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Not really true. Nothing has to be perfect if there is insurance infrastructure. People should not use contracts they have no reason to trust. As a contract b

Not really true. Nothing has to be perfect if there is insurance infrastructure. People should not use contracts they have no reason to trust. As a contract becomes more important it should be viewed/vetted/trusted by as many entities as possible. Users of the contract should pay an insurance fee that goes to the vetters, who promise to reimburse in case of unpredictable behavior. Yes, this means applying some meatspace solutions to Ether. However the smart contract infrastructure itself is ideal for implementing this. Ethereum offers immutability, and blockchains can foster new kinds of trust, but trust still has to grow organically in the ecosystem.

twblalock 9y ago
> Ethereum offers immutability, and blockchains can foster new kinds of trust, but trust still has to grow organically in the ecosystem. If you need a source of trust outside of the blockchain, why would you need the blockchain after such trust has been obtained?
- thiagocsf 9y ago
  Automation? Guaranteed immutability?
- grandalf 9y ago
  > outside of the blockchain The blockchain offers characteristics (immutability, consensus, distributed backup) that allows entities to trust each other efficiently. But when you introduce a non-trivial smart contract, there is a chance that it (a black box) has behavior that is not obvious from its source code. Since the behavior of the contract will cause immutable changes to the blockchain, and since humans can't perfectly mentally model all conceivable source code behaviors and interactions, there must be some other mechanism for establishing that the behavior of the contract matches the common understanding of what the contract does. This could be sandbox testing, parameter range verification, formal verification, star ratings, etc. As the would-be user of a contract I generally want some reason to trust it. Ethereum offers the building blocks to create an elaborate vetting, verification, simulation, etc. system. Thusfar, existing institutions have leveraged their own reputations to make users of Ethereum comfortable trusting their contracts. The DAO is an example of the folly of this, but many other contracts are examples of the reasonableness of it. Over time, Ethereum will build the right meta building blocks to create very rich trust mechanisms which put the meatspace hedging/insurance industry to shame while also shedding much of the inefficiency that ambiguous legal enforcement creates.
  - qyv 9y ago
    > there must be some other mechanism for establishing that the behavior of the contract matches the common understanding of what the contract does. There is, we have been using them for hundreds of years, it is called a contract.
    - grandalf 9y ago
      > it is called a contract. Think about what puts contracts at risk. - enforceability. If your neighbor borrows your car and agrees to pay you $20 but never does, you are screwed. With Ethereum the smart contract could lock the door to the car until funds are received. Verbal contracts for low-priced transactions are rarely enforced. I had a landlord who simply decided not to return my deposit, so I was out $5K. He stole the money simply because I didn't have time to fly back to that city and proceed with small claims court. With Ethereum, there could be an unbiased oracle that verifies the state of an apartment at end-of-lease and allows a contract to refund the deposit as agreed. The oracle could stop by for 15 minutes on move-in day and snap some pictures, then stop by on move-out day and verify the condition and deduct any money from the deposit as previously agreed. Also the contract could enforce that the money was held in escrow as required by law. - regulatory risk. In some cases, regulators use their aesthetic to determine that some legal contracts are (in hindsight) bad, and they wipe them out. This drastically limits the usefulness of contracts as a planning mechanism and is essentially a tax (in the form of uncertainty) on all contracts. It's like having a buggy VM that does things arbitrarily differently now and then. - higher confidence in the outcome of a contract. With paper meatspace contracts, the language is hard to understand and is pieced together from legal boilerplate based on court decisions where the court interpreted a sentence to mean something precise, etc. This makes these contracts difficult for a layperson to understand even though they are written in English. When you sign a contract you don't know how many times it has been reviewed by a court and whether the court found any of it to be unenforceable or to otherwise mean something different from what you think it means when you sign it. We are always signing TOS agreements, license agreements, leases, waivers, etc. etc. Most of these are virgin legal territory, untested in the court system and designed by lawyers to be overly aggressive in favor of the entity the consumer is doing a transaction with. While it's great that all these contracts might one day be reviewed by a court if the stakes get high enough, a much better approach would be to have very simple, easily enforceable terms. How many unique smart contracts for doing insurance does the world need? Probably about as many as it needs AES implementations. Code that matters would be reviewed with far more scrutiny than most verbal contracts ever get, and composing contracts would also be far easier with well-defined, vetted behavior.
- splintercell 9y ago
  It's about the structuring of the trust. I trust that someone from the hospital will triage me when I get to the emergency room, but that kind of trust is very different than if there is an online service which does remote triaging when I am on my way to the hospital. When the proponents of this service are claiming that you don't have to trust the hospital that they would get someone to triage you, instead you can have your own assigned triage Nurse, you're claiming "But you still have to trust that this third party agency will have someone on the remote location to triage you, then what's the point of using this service?"
- baddox 9y ago
  I'm not sure if I understand your question. It's still nice to be able to choose who the trusted party is.
AlexandrB 9y ago
