The disenchantment of smart contracts: Can it avoid Russian default and "nickel forcing empty"?

Anchor of "Two Flowers in Arts and Sciences"

Xiao Xiaopao: the author of "The Knowledge of S

The disenchantment of smart contracts: Can it avoid Russian default and "nickel forcing empty"?

Anchor of "Two Flowers in Arts and Sciences"

Xiao Xiaopao: the author of "The Knowledge of Sheep", a practitioner in the financial industry, a serial entrepreneur, the anchor of the podcast "Cracks in the Wall", and the manager of Xiao Xiaopao, the official account of WeChat.

Grace Wai Wong: He holds a master's degree in mathematics and computer science, and is also proficient in technology and finance. A few years ago, the "all-in" blockchain field became one of the well-known opinion leaders in the blockchain industry.

The word "smart contract" seems to be a meme: it is a concept that will be heard in the financial technology industry, even in all industries related to technology and digitalization-a meme that "sounds powerful, but I don't know what it is" or "I don't know where it is". Anyway, these four words stand for "scientific and technological progress". Can you still be intelligent?

But what is this? What can you do? What can't you do? There is an urgent need for smart contract experts to use a language that both Xiao Bai and liberal arts students can understand.

Recently, in the real world financial market, several interesting things happened: the default of Russian bonds and the "nickel-empty incident" in the metal market-then we will simply make a case analysis to see if smart contracts can solve these headaches in the real world.

A summary of this problem

1, 365-degree panoramic "charm removal" smart contract: where is its "intelligence"? Is it a piece of code? A contract? Or a robot?

2. Can it only solve the problems in the virtual world, or can it also be used in the real world?

3. Russian bonds default: If smart contracts are used, will the results be different?

4. Would the situation be different if sovereign bonds were placed in smart contracts? Can Smart Contracts Solve Credit Problems?

5. The nickel vacancy event and LME's "hard disagreement": If LME adopts intelligent contract automatic execution, will the result be different?

6. What is the difference between "hard fork" in blockchain and "hard fork" (cancellation of transaction) in the real world?

7. Can the setting of "voting" and "cooling-off period" avoid "tyranny of the majority"?

Draft text

Trot 02:48

The word "smart contract" seems to have become a "meme". It is a concept that the financial technology industry and even the wider technology and digital related industries will hear-anyway, these four words represent scientific and technological progress and intelligence.

But it is still a concept of "it sounds powerful, but I don't know what it is" or "I don't know where it is". Most people, including me, know little about it. So today, please ask Mr. Grace Wai Wong to "unlock" the smart contract in a language that both Xiao Bai and liberal arts students can understand.

In addition, just recently, in the real world financial market, several very interesting things happened-including the default of Russian bonds and the short selling of nickel. Today, let's take these two cases to see if smart contracts can solve these headaches in the real world.

First of all, please ask Mr. Grace Wai Wong to explain to you: Where is the "intelligence" of smart contracts?

Grace Wai Wong 04:26

Smart contracts are now the most important core in the fields of blockchain, DeFi and future web3. When Bitcoin came out, everyone said that the blockchain was a "distributed ledger"; Since the birth of Ethereum, people have gradually seen that smart contracts are playing an increasingly important role in the field of web3.0 and even the meta-universe.

Let me start with a short story that happened around me. I have a senior who is a professor in the computer department of the university. Last year, I asked a question: I can understand the blockchain, but I didn't understand a question-where is the "intelligence" of smart contracts?

She must have understood "smart contract" as "smart code" for inquiry. Because she is a technician, she must compare with other codes. By default, "smart contract" should be more "smart" than other codes before it is called "smart contract".

My answer is: don't compare it with computer code, but with the contract in the real world-it is an intelligent contract, not an intelligent code, so it is easy to understand. Comparing it with code is a bit insulting to the word "intelligence". But compared with the contracts signed in daily economic activities, the logic is more appropriate.

Where is its intelligence compared with the contract?

