The era of incomprehensible contracts written in legal language by attorneys in $ 2,000 lawsuits from Ivy League schools is over. The contracts of the next century will be hybrid smart contracts written in code by programmers wearing $ 20 hoodies and living in their flat share in NYC.
What is a hybrid smart contract?
Smart contracts are self-enforcing contracts written in code and executed by the blockchain. These smart contracts are great for sending and receiving money and doing simple calculations, but they cannot access off-chain data, perform complex calculations, or generate random numbers by themselves.
These limitations have so far prevented smart contracts from fulfilling many of the roles traditional legal contracts currently play. Now, the introduction of Oracle networks into the blockchain promises to solve this problem. Oracle networks can provide verifiable randomness, off-chain data, and additional computing resources for smart contracts.
Oracle networks consist of validators that write data to the blockchain. The Oracle aggregates input from multiple validators so that no validator has control over the Oracle feed. Validators can also use various mechanisms to build the data they write to further increase robustness. For example, Oracle networks that provide verifiable randomness want each auditor to use a different pseudorandom number generator.
Oracle networks are decentralized, so you don’t have to forego the benefits of decentralizing the blockchain when using an Oracle network. A smart contract that uses an Oracle network is known as a hybrid smart contract.
Use cases for hybrid smart contracts
Once hybrid smart contracts have access to off-chain data over an Oracle network, they can begin to replace traditional contracts. For example, weather insurance – an insurance that pays out in extreme weather conditions – is currently supported by traditional contracts. If an oracle network provides data on extreme weather events, weather insurance can be implemented instead using hybrid smart contracts. In general, any contract that pays based on real events can be implemented on the blockchain as long as there is an Oracle network that can provide that off-chain data.
Hybrid contracts can also implement mechanisms that are more computationally complex than their non-hybrid counterparts. For example, the Vickrey-Clarke-Groves (VCG) algorithm is a sealed bid auction mechanism. Google and Facebook use VCG to run their ad auctions. The only problem with VCG is that it is difficult to calculate. It would be too expensive to fully implement a VCG mechanism on the blockchain. However, if the computation were delegated to off-chain computing using a hybrid smart contract, VCG could be inexpensive and implemented on the blockchain.
Oracle networks acting as random number generators can of course support multiple games and games of chance in the chain, but they can also support random algorithms and mechanisms, some of which are more efficient than their non-random counterparts. An example is an auction mechanism called a candlestick auction, which is the same as the standard UK auction except that the auction does not end after a set period of time, but at a random time. eBay users may be familiar with the scalping problem, where almost all bidding activity takes place shortly before the auction ends.
This can be frustrating for buyers as they have little information about the actual price that the auction will be settled at before the auction ends. The candlestick auction solves this problem by providing bidders with incentives to submit bids early so that they can obtain them before the auction ends. Without a random number generator, it would be impossible to implement a candlestick auction or any other randomized mechanism or algorithm on the blockchain.
The advantages of hybrid smart contracts over traditional contracts
Unlike traditional contracts, smart contracts are enforced through the blockchain, so no external court system is required to enforce the contracts. Without an expensive court system, contracts are cheaper, so more peer-to-peer transactions can be governed by contracts rather than trust.
Contracts between firms based in different countries are often challenging because navigating through the various court systems is expensive and one nation’s judicial systems usually have limited power over companies in other nations. Hybrid smart contracts do not share this weakness; You don’t see any nationality at all.
The judicial enforcement of traditional contracts is not only expensive, but also leads to uncertainties in the outcome. There will always be a possibility that attorneys will uncover a mysterious loophole in the basement of a haunted house that nullifies the contract entirely. Even if the treaty is tight, the parties rely on the continued goodwill of their government to ensure that the treaty is enforced.
The recent moratorium on evictions in many US states and countries around the world is an example of this. The landlord and tenant concluded an agreement on the pretext that the landlord would have legal recourse against the tenant in the form of an eviction if the rent was not paid. I will not discuss whether this decision was justified; this is a discussion for politicians. What is not up for discussion is that these measures, taken by governments around the world, effectively voided every single lease that existed at the time.
This change not only affected tenants who were unable to pay their rent, but also effectively invalidated rental agreements between landlords and solvent tenants. Even tenants who could pay their rent would not be threatened with eviction, which meant some of those tenants chose not to pay either. Whatever your take on the eviction moratorium, it is clear that contracts that can be stamped at any time by a government official are undesirable compared to hybrid smart contracts.
In the coming years, traditional legal contracts will be replaced by hybrid smart contracts because they are faster, more efficient and less prone to legal loopholes. They are cheaper and can get across borders as well as they can within borders.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Nick Spanos is co-founder of the Zap Protocol, the decentralized Oracle solution for smart contracts. As an early pioneer, Nick founded the Bitcoin Center NYC in 2013, the world’s first physical crypto trading venue opposite the NYSE.