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Cardano Contracts Are ‘Smart,’ But They Might Not Be Smart Enough

Among the many criticisms about cryptocurrencies, the one that seems to stick the most is the lack of underlying fundamentals. Of course, proponents of alternative cryptos like Cardano (CCC:ADA-USD), with their distinct take on the underlying blockchain technology, would argue otherwise. Thanks to the evolution of smart contracts—or the ability to facilitate deals without a human intermediary—Cardano and company seem poised to usher in a new era of decentralized applications.

Cardano (ADA) token with blue and orange digital background.
Source: Stanslavs / Shutterstock

But that brings me to the proverbial falling tree with no one around: does it actually make a sound? Science would suggest that it does indeed make a sound as physical phenomena occur irrespective of the presence of an observer (for argument’s sake, I’m not going to get into the weird world of quantum physics). But that unfortunately seems to be the limitation of Cardano and other modular-application platforms.

Essentially, decentralized technologies are immutable but passive record keepers. They can record the sound of the falling tree but do nothing to prevent it from falling in the first place nor do they hold those who may have illicitly cut it down accountable.

Of course, this isn’t a matter exclusive to Cardano. According to data from Coinmarketcap.com, over 12,000 crypto coins circulate at time of writing. Logic and life experiences tell us that they can’t all be successful: not enough money in the world exists to robustly support each one of these cryptos and bolster the valuations of other publicly traded assets.

Therefore, at some point, mere speculation is not enough to maintain the incredible market capitalizations that some of these digital assets—most of which are likely garbage—command. That’s why we’re entering a new crypto phase, one that focuses on utilitarian assets like Cardano.

I’m just not sure that’s enough to keep the fire going without any mechanisms to hold bad actors accountable.

Chinese Commercial Paper and the Threat to Cardano

Over the past few weeks, the media has been raging with worrying headlines about China Evergrande (OTCMKTS:EGRNF). To be fair, there’s at least a modicum of sensationalism—even among the most battle-hardened journalistic centerpieces—permeating these stories.

If it bleeds, it leads, as the old saying in the news media industry goes. However, the underlying truth about the property developer is cutting a little bit too close to Cardano’s core. Per a description from the Wall Street Journal:

Evergrande is in trouble in part because it developed properties aggressively in places such as Lu’an, where its debt-fueled building spree came as the city’s population dwindled. It launched hundreds of projects across more than 200 Chinese cities.

As it expanded, Evergrande racked up more than $300 billion in liabilities. In September, it said it was facing unprecedented difficulties and was trying to protect customers. Days later, it missed a scheduled interest payment to overseas bondholders. On Monday, Evergrande and its property-management unit halted trading in Hong Kong; the unit said it could be subject of a takeover bid, which could bring in much-needed cash for Evergrande.

In theory, a situation like this might look like a point in Cardano’s favor. After all,  a smart contract under the Cardano architecture could have prevented the above disaster. The parties of the contract could agree that payment will only be distributed once certain milestones were met. That would have prevented Evergrande’s runaway spending spree built on false premises.

However, what Cardano wouldn’t be able to prevent are cases of clever fraud. For instance, if a property developer unethically used cheap materials but disguised them in such a way as to look legitimate, there’s no way the blockchain could address that. Which shows that you still need human actors to enforce contracts, which may require aggression in some jurisdictions.

Blockchain Only as Honest as the Actors

To be clear, I’m not referring to a Tony Soprano type of aggression. Rather, I’m using the term in the loosest sense possible. For instance, law enforcement will throw you in jail for certain fraudulent acts. To me, that qualifies as an aggressive incident.

And that’s really the point about the limitations of blockchain initiatives like Cardano. Push comes to shove, if someone violates the terms of a smart contract, who are you going to call? The decentralized police department? You see, when a contract is decentralized, the underlying morality is likewise disconnected from an established, cohesive set of principles.

The ugly truth about blockchain is that when things go awry, we need a centralized authority to cry to. In other words, the technology is only as honest as its actors. Until the sector can figure out that challenge, people should always adopt a vigilant attitude toward any crypto venture.

On the date of publication, Josh Enomoto held a LONG position in ADA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/cardano-contracts-smart-but-need-force-for-full-effect/.

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