Tokenized Smart Contracts - Redefining the Landscape for Cryptocurrency
The full article was originally published by Lukas Tassanyi on Medium. Read the full article here.
Tokenized Smart Contracts — Redefining the Landscape for Cryptocurrency
Almost 10 years ago, Satoshi Nakamoto published a paper titled: “Bitcoin: A Peer-to-Peer Electronic Cash System”. The idea of Bitcoin was born, but back then you would have been called delusional if you thought an entire asset market worth twelve digit USD figures would emerge from that.
What started with BTC, was soon complemented with other assets. At first, there were mostly just renamed Bitcoin forks, but later new protocols with different natures were designed and even virtual tokens were created on top of smart contract platforms. It would, however, be extremely naive to think that we have already discovered the entire spectrum of assets in this still very young market.
“Tokenized Smart Contracts” (TSCs), which, to be honest, sounds like a weird word mix-up, could be exactly such a new asset. In this article, I will do my very best to describe the concept behind these strange, not yet existing tokens and what value they could provide to the world of cryptocurrency.
Why Nobody Has Thought of It Before …
Assuming that it is technically possible, why is it not a thing yet? Simply put, TSCs cannot just exist anywhere. They require certain features from their protocol, and, according to the authors knowledge, these features do not exist in any current smart contract platform. However, there seems to be a single one, still concept phase, but according to its theory could very well allow such TSCs: IOTA’s Qubic.
Since the technology behind Qubic has been unknown to the public just until less than a week ago, nobody has really grasped it’s full potential yet. Therefore it’s not surprising that just now the first big ideas start to arise.
Qubic fundamentally differentiates from traditional smart contract layers because the contract is not subject to global consensus and does not have to be validated by the entire network, but instead will only be processed by dynamically sized node clusters (called “assemblies”). This enables scalability and is the most important requirement for TSCs.
This article assumes that you have a basic understanding of how Qubic works. Otherwise, I highly recommend you learn about it first before diving deeper into the rabbit hole.
So What Exactly Are TSCs?
Oversimplified, qubics are distributed calculations run by assemblies of q-nodes, who vote on a certain result. In order to receive rewards, a q-node has to come to the same result as the majority of the assembly, thus enabling consensus. Their voting power and rewards are weighted by their resources (e.g. hash power, bandwidth etc. and any mix of resources) which give them a certain “stake” in the qubic.
The IOTA Foundation was very clever to not specify how that stake would be calculated. It’s an open parameter and therefore gives the qubic author a lot of freedom when designing the qubic. One rather interesting strategy could be PoS (“proof-of-stake”), which means that the q-node proves that it owns a certain stake of tokens. Naturally that would be IOTA tokens.
Now here is the thing: What if it’s not IOTA tokens? What if it’s a token that exists solely for this smart contract?
Imagine you build a very big qubic. And you want to make sure, that nobody attacks it. If you choose hash power as the stake defining resource, your qubic could be prevented from reaching consensus by an attacker owning 34% of the hash power. If the attacker owns 67%, they would be the quorum and could even make the qubic machine return wrong results. Since hash power is easy to get, the attacker would have an easy game here.
Instead, the proposed idea here is to distribute a custom token (acting as a share of your smart contract) with a limited supply among a big amount of q-nodes and make this token the stake defining resource of the qubic (every q-node is weighted proportionally to the share it owns).
How Does It Prevent Attacks?
If an attacker wanted to attack your qubic, they would have to buy at least 34% or 67% (depending on the attack) of the total supply. Buying that much of any asset’s entire supply is always an expensive thing to do. Because, while the attacker buys, they lower the available supply and make the price rise by a multiple. And they have to keep buying through the increasing price until they have that much tokens.
But what happens once they have 34% of the supply? They now hold a big share of the tokens. And the value of the tokens depend heavily on the smart contract. If they ruin the reputation of the smart contract by attacking it, they are basically attacking themselves since their tokens will become worthless. And if they were trying to dump this much tokens onto the market to limit their losses, they would run into liquidity problems anyways. Not a very attractive position to be in.
Basically, it introduces proof-of-stake to smart contracts, but in a much more advanced way than a PoS smart contract platform where the stake is simply a single global token that doesn’t tie you to the actual contract in any way. Whereas with TSCs, you have to directly invest into the success of this single smart contract, in order to be allowed to process it. And once you buy these shares, it is in your very own interest that the contract lives on.
How Would This Even be Implemented?!
TSCs require a secure platform on which they can run their custom token. Moreover, they need a way to communicate with this platform. So what more elegant way could there possibly be than having a native token platform running directly on the Qubic protocol? Up until now, there hasn’t been a detailed implementation concept for such a platform. However, since I saw that it would be a fundamental requirement for TSCs, I drank a few cups of tea 🍵 and came up with this solution:
I wrote that article solely as the foundation for this one. I definitely recommend you giving it read, or at the very least try to comprehend the info graphics.
For the lazy ones: There will be multiple Toqen Platforms (toqen = qubic token) running on Qubic, each simulating multiple toqen blockchains. Your qubic will be able to communicate with it to create new toqens or to keep track of the exact stakes. The q-node owners can transact on the toqen ledger as well to buy/sell their shares.
Where Does the Token Value Arise from?
The smart contract token is a share that enables you to receive the contract rewards. Therefore, as time passes, the smart contracts that keep running and paying out rewards, will gain a certain level of reliability associated with expected future rewards. The share gives you the priviledge to be part of such a reliable contract.
Being Entitled to Vote
Once again, the IOTA Foundation made an excellent design choice when they decided that Qubics could vote on certain factors (such as the future assembly size). If you are a q-node, your stake weights your vote, therefore having a share allows you to have an impact on where the contract goes in the long-run. That’s certainly worth something. Custom votings designed for the specific contract could be implemented, opening many new doors in terms of adaptivity and interactivity.
Building up Your Global Reputation
In the future, we will need trust ledgers for everything, including q-nodes. Such a trust ledger would contain a historical record of your q-nodes actions to filter out malicious actors. If you wanted to join a high quality assembly or receive airdrops of new TSC shares, you would be measured by your reputation. So what better thing would there be to show, than the portfolio of the past qubic assemblies you have been part of. The toqen ledger will act as a public record of your honest work.
Autonomously Acting Qubics
Toqens constitute a direct way of revenue for qubics. For example, you could program a qubic that runs some kind of game where people can use toqens to buy virtual items. These toqens can be used to reward the q-node assembly that runs it. The q-nodes are actively staking their shares to gain even more of them at the cost of inflation that hits those who hold shares but do not contribute to the qubic. Apunishment for lazy q-nodes that incentives them to keep unused shares liquid and give them to other q-nodes that actually intend to be an active part of the qubic.
Market Driven Qubics
The speculative nature of tokens opens new possibilities for TSCs. Market participants will actively watch out for promising qubics and buy their shares, therefore raising the price. The increased market capitalization can than be used to fund the qubic. This way the market is the driving force that incentivices quality qubics and accelerates their development.
If you write a very good qubic and the market realizes its potential, you will get it funded, possibly even earn money. ICOs have made many people rich, but now you can make money with all kinds of QApps (Qubic Applications).
Tokenized Smart Contracts might provide important security and innovation-driving advantages and could emerge into a new crypto asset that has to be taken seriously. The theoretical limits and disruptive implications are still hard to imagine.
For technical discussions about Qubic, join the Qubic Forum on qubIOTA.com