Smart Contracts Land on Wall Street

> Using a bitcoin-based system offers several potential benefits. First off, it is faster. A bitcoin transaction clears in about 10 minutes, compared to three days for a traditional debt instrument to clear. The costs are lower.

Speed and cost is really where the advantage is. T+1 to T+3 is the usual range. 10 minutes is ridiculously fast and the cost savings appears to be notable.

Counterparty risk is reduced but the 51% attack exists + various security issues so its non-0 and really represents risk shifting rather than a lack of risk.

Smart contract is basically a small script with defined triggering criteria and defined results. The main benefit - contract is executed by network, not by machine controlled by person or organisation. This minimises trust.

I think they use the mutisig feature of bitcoin and a hash of the contract. The first party would send that transaction to a 3rd party that would then (when whatever requirements are met) would publish it the network.

Someone correct me if I'm wrong and lets to talk in lower level terms as per ops request.

Part of the confusion may come from the idea that it reduces counterparty risk. Using bitcoin to track non-bitcoin assets does not reduce counterparty risk.

A blockchain allows using digital signatures for determining ownership and solves the double spending problem without a central ledger.

A smart contract is a contract that can be executed with the trust parameters you set, these parameters are less limited than typical contracts have since they don't have an inherent necessity to trust a government or even a counterparty.

Some contracts don't require anyone's trust. The most basic "smart contract" is a Bitcoin payment, the contract says "pay this to anyone who can produce a signature corresponding to the public key I have hashed in this contract"[1].

The less used smart contract involving cryptography can be "pay this amount to anyone who can find any sha256 collision"[2], or "flip a trustless N-sided coin and pay someone based on the outcome"[3], or in the future we could play more complex games and trustlessly pay the winner as long as we can create a trustless proof that the winner is in fact the winner.

There are also possible smart contracts that may allow individuals to move their money to another system, be they trustless like a sidechain or lightning hub, or trusty like Open Transactions, which has federated trust between a set of individuals.

Another form of trusty transaction is multisig escrow, where you can have individuals vote on who gets the money. Unlike giving an intermediary money they can run off with, you give an intermediary or set of intermediaries a vote on where the money ends up[4]. With multisig combined with nlocktime you can have money spendable by you if you verify your identity (usually through email) to an authority. If the authority refuses to let you spend, then you can get your funds back when your nlocktime transaction expires. They cannot spend your money though[5].

In short, when you have programmable money you can create a smart contract that allows funds to be redeemed by getting information from trusted external sources or internal trustless cryptography.

[1] https://en.bitcoin.it/wiki/Script#Standard_Transaction_to_Bi...

[2] http://lists.randombit.net/pipermail/cryptography/2013-Septe...

[3] http://arxiv.org/pdf/1402.3698v1.pdf

[4] https://en.bitcoin.it/wiki/Contract#Trust_minimization:_mult...

[5] https://en.bitcoin.it/wiki/GreenAddress

Simple explanation by quoting Nick Szabo:

"Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means."

http://szabo.best.vwh.net/smart_contracts_idea.html

Securities and exchanges professional here, although based in Europe (no affiliation with T0 or any related platform).

Settlement is the process by which securities are delivered against payment, from one counter-party to another (the seller delivers the securities, the buyer delivers the cash).

What happens today is that both clearing and settlement are necessary because the speed of trading is much faster than the cycle time for completing an underlying transaction (delivery versus payment), usually in T+2 or T+3 days.

At the middle is the CSD - Central Securities Counterparty - that intermediates the delivery versus payment transactions and guarantees that when shit hits the fan (when one of the parties fails to deliver) the money is on the table for the other.

Settlement is costly: the CSD charges both parties for this "matching & insurance" service; sometimes the settlement operation represents the largest share of the costs involved in a transaction (trading + clearing + settlement; and after that you have also custody costs).

And usually settlement is only available for very liquid, exchange traded securities. Because the CSD my have to put money on the table they can do it only in securities they know they can get their money back. If you are a broker and there is no CSD you have to trust in the counterparties you deal with to minimize fail-to-deliver risk. Which brings a lot of inefficiency to these markets.

With smart contracts, if "the trade is the settlement" (which is a very neat way of expressing it!) it seems you no longer need to use traditional settlement services. The trade only occurs when you deliver the securities. And you have no limitation in the number of securities you can trade. Less costs, less time to deliver, same level of risks as in with a CSD.(EDIT: broader, unfulfilled markets). Seems like a wining proposition to me.

Smart contracts are about programmable money and shifting the business logic for financial instruments from pages-long ISDA agreements to cryptographically-secured and -enforced transactions on a blockchain. Today, settlement usually requires a trusted third party (TTP) and tedious, inefficient, expensive processes like netting, novation, moving money around, and keeping track of who owns what. Smart contracts holds out the possibility of being able to do away with the TTP and do pretty much everything on a blockchain.

The analogy I like to use to think about possible repercussions of smart contracts is this: smart contracts are to agreement as the internet is to communication.

Think about the criticisms of the internet in its early days. You essentially /only/ had the unprecendented communications wizardry when you tied yourself to one of several oversized devices in universities or big companies. But now, every person has a platform for communication in their pockets and embedded into most other devices.

So right now, we don't have a ubiquitous platform for permissionless agreements that can operate outside government and corporation. The most tech-savvy among us are experimenting, but the real exciting possibilities come when people start building tools for managing agreements without requiring privileged third-parties specializing in the management of that trust transaction. Then, lots of businesses start being decoupled -- the bread and butter of most businesses are just the bundling a few specific trusted transaction types in accordance with legal requirements.

ie Uber = reputation + geospatial routing + messaging/agreements between drivers and passengers. Having an agreement platform allows the monopoly of coordination for these types of trust transactions to be wrested away from organizations like Uber. The same goes for lots of other types of organizations :)

Value is escrowed by the network, so there's an increase in efficiency due due to reduction in ftd and litigation risk.

What it'll be in practice: the Underhanded C Contest http://www.underhanded-c.org/ but as applied to whatever language is used in the system in question.

Yeah, its really risk shifting from a single counterparty to the bitcoin network.

Currently they're not fungible enough to reduce counterparty risk. The entire Bitcoin community is progressing towards complete fungibility, at which time, the risk is completely reduced.

Bitcoin can transfer any tokenized scarce resource, just like Amex can transfer any fiat currency. In these cases, the bitcoin network is transferring bearer bonds. (arguably registered securities)

Codius was discontinued: https://bitcoinmagazine.com/20985/ripple-discontinues-smart-...