> Not really true. Nothing has to be perfect if there is insurance infrastructure. Why not just use a traditional financial institution then? What's the benefit of the complexity of a blockchain if it's still unreliable without the added meatspace complexity of a bank?
- grandalf 9y ago
  > Why not just use a traditional financial institution then? Insurance via smart contracts is still far simpler and more efficient to implement than in meatspace. Consider things like insurer solvency risk and the way that meatspace regulations make that hard to understand. With cryptocurrencies an insurer can easily offer proof of solvency based on all outstanding risks. Insurance emerges as a fundamental economic behavior when you have investment and you have an uncertain future. There is benefit to risk pooling. Since most of us live in the first world where the traditional financial system has evolved ample insurance infrastructure, we don't always realize how remarkable it is, or how vulnerable we are to bad regulation of it.
  - sum627u 9y ago
    This is nonsense. Ethereum is uninsurable. The turtles-all-the-way-down notion that you can wrap a bad "smart contract" in a bad "smart insurance contract" and buy Ethereum insurance from an Ethereum insurer and prove that there will be enough Ethereum there to make everyone whole economically should everything go to shit because a fundamental problem in Solidity lets anyone unilaterally blow the whole thing up... I honestly don't know what to say about that. It's ludicrous.
    - dragonwriter 9y ago
      It may not be uninsurable, but pretty clearly trying to use insurance on the platform to insure against risk that are in some sense endemic to the platform seems quite misguided.
      - grandalf 9y ago
sbierwagen 9y ago
Damn, you're right. And if people use smart contracts to do things that are technically allowed, but have unexpected downsides, we should have a review system in place where impartial third parties review the contract language. Two people should be assigned to speak for and against the unexpected behavior, and then maybe a panel of 12 regular citizens could render the actual verdict.
- bitJericho 9y ago
  I see what you did there!
- Pulcinella 9y ago
  This is the central, glaring flaw in cryptocurrencies to me. Transferring "value" for goods and services is really more of a social problem than a scientific/engineering one. Money is a social technology that solves a social problem. Cryptocurrency is a engineering technology in search of a problem to solve.
  - grandalf 9y ago
    > Transferring "value" for goods and services is really more of a social problem than a scientific/engineering one Do you mean on the margin where there is debate about the contract or whether the goods/services were rendered adequately? Cryptocurrencies don't attempt to solve this problem at all, they simply allow for efficient moving of currency between parties without the need for meatspace regulation/trust to do it. Smart contracts make sense with a blockchain because now humans can agree on specific contract behavior that is fixed due to the highly prescribed way a VM will process it. This doesn't mean that humans will or should blindly trust a smart contract to do what some third party claims it will do. But unlike meatspace, there is one VM that matters, contracts and oracles can earn a reputation as being trustworthy, and established patterns can be executed with incredible efficiency and fairness. The issue that presents a challenge for all systems (cryptocurrencies and meatspace institutions) is bootstrapping. Some people will get burned in the beginning because fraud will be temporarily easier to commit. This is why I wish the DAO had just been allowed to die without the hard fork. What is needed is not innovative crowd funding schemes, but additional trust and vetting infrastructure.
RcouF1uZ4gsC 9y ago
What is "unpredictable behavior"? Per ethereum, the code is the specified behavior. Would a contract with function "GiveMeAllYourMoney" be unpredictable behavior if it did what it said. What if instead it was named "Execute"? So now we have a contract whose "unpredictable behavior" depends on how you name functions and variables. However, that is something that cannot be checked by a computer, but would have to be human checked. "Unpredictable behavior" likely would ultimately have to be adjudicated by a court. In that case, what has the smart contract bought you?
- grandalf 9y ago
  I use the term unpredictable behavior simply to describe a case where the contract has behavior that was not fully anticipated by at leat one user of the contract. Of course, the code is deterministic and so the behavior was unambiguously defined in the contract's source code. But there exist all sorts of semantic bugs, which can at times be pretty subtle, which means that even for an expert, the mental model of code execution may not match reality. If there were nondeterministic behavior in the Ethereum VM that would necessitate a fix to the VM and would likely be completely uncontroversial.
vesinisa 9y ago
Seems like a chicken and egg problem. The crypto currency space is currently so fraught with fraud and crime that I assume no sensible insurer would touch it with a long stick. Insurers need a boatload of seed capital and - if they would be to act as expert intermediaries as you suggest - must invest lots and lots of R&D to due diligence. But as long as ETH mostly remains a get rich quick scheme for computer criminals, any such insurer party would only stand to loose all seed capital they invested.
- grandalf 9y ago
  Hah I am not sure if you are joking. > The crypto currency space is currently so fraught with fraud and crime The lack of KYC requirements has led to some criminals using cryptocurrencies, but BTC is fully public and so money laundering, counterfeiting, and tax evasion both go away when we move to a public blockchain. Those three crimes are all so much bigger and more costly to society than the petty crime that has fled KYC to use the blockchain that I think the truth is the opposite of your insinuation.
  - lsc 9y ago
    >but BTC is fully public and so money laundering, counterfeiting, and tax evasion both go away when we move to a public blockchain. So you believe that all the public mixers are compromised? It's certainly possible, but even so, they clearly aren't publicly compromised, and as such, I'd argue that tracking down large amounts of money moved conventionally is easier than tracking down large amounts of money through the blockchain, as last I read, traditionally, btc was sent through mixers quite often.
