## Schoolkid fights, blockchain and smart contracts

So I’ve been trying to understand the whole blockchain thing better, since people nowadays seem to be wanting to use it for all kinds of contracts (even the investment bankers are taking interest, which suggests there’s some potential out there ðŸ˜› ).

One of the things I’ve been doing is to read this bookÂ (PDF) on Blockchain by Arvind Narayanan and co at Princeton. It’s an easy to read, yet comprehensive, take on bitcoin and cryptocurrency technologies, the maths behind it and so on.

And as I’ve been reading it, I’ve been developing my own oversimplified model of what blockchain and smart contracts are, and this is my take at explaining it.

Imagine that Alice and Bob are two schoolkids and they’ve entered into a contract which states that if Alice manages to climb a particular tree, Bob will give her a bar of chocolate. Alice duly climbs the tree and claims the chocolate, at which point Bob flatly denies that she climbed it and refuses to give her the chocolate. What is Alice to do?

In the conventional “contract world”, all that Alice can do is to take the contract that she and Bob had signed (assume they had formalised it) and take it to a court of law (a schoolteacher, perhaps, in this case), which will do its best possible in order to determine whether she actually climbed the tree, and then deliver the judgment.

As you may imagine, in the normal schoolkid world, going to a teacher for adjudicating on whether someone climbed a tree (most likely an “illegal” activity by school rules) is not the greatest way to resolve the fight. Instead, either Alice and Bob will try to resolve it by themselves, or call upon their classmates to do the same. This is where the blockchain comes in.

Simply put, in terms of the blockchain “register”, as long as more than half of Alice and Bob’s classmates agree that she climbed the tree, she is considered to have climbed the tree, and Bob will be liable to give her chocolate. In other words, the central “trusted third party” gets replaced by a decentralised crowd of third parties where the majority decision is taken to be the “truth”.

Smart contracts take this one step further. Bob will give the bar of chocolates to the collective trust of his classmates (the adjudicators). And if a majority of them agree that Alice did climb the tree, the chocolate will be automatically given to her. If not, it will come back to Bob. What blockchain technologies allow for is to write code in a clever manner so that this can get executed automatically.

This might be a gross oversimplification, but this is exactly how the blockchain works. Each transaction is considered “valid” and put into the blockchain if a majority of nodes agrees it’s valid. And in order to ensure that this voting doesn’t get rigged, the nodes (or judges) need to perform a difficult computational puzzle in order to be able to vote – this imposes an artificial cost of voting which makes sure that it’s not possible to rig the polls unless you can take over more than half the nodes – and in a global blockchain where you have a really large number of nodes, this is not feasible.

So when you see that someone is building a blockchain based solution for this or that, you might wonder whether it actually makes sense. All you need to do is to come back to this schoolkid problem – for the kind of dispute that is likely to arise from this problem, would the parties prefer to go to a mutually trusted third party, or leave it to the larger peer group to adjudicate? Using the blockchain is a solution if and only if the latter case is true.