Blood oaths on the internet – from stone money to the smart contract

Somewhere in the middle of the Pacific Ocean is a tiny tropical group of islands called The Yap Islands. They’ve been inhabited by a native tribe since ancient times, and this remote community provides us with an interesting episode in the history of money: they used money made from limestone, i.e. they paid each other in stone money for centuries.

Money is usually made from rare and difficult to obtain materials like gold. How can it be that the natives made it from limestone? Limestone on the Yap Islands is so scarce that it doesn’t even exist, and it’s so difficult to obtain that the natives had to travel several hundreds of kilometers in their primitive canoes to the neighboring islands to get hold of it. These were long and risky expeditions and they often claimed lives. Since the natives didn’t know how to work iron, shaping limestone into donut shapes was also a Sisyphean task that was done with shells, among other things.

The stones varied in size from ten centimeters to several meters. The biggest ones weighed several tons, and moving them required the coordinated efforts of a lot of people; moving middle-sized stones was also rather difficult. The Yap Islanders therefore invented a peculiar payment system. They realized they didn’t need to physically give the stone money to each other; they could be left unmoved. If a change in ownership occurred, they simply told everyone about it. In other words, they paid by word of mouth, and everyone in the community knew exactly which stone money belonged to whom at any given time.

However, a freshly carved stone coin once fell into the ocean on the way back home from a money-carving expedition. The natives returned home and told the others what had happened. The tribe held a discussion and came to the conclusion that just because they didn’t see it, that stone money undoubtedly existed and could therefore be a valid means of payment in the community. After all, they were already used to paying orally, by word of mouth. And that is indeed what happened; the lost stone lying on the bottom of the ocean has been used for payment for 150 years.

The lesson of the story is that the stones themselves in their physical form played an irrelevant role in the tribe’s payment system. The really important component was collective knowledge, the ledger kept in the minds of the natives with the help of oral tradition. The stones might as well have been thrown into the sea; the monetary system would still have continued to function without interruption. And a monetary system based on such foundations has several interesting characteristics.

One of them is that it functions without a central authority. There’s no central money-issuing authority or central bank; the system is perfectly decentralized.

Another characteristic of this system is its unmanipulability. No native can steal or arbitrarily appropriate someone else’s money, since it doesn’t matter where the stone is physically. Even if a native were to steal one of them, it wouldn’t be of much use to them. If they wanted to spend it and announced this, the others wouldn’t allow it. They’d tell the native that we all know that stone money is in fact not yours, so you can’t pay with it. On the other hand, the rightful owner can easily pay with it even if they don’t have the stone with them, since if they give it to someone orally, it’s a valid transaction. It’s impossible to counterfeit money for the same reasons. The whole tribe collectively guarantees the unmanipulability of the monetary system.

It would be good to extend this kind of monetary system to the whole world, not least of which because of its interesting nature, but without the stones, of course. The difficulty is obviously that many millions of people won’t be able to keep in mind everyone’s wealth based on personally communicating with each other.

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That problem was successfully solved a few years ago with the invention of the blockchain technology by someone under the pseudonym of Satoshi Nakamoto, whose real identity is unknown to this day. They launched bitcoin in 2009 in order to prove that their invention works in practice, too. Although in the case of bitcoin, it’s not people who communicate with each other in person but computers through the internet. However, the bottom line is the same. The cleverly built system ensures that computers form a consensual collective knowledge about how many bitcoins there are on which account at a given time. With this, a monetary system that functions without a central authority or a central bank and that is simultaneously unmanipulable has been created globally for the first time in history.

The new technology therefore makes it possible to store current bitcoin account balances in the blockchain-based database in an unmanipulable way. This, however, is not the real potential of the technology. We can store not only account balances on the block chain, but any other kind of data in an unmanipulable form, too. Take contracts, for example. If we uploaded our digitally signed contracts to the blockchain, we wouldn’t need to constantly print them in large numbers, stamp them, sign them and file them, and there would be no need for each party to store a copy. The blockchain would store them in a certified form.

We can even create a blockchain wherein uploaded contracts implement themselves. A group of software engineers is currently working on developing just such a block chain. They named their invention is Ethereum, and Ethereum’s own currency is called ether.

We’ll better understand what exactly this is through an example, so let’s return to the Yap Islands now. Let’s imagine that the natives keep a mental record not only of the account balances, but also the agreements made between each other. Of course, this is not how it really happened, but the analogy will help us understand the bottom line.

Let’s assume one of the natives (let’s call him Dan) takes a blood oath with another native (let’s call him Les) in front of the tribe, agreeing that if Dan the native brings him a polar bear within a year, Les the native will pay him 10 units of stone money.

In this case, if Les the native wanted to spend all his money on something else the next day, the members of the tribe wouldn’t be willing to record the transaction mentally. After all, if Dan the native came up with the polar bear after this, Les wouldn’t have money left to pay him, even though he’d have to pay since he took a blood oath. Today we’d say the members of the tribe, based on the blood oath, block 10 units of Les the native’s stone money for a year, and he won’t be able to spend this money during this time.

And if Dan the native brings the polar bear within a year and hands it over in front of the tribe, all members of the community will automatically and without requiring anything else mentally implement Les’s payment transaction based on the blood oath, and they will credit the 10 units of stone money to Dan’s account.

The bottom line here is that the blood oath is implemented consensually and automatically by the members of the tribe, depending on the events and according to the conditions set out in the agreement. The software engineers at Ethereum wish to implement this model globally and make it accessible for everyone. The community of users can record the contracts entered into between each other on Ethereum’s blockchain, and these contracts will then automatically be implemented, depending on the events and according to the conditions of the agreement. This is why they’re called smart contracts.

If we put the unmanipulable system of stone money on the blockchain, we get bitcoin. If we put the unmanipulable system of blood oaths on the blockchain, we get Ethereum.

In the form we all know it today, the internet is capable of sharing information directly. We do this by copying the data in our possession and sending it to others, either via email or when others download and display content stored on our server in their browser. We’ll have the information afterwards and the person we sent it to will have it too, meaning it can be copied any number of times. And whatever can be copied infinitely can’t be too valuable.

Bitcoin has proved that virtual instruments can be produced on the internet in a way that they can’t be copied. I can give it to others, but – unlike with normal information – then I will no longer have it. Since their supply is thus limited, these virtual instruments are capable of representing value. We can transfer these valuable instruments directly to each other through the internet. We don’t need to use an intermediary such as a bank, stock exchange or brokerage.

The multiplication and evolution of valuable instruments directly transferable on the internet has begun. There are those that resemble money, others that resemble gold, while still others are like shares. A totally new instrument group that exists completely independently of previous instrument groups and has different characteristics is emerging in the world of investments. We call them by the umbrella term crypto-instruments.

With the creation of Ethereum, we get the ability to exchange various kinds of crypto-instruments with the help of unmanipulable and self-implementing smart contracts, without intermediaries, directly between each other, abiding by conditions previously agreed upon.

Currently, Ethereum doesn’t work well yet, and it’s possible that it won’t do so for a long time. But if one day it is truly completed, it might entirely transform the system of economic relations as we know it today. Many think (myself included) that we face an invention comparable in significance to the internet.

Original date of Hungarian publication: June 27, 2017