    - grandalf 9y ago
      If money laundering is illegal, and the owner of a BTC address sends money to a mixer, it's pretty easy for law enforcement to identify the person involved in money laundering. If a person isn't linked to KYC in any way and the coins are anonyously owned, then it's a bit harder, but as BTC becomes more mainstream it becomes increasingly difficult to prevent most transactions from touching KYC-regulated accounts. As a borderline anarchist I'm not arguing this is a great thing, but it nonetheless offers a much more efficient path to enforcing money laundering laws. FWIW I suspect some are compromised. Also, mixing adds cost, and so even if money laundering happens but is heavily taxed by this additional cost there is some utility to the blockchain based system.
anigbrowl 9y ago
What if the insurance doesn't pay out because it too is a flawed contract?
- grandalf 9y ago
  Various insurance contracts could be applied redundantly and/or recursively, and of course over time the real-world characteristics ought to become known and the price of insurance for well understood contracts should approach free.
  - tkfu 9y ago
    There's a lot wrong with this argument. First of all, a primary concern when buying insurance is proof of the solvency of the insurer. That means the insurer has to hold the capital covering their outstanding risks. So any insurer that can prove solvency also has to sit on a ton of capital instead of using it productively, which means the minimal insurance cost of a contract is going to be value * (risk + r * time), where r is the expected rate of return on capital. Adding on N redundant insurance contracts increases the total cost of insurance by N * value * r * time, assuming that the risk of insuring another insurance contract is extremely low. That number explodes extremely fast, and there's no obvious way to solve the problem apart from buying insurance without blockchain-based proof of solvency. But if you're doing that, why do it on the blockchain at all?
    - grandalf 9y ago
      I think blockchain-based proof of solvency is one of the most compelling use cases of cryptocurrency, fwiw. Your argument is valid, but consider that most contracts execute very quickly and so the scope of the insurance is quite limited. For more elaborate contracts, or for a set of inter-related contracts, insurance will be available for highly demanded combinations. Also, since much of the insurance is against fraud, as parties became more trusted the price of insuring against their bad behavior would decrease. Insurance is and has always been a profitable business simply because pooled risk is desirable in many circumstances. Blockchains don't alter this basic reality, and they make it far cheaper to offer proof of solvency and other meaningful transparency measures that benefit consumers. Consider, for example, if employees could do a solvency audit of the PBGC at the click of a button.
finnh 9y ago
Awesome idea, until an evil-or-just-buggy insurance contract robs its counterparties blind. We're basically in no true Scotsman territory here.
- grandalf 9y ago
  There is money to be made providing vetting services as well as insurance services. You could argue that all parties offering either of those services are 100% going to be fraudulent, but this only makes sense if you assume that there is more money to be made acting badly than by developing a legitimate reputation for being honest. In a group of actors, trust is a good thing. It benefits everyone, and everyone has an incentive to foster its development. In meatspace systems we rely on things like identity verification (id cards, green bar certs, fingerprints, retinal scans, etc.), reputation by affiliation (resumes, schools attended, firms worked for) and and testimonials from others we trust. The key aspect of the above is that we don't have to trust any of those signals perfectly in order for it to be of some benefit. If I find out someone went to Harvard, is followed on Twitter by Marc Andreessen, has had five commits accepted by Linus, has a credit score of 675, uses Android, has bad breath, etc., I will take each of those signals as some indication of her credibility on various issues and formulate my meta-opinion about how/whether to trust her based on some heuristic. When I order from a seller on Amazon with very few stars I take a similar risk, yet once in a while I do so. Some fraud is taking place on Amazon but on balance the system gets more trustworthy every day.
abalone 9y ago
> Users of the contract should pay an insurance fee Which would make such contracts significantly more expensive than regular contracts that are reversible by trusted intermediaries and legal authorities. Paying out insurance claims is much more expensive than simply reversing a transaction. This is part of the reason Bitcoin never took off as an alternative to credit cards. Consumer protections are much more expensive to wrap around immutable transactions.
- grandalf 9y ago
  > Which would make such contracts significantly more expensive than regular contracts that are reversible by trusted intermediaries and legal authorities. You assert this but don't offer proof. The cost of fraud is baked into all areas of our economic system to the point where it's very difficult to establish how much it is costing society. Arguably the massive innovations in counterfeiting prevention in the past decades indicate that counterfeiting is a major problem. Money laundering and tax evasion are the other big crimes that impose significant social cost which public blockchain systems solve beautifully. The larger a percentage of the economy that is transacted via a public blockchain, the less opportunity for all sorts of crime. The existence of the "trusted intermediaries and legal authorities" as well as the elaborate enforcement mechanisms that accompany them, are themselves a cost. > This is part of the reason Bitcoin never took off as an alternative to credit cards This does not make sense as Bitcoin is not a mechanism for extending consumer credit. > Consumer protections are much more expensive to wrap around immutable transactions Protections against what? Confusing interest rate terms or cards sold to college students? Bankruptcy or minimum payment rules? All these sorts of things would apply equally to a credit card denominated in BTC so I'm not sure what you mean.