Our daily contract has several characteristics: first, it is signed by two or more parties; Second, it has contract terms, under what conditions, what to do under what circumstances; Third, there is the subject matter of the contract, which stipulates what goods or services to provide and how much to pay; Fourth, the contract probably has a number, which contract it is, which year, which month and which day it was signed, who signed it with whom, and so on; Fifth, there should be management tools, and each signatory should hold one copy to prevent one party from changing the terms. These five characteristics basically represent the most basic conditions for daily contract execution.

From this perspective, smart contracts are easy to understand.

For example, the smart contract of Ethereum: First, its code and stored data are actually equivalent to what conditions the contract terms meet and how to automatically implement them-this feature of smart contracts may be known to everyone. Second, it is also possible to make the matter of "each signatory holds one copy" realized in the chain. When both signers can access the blockchain, they can actually see the copy of the contract, and the copy is not something they can master or tamper with, but stored in the chain.

This is interesting: Satoshi Nakamoto invented the blockchain to prevent pure digital assets from "double flower" bitcoin. Thus, in the era of smart contracts, Ethereum suddenly gave it the magical ability to "help the parties to the contract store countless copies and ensure that they will not be tampered with". Blockchain is a kind of global distributed storage, which enables any number of people in the world to sign and execute a contract without the danger of being tampered with, which is impossible in the traditional field. Because of technical limitations, you can't get any number of people to sign contracts at the same time.

Thirdly, each piece of code of the smart contract has a corresponding "address", and the entrance to execute this piece of code can be understood as the contract number and unique identification.

Fourth, the smart contract itself can also have "other property". Our daily contract is just a piece of paper, an accessory, and the property is still under people's control-even if the contract stipulates the delivery of nickel, how can paper control the movement of nickel? Smart contracts themselves can control property. A contract must have a "subject matter", including money and goods. This subject matter can be controlled by the smart contract, which is equivalent to being "owned" by it. In this case, the so-called "automatic execution" is guaranteed, and the assets are fully executed.

Trot 1 1:30

It is equivalent to the integration of judicial enforcement.

Grace Wai Wong 1 1:33

That's right. So there are signers, countless reliable backups, automatic execution capabilities, addresses and entrances that can be found, and control over the subject matter of the contract-from this perspective, it is indeed much more "intelligent" than ordinary contracts.

Trot 12:04

In fact, I especially understand the ideas of Miss Wang and Sister Wang. After all, they are all science students, and you may naturally understand them from the perspective of code. But as an ordinary person with a non-technical background, I don't have this understanding obstacle.

At the sight of the word "smart contract", people without code background will naturally regard it as a contract, a "smart contract" that no one needs to execute. In the real world, for example, I signed a contract with my boss, but he doesn't transfer money to my account every month, so I can't help it.

In addition, the smart contract is built on the blockchain, which means that I don't have to know who signed the contract with me. We have never done business before, nor have we established any trust relationship. In fact, we can sign it-because the blockchain guarantees "one person" and cannot be changed. This is a bit like SWIFT-we discussed it-it realizes the integration of "information" and "account"; Intelligent contract is the combination of "content" and "execution" of the contract. Once established, I don't have to worry too much about implementation. Smart contracts will automatically pay me, so I don't have to trust my boss.

But when you think about it, it seems a bit elusive. If its execution is automatic, what if something goes wrong? When we conclude a traditional contract, we will modify the terms in the subsequent development process, or the contract cannot be executed according to the terms at the time of conclusion due to special circumstances-if something goes wrong, will the smart contract be executed regardless?

If this is the case, when you "sign" the smart contract and press the start button, you may have to rethink it-as long as you press it, there is no room for change later, right?

Grace Wai Wong 15:00

Let's talk about the first question first: the greatest value of smart contracts is that people in the world who don't know each other or have never had any cooperative relationship can sign and execute this contract immediately and get the result-this is in line with the characteristics of blockchain.

