Why Ethereum Needs 'Dumb' Contracts

Ethereum entrepreneur Daniel Cawrey discusses the recent demise of The DAO and how that impacts the future of smart contracts.

AccessTimeIconJun 29, 2016 at 5:50 p.m. UTC
Updated Mar 6, 2023 at 3:01 p.m. UTC
AccessTimeIconJun 29, 2016 at 5:50 p.m. UTCUpdated Mar 6, 2023 at 3:01 p.m. UTC
AccessTimeIconJun 29, 2016 at 5:50 p.m. UTCUpdated Mar 6, 2023 at 3:01 p.m. UTC

Daniel Cawrey is head of communications at Velocity, an autonomous derivatives project utilizing smart contracts and built on the ethereum blockchain.

In this opinion piece, Cawrey discusses the recent demise of The DAO and how that impacts the future of smart contracts, the technology on which the short-lived fund was based.

"The two things to know about smart contracts is that they’re dumb, and they’re not contracts."

This statement from Harvard Berkman Center's Patrick Murck seems increasingly relevant in the wake of the collapse of The DAO. The ethereum-based fund was the largest smart contract issued to date, and its failure has led many to reconsider how ready the technology is for primetime.

At their core, smart contracts facilitate decentralized applications by eliminating trust points. Because they automate existing processes, many believe smart contracts could someday lower costs across industries.

However, all that promise isn’t without possible problems.

This is especially true when it comes to smart contracts being built on ethereum, currently viewed as the standard platform for the creation of smart contracts.

Debate is now necessary should the ethereum community want to move forward in improving both its technology and governance structure to support the aims of entrepreneurs and users.

Breaking the system

Ever since the invention of computers, hackers and attackers have been breaking systems by exploiting code.

This trial-by-fire approach to development can arguably be seen as the reason behind the multimillion-dollar attack on The DAO. Though it was the first major achievement in blockchain smart contracts, The DAO attack exposed weaknesses in ethereum’s scripting language that could discourage further efforts.

In total, the attack resulted in 3.6m ether being taken from The DAO, currently worth about $50m. Rather than a theft, the attack appears rooted in exposing the idea ethereum's code is not yet production-ready. This has indeed proved effective. Since the attack, numerous articles displaying flaws in ethereum and its programming language, Solidity, have appeared.

There’s obviously been talk about The DAO attack's "recursive call" issue. Further, the Solar Stormhttps://blog.blockstack.org/solar-storm-a-serious-security-exploit-with-ethereum-not-just-the-dao-a03d797d98fa exploit and several other bugs in the system are now out in public due to the efforts of security researchers.

This shows there is a lot of work to do to make ethereum smart contracts more secure. But, this will require community effort and a more immediate decision as to whether the blockchain will fork as part of an effort to recover the funds.

Dumb contracts

There’s work to be done in making ethereum’s smart contacts ready for the real world.

For example, ethereum smart contract code was designed to remain immutable or unchanged. This makes the system difficult, but not impossible, when it comes to upgrading code.

On one hand, this make sense. Contractual agreements, once signed, cannot simply be revoked. However, software systems are upgraded all the time. This dichotomy is perhaps the main reason why, almost 20 years since Nick Szabo first proposed the idea of smart contracts, they still have not been implemented into the existing legal system.

In law, loopholes are often found in agreements that are then exploited. This is not unlike what has happened with The DAO. Therefore, careful consideration must be taken when creating smart contracts.

"Code is law" sounds like a great motto until flaws are found.

It’s clear simple smart contracts are ideal smart contracts because of ethereum’s design. Building automated governance in the way The DAO wanted sounds great on paper, but it seems it's better to deploy smaller, interrelated smart contracts instead of a larger one.

Governance and transparency

Cryptocurrency-based technology is unique – many get on a hype train and don’t consider the long-term implications.

Ethereum’s price, along with profit expectations of The DAO, have certainly fueled this, as both projects used tokens with a monetary value to fund their efforts.

As a result, conversations on governance must be had, as there is a danger that the situation will encourage an opaque structure where community members aren’t sure who is in control. This type of configuration wouldn’t be different from the less than transparent systems ethereum attempts to displace.

Right now, only a few stakeholders seem to gain from cryptocurrency platforms, though this isn't just an issue with ethereum. For example, if there had been better governance in bitcoin, specific standards bodies would have been implemented to properly define the purpose of BTC, its unit of account.

If nothing is done, the same type of infighting over the mere definition of ethereum might happen.

Is ethereum a smart contract platform? Is it the correct system for deploying decentralized applications? Is it a store of value? A payment currency?

Varying definitions plagued bitcoin up until the point where using it as a fast means of payment has become almost impossible. Ethereum could experience similar issues if proper governance isn’t established.

Road ahead

An optimist would hope infighting won’t destroy Ethereum.

Many are closely observing what will occur over the next few weeks and months. Still, it’s hard to be pessimistic.

There’s still a great future for smart contracts and open blockchains. Ethereum has a place – if its smart contract technology can be properly refined and governance is ironed out.

In the cryptocurrency ecosystem, technology is flirting with fascinating concepts in finance and economics. Bitcoin was obviously the first to do this, a reboot of the definition of value.

Programmatic agreements move this industry into deeper, even more intriguing territory. Prior to Ethereum, there wasn’t an open system for properly implementing agreements in code. Smart contracts on ethereum do work. The DAO proved this – yet it also showed it still requires a good amount of refinement for production use.

Simple smart contracts paired with an open blockchain could improve the legal system by increasing efficiencies and further democratizing law.

But this isn't likely to happen quite yet, not until the technology and a distributed structure of control is properly figured out.

Right now, ethereum is the standard smart contract platform, but without a proper path forward, an upstart could easily arrive to replace it and pave the way.

Man in rowboat image via Shutterstock

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