  - frankydp 9y ago
    Parent is referring to the transaction mechanism of the CC providers, not consumer credit. Fraud is a function of humans not the currency. The reason large systems to protect from fraud are baked in, is because there are a lot of humans that commit fraud. The blockchain would only provide a well documented account of the fraud, with no tooling to remove the assets from the fraudster. Chargebacks are a blessing when you need them and a curse when you receive them, but something that the economy has deemed a necessary evil mostly because there are a lot of fraudsters in the world.
geofft 9y ago
A few days ago people on HN were arguing that it's okay if cryptocurrencies use a decent fraction of the world's energy, because securing the blockchain and building a financial system that is decentralized and impossible for any human to gain control of is a major project for humankind and worth spending a decent fraction of the world's resources on. Does that argument still hold up if you're going to have human insurance and human arbitration?
- grandalf 9y ago
  > Does that argument still hold up if you're going to have human insurance and human arbitration? I think it does. You don't need human arbitration, but there are so many cases where having it makes people more likely to transact. Similarly, a hotel can put up a rack with brochures in the lobby, or can hire a concierge to smile and interact with guests as they walk by. The purpose of the concierge is to create more transactions than would have happened with a rack of brochures. As for the question in the previous thread, I'm not sure if it's worth the energy expenditure or not, but predictions are that energy will cease to be scarce by 2030 or so.
seanhunter 9y ago
There are a few problems with this. 1) moral hazard/information assymetry - If I insure you against fraud I have removed most of your financial incentive to protect yourself, so I need to have some other reason to think that you will. I also need protection against the fact that you have more information than I have about the risk of fraud (how do I know you won't collude with the fraudster, in effect defraud yourself and collect on the insurance?) In the normal world this category of concerns prevents lots of types of risks from being insurable, and we have criminal law to protect against collusion 2) Capital commitment - It's not sufficient to just get a promise from the vetters, the capital has to be committed (ie escrowed in some way) otherwise how do I (as an insured party) know they will make good on their payment when I need them to? As an insured party I have to be able to verify that you have done this. In the normal world, this is handled by regulatory capital guidelines for insurers and counterparty collateral posting in the world of OTC contracts. 3) Network effects - If I have capital in escrow, the contracts protecting that escrow would presumably themselves become extremely high-value targets for fraud. Can they be insured? How would you know that the capital is committed to pay out on these insurance contracts? Escrow again? This is a very significant bootstrapping problem - how do I as a participant somewhere in this chain know that in the last resort my insurance will be able to pay out so that if need by I can make good on my commitments. In the normal world this is handled by central counterparties demanding collateral posting against open contracts. It's very tempting for engineering/technical people to assume that even though they don't really understand all the details, everything has an engineering/technical solution that would be so much better than what has been developed by their predecessors. This disruptor's hubris is necessary for progress to be made against very hard problems otherwise they would probably be to daunting to tackle. Trust in the existing contract law system has grown organically over a very long period of time. Some of the smartest people going are lawyers and they've had a significant head start on these problems. It would be pretty difficult for trust to evolve organically given some of the poor decisions and scale of subsequent fraud that has already happened in the "smart" contract world.
- grandalf 9y ago
  These are valid and clearly articulated points. I do not disagree. I would simply point out the following: You point out the non-trivial nature of building a system like we have today. I'd argue that Ethereum, with smart contracts and an immutable public blockchain is a useful innovation that I consider a useful building block for creating and improving the kinds of institutional relationships and interactions that you describe. A system of insurance implemented on Ethereum would need to have the same sorts of moving parts that you describe. Ethereum would make some aspects of this harder and others far easier. There would still be a need for collateral, escrow, etc. My comments are not meant to argue that these mechanisms become useless, they simply become more transparent and when viewed in terms of the rule of law, become significantly more resilient when markets become politicized and the rule of law is in danger of breaking down. Things that would potentially be far easier in an Ethereum based system would be: - assessing/auditing the books of an entity. Things like proof of solvency become much easier, and also looking at assets which are accounts receivable that depend on another entity's solvency. The modern financial system has very course-grained and inadequate ways of looking at this sort of systemic risk, which makes cascading firm failures truly devastating and nearly impossible to insure against, since any cascading firm failure will involve many ad-hoc regulatory interventions and rule changes that essentially nullify a large number of pre-existing contracts/hedges that might have existed. - forcing precise regulations. One of the pre-2008 meatspace glitches was the too-little-too-late regulatory decision to force firms to mark certain types of assets to market even if their accounting approach determined that doing so inflated or deflated their balance sheets incorrectly. With a public ledger it would be possible to easily test a new accounting rule's impact on a firm's financial statements.