A long time ago, when we introduced the blockchain, we would emphasize one of its characteristics-it allows people in the world who have no cooperative relationship to start transfer transactions. Satoshi Nakamoto's invention to prevent "double flowers" is to achieve-although we don't know each other, I will transfer money to you, and you know that this transfer must be true without any problems. Smart contracts inherit this feature. Contracts cannot be executed because we don't know each other or you cheat.

But if so, the contract will definitely be implemented, which means it will definitely not change. Then how dare I sign it casually?

This depends on the technical point of view-smart contracts can be "changed". From a technical point of view, there is not much difference between "changing" and upgrading a software system.

If a certain clause must be changed, it means that the original contract is invalid and a new contract is signed. The same is true for smart contracts, which is equivalent to upgrading code. It is now 1.0 version. I will come to the version 1. 1 in two days, and change the version1.0-we will implement the version1.1from now on-this is no problem. But the problem is coming again. Who has the right to do it? If both parties to the contract have the right to change the contract, it is meaningless and impossible.

Smart contract is actually equivalent to a "market", where a third party creates the contract, and then everyone is divided into three parties, namely Party A, Party B and Party C, to sign and execute the contract.

I dare to sign this contract because, as Party A, I believe that Party B, Party C and Party D can't change this contract and must implement it. The third party is the publisher and creator of the contract, and it has the right to upgrade the contract code. This mechanism is a bit like setting up a "store", where buyers and sellers sign contracts and do business, but the rules of the store cannot be changed-only the builder of the store has the right to change. This is also a necessity.

Will this necessity bring any problems?

There must be one. For example, third parties are in danger of "internal theft". If he finds that changing the contract is beneficial to him, he can also tamper with the contract, causing losses to the contractor. Even if he wants to improve the execution efficiency of the contract or improve the terms, it is not for personal gain. Does everyone agree?

Examples we often cite are: the "lending" smart contract can specify an interest rate algorithm, such as annualized 5%; If it is adjusted to an annualized interest rate of 30%-on the surface, the interest rate is the cost paid by both borrowers and lenders and has no direct relationship with the interests of the rulemakers; But you can't change the rules just because you are a neutral party, so you need to give buyers and sellers a "buffer period" or a "cooling-off period" or a voting mechanism so that participants can make the same decision. If it is accepted and voted, the rules can be modified.

If the participants don't accept it and you still want to change it, then you give me a cooling-off period and I quit. Therefore, in the end, the whole logic is still complete, and the third-party restriction mechanism should be introduced. I think this is similar to some rules of the existing financial market.

Trot 20:42

This is why experts are needed to interpret it. If you only look at these four words, you will feel that it is a cold automatic code; But there are actually a series of rules behind this, and most of these rules can be mapped to the real world. For example, the example just now is very similar to an "arbitration mechanism".

In this case, let's find a few real-world cases, analyze the problems in the real world and put them on smart contracts. Will the result be different?

I found two: one is a Russian default, and the other is a nickel short.

Let's start with Russia. In fact, Russia is a country that defaults frequently, with frequent sovereign debt defaults: 19 18 czar's imperial bonds default, 1998 Russian brady bonds almost defaulted, and the recent Russian-Ukrainian war has brought it into another dangerous default period.

/kloc-in March of 0/6, Russia paid more than $6,543.8+billion in interest on two US dollar debts; A week before the interest payment, everyone began to worry, because Russia and Ukraine have already gone to war, can they still pay it back now? If I pay in what currency? Do you use rubles? It has depreciated by 20%.

As a result, there was no breach of contract and the crisis was temporarily lifted. On March 18, the Russian Ministry of Finance paid it back. Although it is a day late, it is still within the 30-day grace period. But it's not over yet. In April, the principal repayment exceeded $2 billion. So up to now, whether it will default is still a huge question mark.

