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.
- 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.
Proof of work allows participants to trust the ledger in a way that is enforced by cryptography, not by law. This creates a powerful deterrent for certain kinds of fraud and abuse.
I agree that waste-heat-generating proof of work is inefficient, but that does not mean that no proof of work system exists where the work itself has some positive externalities.
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.