twblalock 9y ago

> Ethereum offers immutability, and blockchains can foster new kinds of trust, but trust still has to grow organically in the ecosystem. If you need a source of trust outside of the blockchain, why would you need the blockchain after such trust has been obtained?

thiagocsf 9y ago
Automation? Guaranteed immutability?
grandalf 9y ago
> outside of the blockchain The blockchain offers characteristics (immutability, consensus, distributed backup) that allows entities to trust each other efficiently. But when you introduce a non-trivial smart contract, there is a chance that it (a black box) has behavior that is not obvious from its source code. Since the behavior of the contract will cause immutable changes to the blockchain, and since humans can't perfectly mentally model all conceivable source code behaviors and interactions, there must be some other mechanism for establishing that the behavior of the contract matches the common understanding of what the contract does. This could be sandbox testing, parameter range verification, formal verification, star ratings, etc. As the would-be user of a contract I generally want some reason to trust it. Ethereum offers the building blocks to create an elaborate vetting, verification, simulation, etc. system. Thusfar, existing institutions have leveraged their own reputations to make users of Ethereum comfortable trusting their contracts. The DAO is an example of the folly of this, but many other contracts are examples of the reasonableness of it. Over time, Ethereum will build the right meta building blocks to create very rich trust mechanisms which put the meatspace hedging/insurance industry to shame while also shedding much of the inefficiency that ambiguous legal enforcement creates.
- qyv 9y ago
  > there must be some other mechanism for establishing that the behavior of the contract matches the common understanding of what the contract does. There is, we have been using them for hundreds of years, it is called a contract.
  - grandalf 9y ago
    > it is called a contract. Think about what puts contracts at risk. - enforceability. If your neighbor borrows your car and agrees to pay you $20 but never does, you are screwed. With Ethereum the smart contract could lock the door to the car until funds are received. Verbal contracts for low-priced transactions are rarely enforced. I had a landlord who simply decided not to return my deposit, so I was out $5K. He stole the money simply because I didn't have time to fly back to that city and proceed with small claims court. With Ethereum, there could be an unbiased oracle that verifies the state of an apartment at end-of-lease and allows a contract to refund the deposit as agreed. The oracle could stop by for 15 minutes on move-in day and snap some pictures, then stop by on move-out day and verify the condition and deduct any money from the deposit as previously agreed. Also the contract could enforce that the money was held in escrow as required by law. - regulatory risk. In some cases, regulators use their aesthetic to determine that some legal contracts are (in hindsight) bad, and they wipe them out. This drastically limits the usefulness of contracts as a planning mechanism and is essentially a tax (in the form of uncertainty) on all contracts. It's like having a buggy VM that does things arbitrarily differently now and then. - higher confidence in the outcome of a contract. With paper meatspace contracts, the language is hard to understand and is pieced together from legal boilerplate based on court decisions where the court interpreted a sentence to mean something precise, etc. This makes these contracts difficult for a layperson to understand even though they are written in English. When you sign a contract you don't know how many times it has been reviewed by a court and whether the court found any of it to be unenforceable or to otherwise mean something different from what you think it means when you sign it. We are always signing TOS agreements, license agreements, leases, waivers, etc. etc. Most of these are virgin legal territory, untested in the court system and designed by lawyers to be overly aggressive in favor of the entity the consumer is doing a transaction with. While it's great that all these contracts might one day be reviewed by a court if the stakes get high enough, a much better approach would be to have very simple, easily enforceable terms. How many unique smart contracts for doing insurance does the world need? Probably about as many as it needs AES implementations. Code that matters would be reviewed with far more scrutiny than most verbal contracts ever get, and composing contracts would also be far easier with well-defined, vetted behavior.
splintercell 9y ago
It's about the structuring of the trust. I trust that someone from the hospital will triage me when I get to the emergency room, but that kind of trust is very different than if there is an online service which does remote triaging when I am on my way to the hospital. When the proponents of this service are claiming that you don't have to trust the hospital that they would get someone to triage you, instead you can have your own assigned triage Nurse, you're claiming "But you still have to trust that this third party agency will have someone on the remote location to triage you, then what's the point of using this service?"
baddox 9y ago
I'm not sure if I understand your question. It's still nice to be able to choose who the trusted party is.

