Formalizing and Securing Relationships on Public Networks, by Nicholas Szabo

For anyone who is interested in the future of information and networked society, I found this paper, written by a very early proponent of digital money, Nick Szabo, to be quite relevant. Szabo is most famous for his articles and blogs, which covered a wide range of subjects from history, economics, to cryptography–which may have influenced the development of Bitcoin. But to my delight, I have also found a First Monday paper written by Szabo on the rationales and approaches to digitizing paper contracts using cryptography, and social issues that we have yet to resolve.

This paper addresses what Szabo called the “smart contracts.”┬áTo quote what he has described as a benefit of smart contracts:

Control protocols, and the professions of auditing and accounting based on them, play a critical but ill-analyzed role in our economy. … Controls allow a quarrelsome species ill-suited to organizations larger than small tribes to work together on vast projects like manufacturing jumbo jets and running hospitals. These control protocols are the result of many centuries of business experience and have a long future ahead of them, but the digital revolution will soon cause these paper-era techniques to be dramatically augmented by, and eventually integrate into, smart contracts.

According to Szabo, “The basic idea behind smart contracts is that many kinds of contractual clauses … can be embedded in the hardware and software we deal with.” For example, when ‘company A’ sends money to their ‘distributor B,’ this transaction can be recorded digitally on public networks, but encrypted in a way that its details are only accessible by authorized persons, e.g., shareholders and auditors. That is, the public will know that company A and company B signed a contract, but the details are kept secret, as per standard business practice. This reduces fraud and increases accountability of companies; auditors will not need to rely on uncooperative (perhaps incompetent or dishonest) accountants to provide figures and thus more likely to deliver more accurate judgments on corporate performances. There are also sections discussing other forms of transactions, e.g., reputation, credit, and content rights management.

The paper may not be written in the best language, but for its raw merits in describing something truly revolutionary, I believe it has contents that will benefit information scholars.