Quoting from a coindesk article,

Recall that a blockchain is just a database, in this case a financial ledger containing the issued bond and some cash. So, when we talk about coupon payments, what we're actually talking about are database operations which take place automatically at an agreed time. While this automation is technically feasible, it suffers from a financial difficulty. If the funds used for coupon payments are controlled by the bond's smart contract, then those payments can indeed be guaranteed. But this also means those funds cannot be used by the bond issuer for anything else. And if those funds aren't under the control of the smart contract, then there is no way in which payment can be guaranteed. In other words, a smart bond is either pointless for the issuer, or pointless for the investor. And if you think about it, this is a completely obvious outcome


Is this objection fair? What are plausible responses? Do you all agree or disagree? What are plausible solutions? Curious to hear.


Yes, it is correct - if the smart contract doesn't contain the necessary assets, it's not possible to guarantee the result as the assets can't be held as 'hostage'.

The view of the article is quite typical for today. It's all viewed based on current economic functions. It doesn't include a vision of a possible future where "everyone" would keep at least some of their funds within smart contracts.

Currently usage of any crypto currency is really marginal and mostly for techno-nerds like us. But if/when the adoption rate grows and normal people keep money in smart contracts, then they can be used for such uses.

  • But even if people start keeping their funds in smart contracts you would need to keep the full debt amount as a hostage in it to guarantee payment, which doesn’t make sense because if you have this amount already you don’t need the debt Feb 19 '18 at 11:55
  • Someone just presented the same reasoning a while ago and the answer I heard was "even if you have 100% of the amount as collateral, you may not wish to sell it right now. Maybe it's in a token which you believe will skyrocket in a week so selling it now wouldn't make any sense". So, there are scenarios for everything Feb 19 '18 at 12:07
  • @medvedev1088 - Yes the original argument is flawed. It's a straw man argument, or something similar, where the author says "Look - you can create a contract that guarantees returns 100% by locking away the invested money" and then goes to knock that down by saying "But a 100% guaranteed return is pointless!". Of course it is. That is the whole point of bond yield: the interest is paid because a) there is value in having the money right now b) there is risk it might never be returned.
    – Sentinel
    Feb 19 '18 at 14:41
  • ok good point. follow up is how do you ever issue someone debt without a notion of identity like a credit rating? how on earth would you ever assess credit risk? you don't know what this entities future interest paying ability is.
    – griggah
    Feb 21 '18 at 3:23
  • @griggah I think I offer a method in the answer below
    – Sentinel
    Feb 21 '18 at 5:08

Nice to see some economics here for a change. I agree with the other answer to a large extent.

My take on it is that the view of that article is too narrow. The contract, for example, may be integrated with other contracts that commit tangible assets as security. Sure, the infrastructure for that is not quite there yet, but when it is it will offer transparency and efficiency. Conceivably, the land registers could be directly integrated into this.

When, eventually, wages and taxes take place on distributed ledger, the future for those trading risk like that could be quite Orwellian. Essentially you could commit yourself to selling bonds backed by your future earnings and never be able to escape it. Ironically, it will be today's cash that is seen as the medium to f exchange for freeloaders and black marketeers..

It is even conceivable today that the bonds could be backed by the future cashflow of the company, assuming its operations are on chain. This scenario is overlooked by the article.

To elaborate, the company would transact on chain, or on ledger, and have a provable earnings track record. This would allow it to issue bonds at yields realistic to its current profitability. The risk would be on the buyer side, but mitigating smart contract features could be there implemented, such as direct conversion of debt to equity in the event of default.

In a way the article is begging the question. It says that funds can be guaranteed but then asks what is the point of bonds with guaranteed funds. Of course! It skips that the whole point of bond yield is that somewhere in that mix is the concept if risk.

Update: it would be quite revolutionary if a legal firm came up with template company constitutions that integrated these operational details into the company. Companies could be formed 'on chain,' through an online order process, and then operations such as bond issuances/debt issuance against future cashflow or equity could be easily implemented.

  • agreed. how on earth would you establish credit ratings or make these future cash flows knowable in a trust-less way? I actually cannot think of a solution that is resilient to clever attempts at fraud (including obvious methods of defrauding the system). right now we do this via a trusted entity called the SEC in the U.S., but this doesn't work for blockchains.
    – griggah
    Feb 21 '18 at 3:24
  • @griggah I can see a few ideas that would work. 1. Transparency. 2. On chain tangible asset ownership securing the bond or cash flow. 3. On chain debt to equity conversion on default. 4. Trusted AI auditing.
    – Sentinel
    Feb 21 '18 at 5:12
  • I used to handle high profile bankruptcy cases but am new to crypto, so maybe we can help each other understand this. Most debt in the “real world” is not secured to a hard asset. It has value because it is tied to a stream of cash flows and because it must be paid before equity is earned. For unsecured debt, you don’t have asset protection and instead you rely on the creditworthiness of the borrower, usually determined by their income. the ratio of income to the debt outstanding is a proxy for creditworthiness. So to rephrase my question: can you create unsecured debt in a trustless way?
    – griggah
    Feb 21 '18 at 22:22
  • @griggah Yes in the sense that no intermediary is needed for the operations of establishing the debt and then transferring payment. No in the sense that the creditor will have to trust (aka take risk on) the debtor. However, if the debtor was an onchain entity, such as a smart contract rendering digital services, that entity may be inherently designed to pay creditors according to specific rules that can be transparently audited. in that case, yes. Does that make sense? The smart contract can be made to be provably unmodifiable + determined to channel cashflow to creditors according to rules.
    – Sentinel
    Feb 22 '18 at 4:08
  • @griggah. Realistically, if this model became popular, I imagine online services would emerge offering ratings to the layman. A trust pattern would emerge. It would not be necessary however. PS pls use at-sign Sentinel or I will not be notified of your response
    – Sentinel
    Feb 22 '18 at 4:16

I think smart contracts could be promising if the official currency is a government-issued cryptocurrency. I'm thinking that a government could first create a currency (call it the smartcoin). The smartcoin's design stipulates that the government can offer smart contract bonds (call them smartbonds) that work like this: The smartbonds give their holders payments in smartcoins over time. The government can move smartcoins into an account that the smartbonds can use to pay them with. If there aren't enough smartcoins in the payment account, then new smartcoins will automatically be issues to pay the smartbonds. This could protect investors from a politician deciding to default on bonds. The risk that politicians decide not to pay bondholders seems to be a reason why the US got its credit rating cut.

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