AlexandrB 9y ago

> Not really true. Nothing has to be perfect if there is insurance infrastructure. Why not just use a traditional financial institution then? What's the benefit of the complexity of a blockchain if it's still unreliable without the added meatspace complexity of a bank?

grandalf 9y ago
> Why not just use a traditional financial institution then? Insurance via smart contracts is still far simpler and more efficient to implement than in meatspace. Consider things like insurer solvency risk and the way that meatspace regulations make that hard to understand. With cryptocurrencies an insurer can easily offer proof of solvency based on all outstanding risks. Insurance emerges as a fundamental economic behavior when you have investment and you have an uncertain future. There is benefit to risk pooling. Since most of us live in the first world where the traditional financial system has evolved ample insurance infrastructure, we don't always realize how remarkable it is, or how vulnerable we are to bad regulation of it.
- sum627u 9y ago
  This is nonsense. Ethereum is uninsurable. The turtles-all-the-way-down notion that you can wrap a bad "smart contract" in a bad "smart insurance contract" and buy Ethereum insurance from an Ethereum insurer and prove that there will be enough Ethereum there to make everyone whole economically should everything go to shit because a fundamental problem in Solidity lets anyone unilaterally blow the whole thing up... I honestly don't know what to say about that. It's ludicrous.
  - dragonwriter 9y ago
    It may not be uninsurable, but pretty clearly trying to use insurance on the platform to insure against risk that are in some sense endemic to the platform seems quite misguided.
    - grandalf 9y ago

sbierwagen 9y ago

Damn, you're right. And if people use smart contracts to do things that are technically allowed, but have unexpected downsides, we should have a review system in place where impartial third parties review the contract language. Two people should be assigned to speak for and against the unexpected behavior, and then maybe a panel of 12 regular citizens could render the actual verdict.

bitJericho 9y ago
I see what you did there!
Pulcinella 9y ago
This is the central, glaring flaw in cryptocurrencies to me. Transferring "value" for goods and services is really more of a social problem than a scientific/engineering one. Money is a social technology that solves a social problem. Cryptocurrency is a engineering technology in search of a problem to solve.
- grandalf 9y ago
  > Transferring "value" for goods and services is really more of a social problem than a scientific/engineering one Do you mean on the margin where there is debate about the contract or whether the goods/services were rendered adequately? Cryptocurrencies don't attempt to solve this problem at all, they simply allow for efficient moving of currency between parties without the need for meatspace regulation/trust to do it. Smart contracts make sense with a blockchain because now humans can agree on specific contract behavior that is fixed due to the highly prescribed way a VM will process it. This doesn't mean that humans will or should blindly trust a smart contract to do what some third party claims it will do. But unlike meatspace, there is one VM that matters, contracts and oracles can earn a reputation as being trustworthy, and established patterns can be executed with incredible efficiency and fairness. The issue that presents a challenge for all systems (cryptocurrencies and meatspace institutions) is bootstrapping. Some people will get burned in the beginning because fraud will be temporarily easier to commit. This is why I wish the DAO had just been allowed to die without the hard fork. What is needed is not innovative crowd funding schemes, but additional trust and vetting infrastructure.

RcouF1uZ4gsC 9y ago

What is "unpredictable behavior"? Per ethereum, the code is the specified behavior. Would a contract with function "GiveMeAllYourMoney" be unpredictable behavior if it did what it said. What if instead it was named "Execute"? So now we have a contract whose "unpredictable behavior" depends on how you name functions and variables. However, that is something that cannot be checked by a computer, but would have to be human checked. "Unpredictable behavior" likely would ultimately have to be adjudicated by a court. In that case, what has the smart contract bought you?

grandalf 9y ago
I use the term unpredictable behavior simply to describe a case where the contract has behavior that was not fully anticipated by at leat one user of the contract. Of course, the code is deterministic and so the behavior was unambiguously defined in the contract's source code. But there exist all sorts of semantic bugs, which can at times be pretty subtle, which means that even for an expert, the mental model of code execution may not match reality. If there were nondeterministic behavior in the Ethereum VM that would necessitate a fix to the VM and would likely be completely uncontroversial.

vesinisa 9y ago

Seems like a chicken and egg problem. The crypto currency space is currently so fraught with fraud and crime that I assume no sensible insurer would touch it with a long stick. Insurers need a boatload of seed capital and - if they would be to act as expert intermediaries as you suggest - must invest lots and lots of R&D to due diligence. But as long as ETH mostly remains a get rich quick scheme for computer criminals, any such insurer party would only stand to loose all seed capital they invested.

