforting. In the past two years, DeFi has grown more than 200 times, becoming the only bright spot in smart contract applications. There is of course a reason for this. The peculiarity of financial business is that its core product itself is a financial contract, and there is nothing else. Therefore, for smart contract applications, it is just the right choice, and it is reasonable to take the lead. The core of leading projects such as Uniswap, Aave, Compound, and Curve in DeFi is actually a set of smart contracts, and their business is to “sell” these contracts. Therefore, it can be considered that the success of DeFi just confirms the judgment that “smart contracts should become the killer application of blockchain”.

But even DeFi’s success is very limited. The total number of users involved is only 4 million, and the real active users may only be hundreds of thousands. Many well-known DeFi products have only a few hundred daily activities. Moreover, due to the particularity of financial business, the entire DeFi community is built on the enthusiasm of “obtaining high yields”, swinging between greed and fear, and cannot provide a strong “utility anchor” for the entire industry. More importantly, although many technical mechanisms of DeFi should be used in traditional finance, there is no such sign so far.

In short, although smart contracts have the potential to become a killer application in theory, in more than five years of practice, such market achievements have not really been achieved. On the other hand, this also drags down the Web3 revolution, making it difficult for a large number of Web3 applications to land immediately or show their huge competitive advantages.

External friction and decisive internal causes

Where is the problem? What is preventing the large-scale application of smart contracts?

The first reason most people can think of must be the limitations of external infrastructure, supporting equipment and applications, and the cost issues caused by these limitations, such as:

  • The performance of blockchains such as Ethereum is not sufficient to support large-scale consumer applications;

  • Gas fees are too high and fluctuate wildly;

  • The imperfection of large-scale decentralized storage technology;

  • The popularity of consumer-grade apps such as mobile wallets is too low, etc.

In addition, the lag of relevant legislation and supervision has also seriously restricted the pace of smart contracts entering traditional fields, such as:

  • The major economies in the world have not yet launched legal digital currency on the blockchain, nor have they given a clear legal position to the existing digital assets on the blockchain;

  • None of the major economies in the world have formulated a system of rules for asset chaining;

  • None of the major economies in the world have promulgated supporting laws and regulations to protect the rights and interests of digital assets on the chain.

As a result, smart contracts are “hard to cook without rice”, and they have no use in traditional industries.

These reasons are indeed important. But if we look closely, we will find that these factors can be summed up as “external friction”, or external causes. Either the infrastructure is weak, or the legislation and regulation are delayed. In short, the problem is external, and the fault is someone else’s.

Common sense tells us that external causes are of course important, but internal causes are often more decisive. Is there a deeper problem that has caused the application of smart contracts to fail to develop as it should? Is it because the design and technical implementation of the smart contract itself still have some important defects, so that it fails to stimulate the general consensus and support of the outside world, and it has not been able to form a situation where “everyone gathers firewood and the flame is high”?

We believe that such an internal cause exists. There are indeed some deficiencies in the implementation of the current mainstream smart contracts, and perhaps these deficiencies are the key factors hindering the large-scale application of smart contracts.

To see the shortcomings of the current smart contract technology, let us first imagine what functional characteristics an ideal smart contract mass application should have.

First of all, as the protagonist of this application, a smart contract should be a figurative and visual digital object, just like a digital document with a graphical interface that can be interacted with with fingers, keyboard and mouse. Concretization and visualization may be the most critical step for smart contracts to become popular.

Second, it should allow an ordinary user without any programming training to create and customize the smart contracts they need in a very intuitive way, and the complexity of the operation should be lower than that of spreadsheet software such as Excel.

Third, ordinary users can easily create safe and reliable smart contracts without worrying about the risks and losses caused by code loopholes and hacker attacks, and can get double protection in key processes, such as rolling back transactions under certain conditions, Or in the case of complex disputes, it can be mediated and adjudicated by arbitration, and so on.

Fourth, users can easily discover each other, verify conditions and connect with each other, so that contract parties can safely conclude contracts through simple digital signatures.

Fifth, it must be ensured that smart contracts can be automatically executed accurately and reliably.

Sixth, the holder of the contract has the right to transfer and sell the contract if it is allowed. After the contract is transferred, the relevant rights and obligations are automatically transferred to the new holder.

Seventh, under the premise of being allowed, the holder of the contract can freely financialize the contract. The concept of financialization is relatively abstract and has different meanings in different application scenarios. For example, in some cases, financialization means that contracts can be securitized, fragmented, and homogenized, and in other cases, financialization means that they can be used as collateral. In the context of DeFi, this also means that contracts as an asset should be able to enter various mainstream DeFi protocols.

Eighth, smart contracts should also provide certain assistance for things beyond their own capabilities. For example, off-chain data can be obtained even through an “oracle”. For another example, legal documents in natural language can be generated, and the lack of coding capabilities can be compensated for with the help of real-world judicial mechanisms, and so on.

Summary: The Flaws of Current Smart Contracts

In the second-generation blockchain represented by Ethereum, smart contracts are a key innovation. After several years of development, it can be said that it has achieved universally recognized achievements in the certainty, automation, and precise execution of smart contracts (Article 5 above). ), etc., the status quo is basically satisfactory. However, in terms of ease of use, liquidity, etc., today’s smart contract technology does still have major defects, which are as follows:

Intangible, no graphical interface : Today’s smart contracts are a piece of virtual machine bytecode stored in the blockchain. There is no standardized appearance. You must write DAPP programs or use professional development tools to interact with them. This shuts out ordinary users thousands of miles away. The direct consequence is what we often observe in practice. Even if ordinary users operate smart contracts through wallets or DAPPs under professional guidance, they appear to be trembling and walking on thin ice. Forgetting, the user experience is extremely poor.

High difficulty and high risk of creation: creating smart contracts should be a common function of ordinary users, but in the current blockchain, it must be realized by professional developers through programming. And because loopholes and errors in smart contracts often cause huge economic consequences, smart contract codes usually have to undergo rigorous testing and auditing processes, making creating smart contracts a difficult, high-risk, and high-cost job that ordinary users cannot do at all. master.

No ownership, no transfer : Ethereum and almost all mainstream second-generation blockchains implement smart contracts as independen

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