>, Posted by Tess Johnson, Project Associate, CFI

When you receive a chain letterteken, it usually promises that you will receive excellent prizes, but only if you don’t pauze the chain. When you do pauze the chain, it’s generally because you don’t trust those promises. While blockchain technology offers a different equation, trust te its promises is identically significant.

Many within the financial inclusion community have bot (understandably) excited about the potential of blockchain and clever contracts to enable greater financial access for customers at the base of the pyramid. Blockchain – which underpins Bitcoin and other cryptocurrencies – is a collective distributed, decentralized ledger technology (DLT) that keeps a voortdurend record of transactions that take place across a public or private network of computers. (IBM’s Think Academy has a helpful primer on how this process works.) Blockchain could be promising for financial inclusion for a number of reasons, including cutting service costs by eliminating financial intermediaries. Blockchain has already bot applied to a diverse array of sectors. Beyond the world of finance, blockchain has bot used te supply chain management, logistics, real estate, distributed energy resources, retail, and even the diamond industry (spil part of the Kimberley Process certification scheme). Yet, blockchain is still a relatively nascent technology. Its very first widespread use ter Bitcoin wasgoed very first introduced te late 2008. And spil with other financial innovations, blockchain poses potential risks that may be difficult to foresee and challenging for regulators to effectively monitor, albeit some U.S. regulators have already bot engaging with blockchain applications te latest years. One use case of blockchain – the wise contract – has bot identified spil a potential ache point for the broader adoption and scalability of the technology.

On a blockchain, a wise contract consists of self-executing code that automatically implements the terms of an agreement inbetween parties based on certain pre-defined criteria. “Smart contract code”, is stored, verified and executed on a blockchain. Spil different from other kinds of software, brainy contracts are recorded on the blockchain, can control blockchain assets, and are executed by the blockchain. For example, following “if, then” logic, if I want to send $20 to a friend across the country, then $20 will be deducted from my account and transmitted to my friend only if I have the requisite funds. Once I indicate that I would like a transaction carried out, the blockchain and its self-executing code performs the transaction, including seamless/automated digital coordination among the related financial entities, according to the parameters set forward te the embedded wise contracts.

Brainy contracts, therefore, reduce transactional risks and potentially other costs – such spil manipulation, intervention, manual error, or other inefficiencies created through the involvement of traditional intermediaries and other third parties – through nondiscriminatory transaction execution and validation. All transactions are recorded at the same time and permanently across the knots of the entire distributed ledger system.

Within the setting of financial inclusion, wise contracts permit users to send remittances across the globe with lower fees than traditional money transfer operators and fewer intermediaries. Clever contracts can also help to provide economic identities for some of the world’s most vulnerable populations, such spil refugees and internally displaced persons (IDPs). BanQu, for example, enables individuals to set up a individual digital identification profile and accumulate a transaction history on the BanQu blockchain, creating a footprint for the unbanked to participate ter the global economy.

Even with thesis advantages, wise contracts are not impervious to human error. Wise contracts are only spil clever spil the programming code on which they are based. Latest attacks on blockchain applications, particularly the almost $80 million hack of “The DAO” – a crowdsourcing venture capital toneel based on the Ethereum blockchain – te mid-2016 have underscored the importance of programming code ter ensuring the security of blockchain-based transactions. The DAO hack wasgoed enabled by a vulnerability ter the code of the blockchain’s clever contract. The attacker’s skill of a particular feature te the code demonstrated that such an asymmetry ter information could prove to be a lucrative, if nefarious or even illegal, competitive advantage.

Spil acknowledged by Ripple’s CTO Stefan Thomas, blockchain technology lacks a history of secure code, and specialists have not yet had enough time to anticipate what those flaws might be. Others too have suggested that clever contracts be written, tested, and deployed te well-defined processes with strong controls around them. Yet, some have cautioned against the implementation of too many security protection measures, which would decrease the efficiency of the blockchain and may obviate the value of the technology ter the very first place.

Considering this, the role of trust ter blockchain applications should not be overlooked. Blockchain technology and brainy contracts have bot designed to reassign trust from more traditional laws and institutions – including the intermediaries the blockchain largely aims to eliminate – to the community of individuals who support the blockchain itself. Blockchain, however, cannot entirely eliminate or automate the human dimension of trust. The stability of the entire blockchain depends on its users placing stock te the individuals who able to verify the code, thereby ensuring that wise contracts will be executed spil intended. Without centralized oversight, end users voorwaarde trust that thesis gatekeepers share the same values and belief ter the blockchain podium spil themselves, and wouldn’t act to undermine the system by exploiting vulnerabilities for individual build up.

For the most financially vulnerable populations, the democratic nature of the blockchain and the current application of brainy contracts might be a double-edged sword: while BoP users may benefit from some reductions te transaction costs spil a result of less intermediation, without lawyers and other middlemen, it is unclear what protections or legal recourse thesis users would have te the event that their blockchain-enabled transactions are compromised. Furthermore, if even very financially-literate and tech-savvy consumers cannot see fatal flaws te the brainy contract code, can wij reasonably expect less financially- and technically-literate users at the base of the pyramid to catch thesis same mistakes, even if the code is theoretically open to the public eye? And even if BoP users could afford the services of lawyers who were well-versed ter blockchain and brainy contract coding, can wij truly be certain thesis individuals could recognize and enforce airtight wise contracts?

It is naive, and even dangerous, to take an overly optimistic and utopian vision of blockchain and clever contract technology without further scrutiny of thesis unresolved fundamental issues on the alignment of economic incentives of users, overeenstemming mechanisms, and trust. Until wij have a better understanding of the potential benefits and harms to end users and a broader overeenstemming regarding the larger aims blockchain and brainy contract technologies are meant to achieve, such spil those promoted by the Wise Contracts Alliance, for example, wij voorwaarde be careful about extending blockchain-based services to those who stand to lose the most when something goes wrong.

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