grandalf 9y ago
Hah I am not sure if you are joking. > The crypto currency space is currently so fraught with fraud and crime The lack of KYC requirements has led to some criminals using cryptocurrencies, but BTC is fully public and so money laundering, counterfeiting, and tax evasion both go away when we move to a public blockchain. Those three crimes are all so much bigger and more costly to society than the petty crime that has fled KYC to use the blockchain that I think the truth is the opposite of your insinuation.
- lsc 9y ago
  >but BTC is fully public and so money laundering, counterfeiting, and tax evasion both go away when we move to a public blockchain. So you believe that all the public mixers are compromised? It's certainly possible, but even so, they clearly aren't publicly compromised, and as such, I'd argue that tracking down large amounts of money moved conventionally is easier than tracking down large amounts of money through the blockchain, as last I read, traditionally, btc was sent through mixers quite often.
  - grandalf 9y ago
    If money laundering is illegal, and the owner of a BTC address sends money to a mixer, it's pretty easy for law enforcement to identify the person involved in money laundering. If a person isn't linked to KYC in any way and the coins are anonyously owned, then it's a bit harder, but as BTC becomes more mainstream it becomes increasingly difficult to prevent most transactions from touching KYC-regulated accounts. As a borderline anarchist I'm not arguing this is a great thing, but it nonetheless offers a much more efficient path to enforcing money laundering laws. FWIW I suspect some are compromised. Also, mixing adds cost, and so even if money laundering happens but is heavily taxed by this additional cost there is some utility to the blockchain based system.

anigbrowl 9y ago

What if the insurance doesn't pay out because it too is a flawed contract?

grandalf 9y ago
Various insurance contracts could be applied redundantly and/or recursively, and of course over time the real-world characteristics ought to become known and the price of insurance for well understood contracts should approach free.
- tkfu 9y ago
  There's a lot wrong with this argument. First of all, a primary concern when buying insurance is proof of the solvency of the insurer. That means the insurer has to hold the capital covering their outstanding risks. So any insurer that can prove solvency also has to sit on a ton of capital instead of using it productively, which means the minimal insurance cost of a contract is going to be value * (risk + r * time), where r is the expected rate of return on capital. Adding on N redundant insurance contracts increases the total cost of insurance by N * value * r * time, assuming that the risk of insuring another insurance contract is extremely low. That number explodes extremely fast, and there's no obvious way to solve the problem apart from buying insurance without blockchain-based proof of solvency. But if you're doing that, why do it on the blockchain at all?
  - grandalf 9y ago
    I think blockchain-based proof of solvency is one of the most compelling use cases of cryptocurrency, fwiw. Your argument is valid, but consider that most contracts execute very quickly and so the scope of the insurance is quite limited. For more elaborate contracts, or for a set of inter-related contracts, insurance will be available for highly demanded combinations. Also, since much of the insurance is against fraud, as parties became more trusted the price of insuring against their bad behavior would decrease. Insurance is and has always been a profitable business simply because pooled risk is desirable in many circumstances. Blockchains don't alter this basic reality, and they make it far cheaper to offer proof of solvency and other meaningful transparency measures that benefit consumers. Consider, for example, if employees could do a solvency audit of the PBGC at the click of a button.

finnh 9y ago

Awesome idea, until an evil-or-just-buggy insurance contract robs its counterparties blind. We're basically in no true Scotsman territory here.

grandalf 9y ago
There is money to be made providing vetting services as well as insurance services. You could argue that all parties offering either of those services are 100% going to be fraudulent, but this only makes sense if you assume that there is more money to be made acting badly than by developing a legitimate reputation for being honest. In a group of actors, trust is a good thing. It benefits everyone, and everyone has an incentive to foster its development. In meatspace systems we rely on things like identity verification (id cards, green bar certs, fingerprints, retinal scans, etc.), reputation by affiliation (resumes, schools attended, firms worked for) and and testimonials from others we trust. The key aspect of the above is that we don't have to trust any of those signals perfectly in order for it to be of some benefit. If I find out someone went to Harvard, is followed on Twitter by Marc Andreessen, has had five commits accepted by Linus, has a credit score of 675, uses Android, has bad breath, etc., I will take each of those signals as some indication of her credibility on various issues and formulate my meta-opinion about how/whether to trust her based on some heuristic. When I order from a seller on Amazon with very few stars I take a similar risk, yet once in a while I do so. Some fraud is taking place on Amazon but on balance the system gets more trustworthy every day.

abalone 9y ago

> Users of the contract should pay an insurance fee Which would make such contracts significantly more expensive than regular contracts that are reversible by trusted intermediaries and legal authorities. Paying out insurance claims is much more expensive than simply reversing a transaction. This is part of the reason Bitcoin never took off as an alternative to credit cards. Consumer protections are much more expensive to wrap around immutable transactions.

grandalf 9y ago
> Which would make such contracts significantly more expensive than regular contracts that are reversible by trusted intermediaries and legal authorities. You assert this but don't offer proof. The cost of fraud is baked into all areas of our economic system to the point where it's very difficult to establish how much it is costing society. Arguably the massive innovations in counterfeiting prevention in the past decades indicate that counterfeiting is a major problem. Money laundering and tax evasion are the other big crimes that impose significant social cost which public blockchain systems solve beautifully. The larger a percentage of the economy that is transacted via a public blockchain, the less opportunity for all sorts of crime. The existence of the "trusted intermediaries and legal authorities" as well as the elaborate enforcement mechanisms that accompany them, are themselves a cost. > This is part of the reason Bitcoin never took off as an alternative to credit cards This does not make sense as Bitcoin is not a mechanism for extending consumer credit. > Consumer protections are much more expensive to wrap around immutable transactions Protections against what? Confusing interest rate terms or cards sold to college students? Bankruptcy or minimum payment rules? All these sorts of things would apply equally to a credit card denominated in BTC so I'm not sure what you mean.
- frankydp 9y ago
  Parent is referring to the transaction mechanism of the CC providers, not consumer credit. Fraud is a function of humans not the currency. The reason large systems to protect from fraud are baked in, is because there are a lot of humans that commit fraud. The blockchain would only provide a well documented account of the fraud, with no tooling to remove the assets from the fraudster. Chargebacks are a blessing when you need them and a curse when you receive them, but something that the economy has deemed a necessary evil mostly because there are a lot of fraudsters in the world.