Usually, a country is unwilling to default on its sovereign debt. The main reason is that if you default, the market will punish you in some way, such as losing credit and being downgraded to junk debt by rating agencies, which makes investors reluctant to touch it for a long time, so it is difficult for you to find money in the market.

But there are too many possibilities for a country to default. In the last century, a large number of sovereign bonds were issued to finance the war. Once the war breaks out, it must be a breach of contract-because all the money will be used for the war. Russia is like this now, and it is more difficult-whether it is passive sanctions or active sanctions, investors are obviously unwilling to touch it. Russia is basically isolated from the world and can no longer lose credit because it has almost no credit; If foreign exchange reserves are frozen, even if you want to pay them back, where can you find dollars and hard currency?

So what does the word "breach of contract" mean in this case?

In the real world, as a government creditor, it is actually very difficult for you to freeze or force the sale of a country's assets. This is a game of confidence and patience. If you have the ability to harass the government of this country for a long time, you will pursue it year after year, just like Paul Singh simply robbed Argentina's ship to collect debts. Russia, a fighting nation, is different. Historical experience shows that even the most determined creditors, Russians have enough ability to surpass them and block all debt collection with the mentality that dead mice don't catch a cold.

There is another interesting thing this time: there is a clause in this sovereign debt called "paripassu"-the principle of "equal treatment". This is an ancient clause, which was used in debt contracts more than a century ago. It requires the debtor to treat all creditors equally, not favoring one over the other, and to give all other creditors the same repayment treatment as long as they negotiate with any one of them.

Since Paul Singh successfully used this clause to collect debts from the Argentine government, most countries have deleted this clause when issuing sovereign debts-to prevent these "nail households" from using this clause again when collecting debts.

But Russia's debt has not been deleted-either the fighting nation is too arrogant and feels that it will never be prosecuted; Forget it. However, the term "future repayment" in the clause magically disappeared-intentionally, perhaps by a clerical error. Anyway, the result has become: the principle of "equal treatment" will be observed when issuing, and all creditors are the same, but it does not mean that "the future" will remain the same.

This example tells us that the bond market is a "copy &; In the "paste" transaction, few people actually read hundreds of pages of terms-but the devil is here, and there is too much room for artificial "adjustment" and "breach of contract".

Wouldn't this happen if bonds were issued based on smart contracts?

Grace Wai Wong 28:09

This case is particularly interesting. At first, I was a little worried, because blockchain or smart contracts are actually the least suitable for solving the debt problem. However, after listening to many details of Russian debt, there is a good place to solve it.

First of all, "debt" is a typical "loan" process. In essence, I divide finance into "credit process" and "calculation process". Blockchain, smart contract, DeFi, etc. In fact, it solves the part of "calculation process", and "debt" is a typical "credit process".

In fact, "bond default" is the last thing that smart contracts need to solve. In other words, smart contracts and blockchain technology are the most powerless to "bond default"–because default is a process of credit loss. That is, smart contracts are used to write debt contracts, but the process of debt repayment involves the repayment subject, and you need to put assets into smart contracts to execute them; If you don't put it in, you can't execute it.

This goes back to the most crucial point: the premise that smart contracts can guarantee automatic execution is that the contracts themselves have "control" over the subject matter. But if the money I want to pay back in the future-principal and even interest-is to be placed in the smart contract and dominated by it, then why should I "borrow" this money now? You must turn some interests upside down.

In the field of DeFi, we also see many projects and entrepreneurs trying to solve debt market problems or create credit products with smart contracts. In fact, there is no problem, because there can be a set of other safeguard mechanisms behind smart contracts, such as voting and so on; It is still possible to finally convert the "credit" part into other guarantee mechanisms.

The "executive part" of credit cannot be transformed into a security mechanism at the code level, but it does not mean that smart contracts cannot improve the debt market.

Take Russian debt as an example, it has removed the word "future" from the "equal treatment" clause, which is its right and there is no way to control it; People who buy bonds buy when they are not careful and don't notice the change-this can actually be improved at the level of smart contracts.

