Our Securitized Future

Smart contracts can deliver unique value distribution opportunities that are otherwise infeasible or impossible in traditional systems.

Most routine resource exchanges, such as purchasing a book online, are completed with a 1:1 equivalency. An online retailer selling a particular book for $12 will transfer the ownership of the book to anyone with $12. While the post-purchase divvy might entail splitting the $12 among the retailer, publisher, and author, the transaction has settled for the customer as soon as his (or his bank’s) $12 is delivered to the merchants bank account.

What has changed in the world since this process became the norm? If we were to reinvent the our social, cultural, and economic systems based on the technology we have today, what would be different? What would be the same?

We believe there is an unrealized value-creation opportunity in the present 1:1 exchange of currency for goods. Smart contracts allow us to create unique business logic for any exchange, but at some point we’ll have to build a standard method of transfer to make transactions settle quick enough to be used in practice.

When smart contracts begin to mediate exchanges like the one I mentioned above, intellectual capital will become securitized at the lowest-level. Currently, transferable assets are used as proxies for intellectual capital. The software engineer’s knowledge is priced into his salary. As we move towards an economy mediated by smart contracts, intellectual capital will become directly transferable for goods, and the 1:1 exchange that we know today will become a 1:n exchange. Intellectual capital will become transferrable for goods, and complex contracts will be created in real-time to best-match a buyer’s intellectual capital to a dollar value equivalent. These contracts will have long intrinsic settlement times, but banks will exist to settle with merchants in real time. The terms of these contracts will be insured, first by a peer-review reputation system, and later, through a series of collateral contracts tied to the user’s identity.

Within the next decade, consumer purchases will not be 1:1 exchanges, but collateralized debt obligations based on the intellectual capital of the consumer. This is premised on the existence of a bank to support this type of exchange, but I believe that one will emerge to fill this need.

If we return to the book-buying example above, we can reformulate the purchase process using this new paradigm, but we should add a bit more color to the persona of this buyer. Let’s image that he has 120k followers on Instagram (I don’t know any software engineers with this many Instagram followers), and three outstanding freelance offers on his Upwork account (he must be a front-end guy). Before starting the purchase, the buyer, or his bank, will have configured a set of collateral on his behalf. This will include his API keys to the relevant services, as well as the ownership rights to a wallet contract that he owns, and the bank can call on his behalf.

At the point of sale, the bank will make a $12 loan to the retailer on behalf of his collateral. When his monthly statement is due, he will have to pay back his principal and interest, but this is where it gets interesting.

He will have the option to make his payment traditionally, in cash (fiat or crypto), or by signing a smart contract with his single-source identity (it remains to be seem which company will “win” identity, but there will be a winner) that binds his identity and his authenticated API keys to a specific task. Since he has a lot of Instagram followers, he might have the option to make a sponsored post on behalf of a clothing brand, which will earn him his $12 so long as the post generates at least 10k impressions. When his credit statement is due, the smart contract will evaluate the completion of this collateralized task by querying his Facebook ad account (curl /<ad_accont_id/insights) and pass the result into the contract ABI. If the result is True (he completed the task), his credit statement will settle, any interest will be tallied, and the cycle will continue. But, if the result is False (seasonal depression made him camera shy), the contract will call his wallet contract and ask for payout in the statement amount. Since he has already given the bank contract permission to call for payout on his wallet contract, the bank can automatically deduct the minimum payment, and even charge a late-fee.

I anticipate the advent of smart contracts to introduce a thick new layer of complexity into our local, regional, and global economies. While using a proxy for intellectual capital (cash) is a simpler method of exchange, smart contracts have thrown a wrench into the economic evolution of humans by creating a new platform for profit and speculation. I’m not sure that this will prove be more efficient than the system we have now. I just think it’s inevitable.