geofft 9y ago

A few days ago people on HN were arguing that it's okay if cryptocurrencies use a decent fraction of the world's energy, because securing the blockchain and building a financial system that is decentralized and impossible for any human to gain control of is a major project for humankind and worth spending a decent fraction of the world's resources on. Does that argument still hold up if you're going to have human insurance and human arbitration?

grandalf 9y ago
> Does that argument still hold up if you're going to have human insurance and human arbitration? I think it does. You don't need human arbitration, but there are so many cases where having it makes people more likely to transact. Similarly, a hotel can put up a rack with brochures in the lobby, or can hire a concierge to smile and interact with guests as they walk by. The purpose of the concierge is to create more transactions than would have happened with a rack of brochures. As for the question in the previous thread, I'm not sure if it's worth the energy expenditure or not, but predictions are that energy will cease to be scarce by 2030 or so.

seanhunter 9y ago

There are a few problems with this. 1) moral hazard/information assymetry - If I insure you against fraud I have removed most of your financial incentive to protect yourself, so I need to have some other reason to think that you will. I also need protection against the fact that you have more information than I have about the risk of fraud (how do I know you won't collude with the fraudster, in effect defraud yourself and collect on the insurance?) In the normal world this category of concerns prevents lots of types of risks from being insurable, and we have criminal law to protect against collusion 2) Capital commitment - It's not sufficient to just get a promise from the vetters, the capital has to be committed (ie escrowed in some way) otherwise how do I (as an insured party) know they will make good on their payment when I need them to? As an insured party I have to be able to verify that you have done this. In the normal world, this is handled by regulatory capital guidelines for insurers and counterparty collateral posting in the world of OTC contracts. 3) Network effects - If I have capital in escrow, the contracts protecting that escrow would presumably themselves become extremely high-value targets for fraud. Can they be insured? How would you know that the capital is committed to pay out on these insurance contracts? Escrow again? This is a very significant bootstrapping problem - how do I as a participant somewhere in this chain know that in the last resort my insurance will be able to pay out so that if need by I can make good on my commitments. In the normal world this is handled by central counterparties demanding collateral posting against open contracts. It's very tempting for engineering/technical people to assume that even though they don't really understand all the details, everything has an engineering/technical solution that would be so much better than what has been developed by their predecessors. This disruptor's hubris is necessary for progress to be made against very hard problems otherwise they would probably be to daunting to tackle. Trust in the existing contract law system has grown organically over a very long period of time. Some of the smartest people going are lawyers and they've had a significant head start on these problems. It would be pretty difficult for trust to evolve organically given some of the poor decisions and scale of subsequent fraud that has already happened in the "smart" contract world.

grandalf 9y ago
These are valid and clearly articulated points. I do not disagree. I would simply point out the following: You point out the non-trivial nature of building a system like we have today. I'd argue that Ethereum, with smart contracts and an immutable public blockchain is a useful innovation that I consider a useful building block for creating and improving the kinds of institutional relationships and interactions that you describe. A system of insurance implemented on Ethereum would need to have the same sorts of moving parts that you describe. Ethereum would make some aspects of this harder and others far easier. There would still be a need for collateral, escrow, etc. My comments are not meant to argue that these mechanisms become useless, they simply become more transparent and when viewed in terms of the rule of law, become significantly more resilient when markets become politicized and the rule of law is in danger of breaking down. Things that would potentially be far easier in an Ethereum based system would be: - assessing/auditing the books of an entity. Things like proof of solvency become much easier, and also looking at assets which are accounts receivable that depend on another entity's solvency. The modern financial system has very course-grained and inadequate ways of looking at this sort of systemic risk, which makes cascading firm failures truly devastating and nearly impossible to insure against, since any cascading firm failure will involve many ad-hoc regulatory interventions and rule changes that essentially nullify a large number of pre-existing contracts/hedges that might have existed. - forcing precise regulations. One of the pre-2008 meatspace glitches was the too-little-too-late regulatory decision to force firms to mark certain types of assets to market even if their accounting approach determined that doing so inflated or deflated their balance sheets incorrectly. With a public ledger it would be possible to easily test a new accounting rule's impact on a firm's financial statements.