Is the Bitcoin Blockchain a Court for Smart Contracts and Not a Payment System?

Is the Bitcoin Blockchain a Court for Smart Contracts and Not a Payment System?

By Kyle Torpey - min read
Updated 22 May 2020

The first response to Satoshi Nakamoto’s announcement of the Bitcoin white paper on a cryptography mailing list in 2008 was that the system does not seem to scale. More than seven years later, solutions for scaling Bitcoin to a worldwide audience are finally becoming a bit clearer.

The main issue with Bitcoin pointed out by that first responder on the cryptography mailing list (and many others since him) is that everyone has to know about every transaction on the network; however, the Lightning Network intends to reshape how Bitcoin is viewed to the point where that potential flaw with Satoshi’s peer-to-peer digital cash system is no longer relevant.

At the recent MIT Bitcoin Expo, Lightning Network co-creator Joseph Poon made the case that Bitcoin scales more easily as a settlement layer for smart contracts rather than a payment system. Many have stated the Lightning Network is an off-chain solution, but Joseph Poon clarified that this is a bit of an oversimplification during a panel discussion on various improvements to Bitcoin. Poon explained:

“It’s done using real Bitcoin transactions using smart contract scripting mechanisms. It’s not any overlay network. It’s not like a third party holding custody of your funds. These are real bitcoins.”

Reshaping How the Bitcoin Blockchain is Viewed

After explaining some of the basic ins and outs of the Lightning Network, Joseph Poon went on to describe the implications of the project at a deeper level. In his view, the blockchain becomes much more powerful if it’s viewed as the final judge for smart contracts. He explained:

“The ultimate view of the way the Lightning Network works on a deeper level is that it reshapes the view of what the blockchain is. Instead of viewing it as simply a payment system, if you view it as a smart contracting system, which enables the blockchain to act as a dispute mediation system, viewing the blockchain as a judge is a lot more understandable and a lot more powerful.”

Poon later added:

“It’s even better than real life court because it’s programmatic. You can’t really convince the judge in this case; it’s either a one or a zero.”

These comments from Joseph Poon are similar to statements made by Ethereum creator Vitalik Buterin at a recent event in Toronto. At the event, Buterin discussed how public blockchains, such as Bitcoin and Ethereum, can be used to settle disputes related to activity on state channels

Bitcoin Scales Better as a Court for Smart Contracts

Joseph Poon went on to explain how much more activity (and perhaps more interesting activity) can take place when the blockchain isn’t required for every single interaction between multiple parties. Poon used an analogy to the traditional system of legal contracts to make his point:

“The analogy would be: You can write a lot of legal contracts individually (rent, employer agreements, and things like that) — you don’t go to court every time. If you view the blockchain as court, it makes a lot more sense because you can have a lot of agreements off-chain, you can have a lot of activity, and ultimately, you both have full confidence these smart contracts can be enforced because either of you can go to the blockchain unilaterally to enforce the state.”

When the blockchain is viewed in a manner similar to the court system, it becomes easy to see how scalability can be dramatically improved. Instead of having a judge sign-off on every single interaction on the network, the blockchain is only needed to resolve disputes.

Bitcoin Core contributor Peter Todd also recently commented on Bitcoin’s inability to scale on-chain. He stated, “The system doesn’t scale, and you just have to accept that and do something smarter.”

Should Bitcoin Be Turned Into a Court for Smart Contracts?

One of the last comments Joseph Poon made in regards to the Bitcoin blockchain’s usefulness as a dispute resolution mechanism was that the Lightning Network is only the first of many systems that will take this approach. He stated:

“Lightning Network is one of the earlier examples of a functional smart contract system. I think in the coming months and years ahead, you’re going to see some really, really cool stuff.”

The view of Bitcoin as a settlement layer has near-universal agreement among the technical community. Although longtime Bitcoin Core contributors Jeff Garzik and Gavin Andresen co-wrote a piece about Bitcoin being hot-wired for settlement late last year, the post mostly focused on how leaving the block size limit at 1 MB would change the economics of the Bitcoin network. Andresen and Garzik wrote:

“Users have concerns that this [Bitcoin Core] roadmap and new economic direction dances obliquely around a shift of bitcoin from a network for P2P cash payments to a settlement system for as-yet-incomplete technology such as side chains or payment channels, pushing out businesses that bought into the original ‘P2P electronic cash’ vision of bitcoin.”

The duo also wrote:

“Few have the luxury to pause until a new payment layer is developed on top of bitcoin-1’s emerging settlement layer. Stuck-at-1M risks reversing bitcoin’s network effect by pricing users out of the core blockchain, forcing them onto centralized platforms.”

In the past, Garzik has also authored a post where he makes the case that Bitcoin is a settlement system by design. Garzik concluded that post by writing:

“It is foolish to think the entire world will connect directly to the P2P block network and broadcast all the morning coffees to all the miners. That’s not how the system works. It is a settlement layer. We must build decentralized layered solutions on top of bitcoin, rather than stuffing everything into bitcoin itself.”

Most of the contention against Bitcoin as a settlement layer or dispute resolution system for smart contracts is about the timing of that transition for P2P payments to settlement layer more than anything else. The more advanced smart contracting systems that can help scale Bitcoin are not yet available, but the Lightning Network could be ready for deployment in less than six months.