First of all, smart contracts are written with code rules, and naturally there is an "equal treatment" clause, because the code can be executed by everyone. As long as there is an address and the code is solidified in it, people all over the world can execute it, so it will be "equally treated" by default. If you don't want to be treated equally, you have to do a lot of tricks.

About "The bond market is based on the template, copy &; Paste's market "-reminds me of many" micro-innovations "in the field of DeFi smart contracts in the past few years. It is also to copy all the codes of some smart contracts and then change them into two or three words.

But you will find that in this case, smart contracts are valuable. Why?

Because smart contracts are accurate codes. Audit institutions can easily find these changes. Different lines of code mean different results, and the judgment can be deduced accurately. In the traditional market, due to the imprecision of natural language, even if lawyers are allowed to try, we don't know if there are other meanings behind these changes. Or lead to any unexpected consequences.

The audit institution of smart contract is a very important party in the whole ecology. These organizations are usually smart contract developers or white-hat hackers. Their role is very similar to that of law firms in the real world. They are responsible for reviewing contracts and contract codes.

So to sum up: although smart contracts can't solve all the problems of debt, they still play a great role in debt execution and clause analysis.

Trot 35:47

Therefore, now I think it may be unrealistic to put Russia's situation, or even the entire sovereign debt, on smart contracts. Because for the party that originally intended to "not implement", it may not sign at all.

This leads to the second case: the nickel forced warehouse incident that made a lot of noise some time ago.

A general answer: On Women's Day, the market staged a historic event, and we witnessed the epic short-term squeeze of LME market. The price of nickel hit the most extreme price fluctuation in history, soaring 76% on March 7, reaching more than 50 thousand dollars per ton; Then the next day, it broke through the mark of $654.38+million a ton.

This is an obvious blank. Qingshan company, the world's largest nickel producer, was forced to go in the wrong direction before the Russian-Ukrainian war. Short position of 654.38+0.5 million tons of nickel, of which 50,000 tons are off-site positions of JPMorgan Chase; In other words, at this moment, Castle Peak has owed JP about $654.38+0 billion in deposit.

In fact, there is still room for discussion about OTC. In case of extreme situations, the parties will first negotiate solutions in the OTC market. After the explosion, Qingshan paid a deposit to the exchange economically, otherwise there would be huge problems in liquidation. The result of the negotiations was to keep short positions first, and then LME "made history", canceled the transaction and stopped nickel trading until mid-March.

From that moment on, from the perspective of global market, LME's "credit" and "neutrality" appeared a huge question mark-the sudden suspension of trading affected thousands of transactions, and other participants in the market suffered huge losses.

In this case, where can smart contracts play some roles?

Grace Wai Wong 42: 10

In fact, when introducing smart contracts just now, we also mentioned that smart contracts can be "interfered", but it is not true that 100% cannot be changed.

From this perspective, LME's intervention can also be regarded as an "intervention". But there are some problems here: first, the "intervention" of smart contracts must be upgraded by the "licensor"; Or directly modify the parameters in the smart contract. This is different from a centralized system that "rolls back" or "cancels" transactions.

The intervention of smart contract, whether it is code upgrade or parameter adjustment, can only be "backward intervention", changing the future rules, but not going back to a certain stage in the past-blockchain does not support this intervention.

Of course, this does not mean that "reverse intervention" cannot happen at all. For example, you may all have heard of the attack on the Ethereum by the corridor, so the Ethereum has a "hard fork"-this is indeed a "rollback", which happened once in the history of Ethereum. However, the result of this "rollback" is the simultaneous generation of ETC and ETH chains.

Therefore, under the system of "calculation", even if you want to "roll back", it is not 100%, because there are still people who can choose to execute the contracts that you have not "rolled back".

But this is impossible in the real world. Because it is impossible for people in another parallel world to choose to continue trading orders that have been forcibly emptied, because there is only one exchange, and rollback means rollback, and the two exchanges will not be hard-forked.

