- Basic Use Cases
The first use case is a smart asset, or token, built on a currently existing blockchain. All that needs to be done is to ensure that a user who wants to spend money has the funds, has been authenticated, and is not double spending.
Another meaningful use case for smart contracts is multisignature wallets. On Ethereum, we can leverage the platform’s built-in authentication protocol to create a functionality that allows us to have an m of n signature scheme (refer to Lecture 3).
We can also create Proof-of-Existence use cases using smart contracts, which hash intellectual property onto a blockchain to prove the existence of some piece of information at some point in time. With Proof-of-Existence, we leverage both the public auditability and immutability of the blockchain. We can use Proof-of-Existence to record document ownership or implement a decentralized DNS system.
- Advanced Use Cases
Many developing nations struggle with broken land titles systems; flawed paperwork, forged signatures, and unclear documents make tracing ownership of land difficult. The pitfalls which keep a central organization from solving this problem are mistrust between citizens and these central parties.
Proof-of-Ownership helps address these issues by tracking ownership of documents, similar to Proof-of-Existence. We can create an association between users and document hashes to prove ownership. This provides transparency and immutability, and it limits centralization. A major caveat to this use case is “Garbage in Garbage Out” (GIGO), which states that if the inputs are incorrect, the outputs will also be incorrect. We refer to the entities that send information from the real world into the blockchain as “oracles.” Prediction markets are another advanced use case of smart contracts. A prediction market allows users to bet on the future and receive winnings if they bet correctly.We can use prediction markets to “buy information.” Use cases of prediction markets include insurance, bug bounties, ICO signaling, and futarchy.
Smart contracts also have significant potential to secure supply chains. Everledger was created to tokenize and track a diamond’s path from mining to current product.
In addition to providing a digital service, blockchain can also be used to provide a real world service, such as providing infrastructure in the absence of government action to do so. A common infrastructure problem is that of energy grids. Individual households can create smart contracts that promise to pay a certain amount of money to build an electric grid if neighboring households commit to doing the same. A contractor can then redeem the money in exchange of working on the grid. Through smart contracts, we can coordinate between untrusting parties without a central entity.
Finally, blockchain can also allow us to conduct after hours trading by solving the “Liquidity Problem,” which causes the SEC to restrict after hour trading to placing limit orders. With blockchain, brokers can tokenize stocks by creating legal contracts underwriting them. Stock tokens can be traded worldwide even after the markets close and redeemed for their respective stocks during business hours.
- Blockchain Generalizations: Essential Properties
Although using blockchain provides numerous properties if implemented in a system, there are often other solutions that provide the desired properties without using a blockchain.
Blockchains provide guarantees of privacy, decentralization, and more. However, these properties are sometimes unaffordable for practical use depending on the user base, goals, and scale of the application.
III.I Efficiency
The word “efficiency” is often used when used to describe blockchains, but blockchains are not always efficient for their proposed use cases they are proposed for. For example, if one wanted to purchase a coffee using bitcoin, it is far less efficient to wait 10 minutes for a confirmation than it is to simply swipe a credit card or hand the cashier some money. However, sending money across the world using Bitcoin would take a mere ten minutes, compared to the days for coordination between banks internationally. As shown, there are numerous properties that a blockchain provides if implemented, but sometimes there is no need to implement a blockchain in order to achieve these properties for specific uses cases. Efficiency depends on whether the immense cost and complexity of decentralized consensus is overcome by the benefits of blockchain.
In addition, properties like data immutability , integrity, auditability, authenticity, and public key identity infrastructures are all very powerful properties provides by blockchains that a blockchain can possess, but can all be achievable by using previously existing technologies, like cryptography and implementing a system with a hash chains. Redundant, mission-critical, fault-tolerant systems already exist in the form of secure servers or cloud services like such as Amazon Web Services. In addition, these centralized solutions are literally millions of times less expensive to run than current decentralized solutions. Although by definition a blockchain possesses these properties, a centralized solution can just as well implement these, usually cheaper as well.
III.II Solving coordination failures
One major property of a blockchain system is its ability to create arbitrary incentive structures so as to solve coordination failures. By offering rewards for users to act a certain way, a system can therefore incentivize them to follow those certain expectations. Because of this, blockchain can be considered a “technological solution to a social problem.” This is especially useful in use cases where individuals do not trust each, but could benefit from working together. Blockchain allows for them to still coordinate or collaborate without the need for a trusted third party. Funding public infrastructure/crowdfunding is one such example for coordination, such as with the smart energy grid example, which uses smart contracts in order to create a common law without a third party.
III.III Horizontal Integration
Blockchains create a standardized platform for access and interaction, combining the power of all users to enhance all of their capabilities. One such example of this is the combining of data silos. Since all information that is stored on a blockchain is shared, it is accessible for all users on the chain. Any individual contribution to the chain increases the protocol’s value for all. This property, along with that of enforcing having a common formatting standards, is known as network effects, which is the increased value of potential of a product for each additional user. Users support the entire community while also benefiting themselves.
III.IV Pure decentralization
One of the largest selling points of using a blockchain is its decentralization. Pure decentralization refers to decentralization for decentralization’s sake, such as Bitcoin avoiding the functioning bank system out of distrust. So if it required to avoid a centralized authority, a blockchain would be a good solution to this issue. This extends to scenarios of corruption or power saturation in central authorities, such as governments and financial institutions. In a situation where there is a lack of trust in the government due to corruption, a blockchain could be implemented. This decentralization paves the path to also create censorship resistance and disintermediation of power. Because blockchains are globally accessible, they are unstoppable as long as there is a community that supports them.
III.V Advantages of centralized solutions
A central solution is fully controlled by a single organization, keeping everything under the same umbrella. One of the benefits of this is simpler and faster software updates, meaning it is easy to make changes and have the update for all users. Contrast this with a blockchain, where everyone instead must have to voluntarily agree to upgrade. It is much easier to make security patches when you don’t need to reach consensus on upgrades across all users. Centralized solutions are also more efficient, as instead of having to do a computation for every user in a network, it only needs to be done once, and there is no need for verification. Access control is also much easier, as the central authority can simply keep track of access in a centrally controlled database, something that cannot be done in a decentralized system. Most significantly, centralized systems can make decisions with their human judgment, especially helpful when tackling complex decisions. In a decentralized system, smart contracts may not be able to cover or formalize all of the edge cases, and may not be suitable for use in more complex issues. For example, if Airbnb were replaced by used smart contracts, how would a smart contract be able to determine what to do if household possessions were damaged? Which individuals could be trusted to report this information without stripping away the values of decentralization? How would a smart contract handle human error? In the end, it is important to always ask why a blockchain is better than a centralized solution. Neither is better than the other universally, so it is important to compare the pros and cons of both to determine which one is better for each specific use case.