The real world cannot be bifurcated, nor can it be bifurcated into two green mountains, two Russia, and one ton of nickel becomes two tons-one ton in each of the two parallel worlds. This is determined by the physical world. Therefore, smart contracts and blockchain systems can only have the so-called "guaranteed execution" ability for "pure digital assets".

Can LME's "stop trading" and "cancel trading" be done in the field of smart contracts?

Objectively speaking, it is also possible. There are generally two means: the first is voting. It is equivalent to the collective voting of LME shareholders. The voting result determines whether to allow rollback, and it cannot be changed if the voting is not passed. This is also why the current encryption field will implement the "token economics" system, which is a model similar to equity. Voting results can be bound to smart contracts and automatically executed.

Second, what does voting mean? Voting in the digital world is a "rigid" result-51%people agree to change it, but won't this lead to "tyranny of the majority"? 49% people disagree and can only accept it? What if voting can't solve the problem?

The answer is to set a "cooling-off period" or "transition period"-a few days or hours. Even if the vote is passed, it can only be implemented after the cooling-off period. If you don't want to play, just quit the system during this time. There is no problem to change the rules, but give me the freedom to leave-this is the most basic freedom.

LME's practice is a typical drawback of "centralization" system-even if we want to change the rules, can we let everyone vote first? Those who are affected by the rules should at least have a chance to speak. Second, even if the vote is passed, it will take some time to change.

If it is implemented through smart contracts and abides by the governance rules just now, its credibility will definitely be higher. Therefore, from this perspective, smart contracts will be of great use in maintaining fair and efficient market rules with higher trust.

Trot 50:5 1

Yes, some mechanisms in the virtual world can also be used in the real world. But how practical are these rules such as voting and cooling-off period?

Such as the tyranny of the majority. If everyone suddenly realizes the possibility of "tyranny of the majority", such as I hate the rich, we are all leeks in the market anyway. We won the lottery by number, voted together and transferred all the money in the large account to our account. If it is automatically executed according to the voting results, isn't it equivalent to "reasonable robbery"?

However, if a cooling-off period is set and the robbery is officially carried out after 15 days, the extended family will definitely leave and can't wait to be robbed. But all the extended families have left. /kloc-who am I going to rob in 0/5 days? The whole game is meaningless?

Grace Wai Wong 52: 17

This is a core concept of blockchain and cryptocurrency-that is, your behavior should be economical and reasonable.

Xiaosan does this at the expense of others. Not only did you not get the money, but the only result was to destroy the value and credit of this platform. In this case, you will find that Xiao San is not so stupid. They know that it is meaningless to vote for him.

This can be traced back to Satoshi Nakamoto's Bitcoin White Paper. You can attack with 5 1% computing power and take all the bitcoin in your own hands, but the bitcoin will be zero-the cost of those machines you bought will not come back. What's in it for you?

Therefore, in a sense, "economic model" is the core "meme" in the blockchain field. The rationality of the economic model we maintain makes this attack meaningless and unreasonable.

Trot 54: 1 1

I now feel that in fact, although any rules and mechanisms seem to be remedial measures, they actually play their greatest role before things happen.

Under the influence of the game, everyone's behavior will automatically find the most rational and "obeying the rules can maximize the value" result. In other words, good design in advance will lead to a rational result.

Grace Wai Wong 55: 13

The core value of smart contracts and blockchains is actually "maintaining the effectiveness of rules". More suitable for the platform economy, or the logic of the bilateral market. The creators of blockchain and smart contracts are the makers and maintainers of rules, and they are not necessarily participants themselves. Participants are strangers in the world and all participate in the game.

If two people know each other, sign the contract, exchange the contract text, and are willing to guarantee the future implementation-then in this scenario, the smart contract does not make much sense.

Trot 56:55

I totally agree. You may have various ways to upgrade customs clearance, but the whole framework of game rules can be improved through smart contracts.

End—

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