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What Kind Of Agreements Can Be Turned Into Hybrid Smart Contracts?

Hybrid smart contracts are “smart” because they use decentralized oracles to prove that something happened in the real world. That “something” could be anything verifiable by data about market prices, weather, shipping, transportation, etc. But what are the limits of data to establish definitive truth? Could new data feeds be created to prove objective reality about outcomes we consider subjective? 

Recently, Chainlink Co-Founder Sergey Nazarov and AI researcher Lex Fridman tackled this essential philosophical question: “Could you create a hybrid smart contract to prove someone painted your house the right shade of blue?” 

To begin answering this question, it helps to understand how hybrid smart contracts eliminate ambiguity. Many agreements people form today are written in natural language, which is subject to interpretation. How quickly and easily these comparatively ambiguous contracts can be codified into more deterministic hybrid smart contracts depends on the type of agreement. 

Nazarov said he believes agreements that already reference another settlement system, such as legal agreements that accept e-signatures, will be relatively easy to convert to hybrid smart contracts by swapping a centralized system for a decentralized blockchain system. “There’s a huge amount of agreements that are already able to do that,” he said. 

More ambiguous agreements that are complex and difficult to understand can be rewritten in code that is inherently and immutably clear and transparent. That code, Nazarov explained, is then much easier to translate back into natural language explanations that are more straightforward and much simpler to understand. 

Hybrid smart contracts use decentralized oracle networks (DONs) to prove whether or not something happened with data. “What it fundamentally comes down to is whether there is data,” Nazarov said. “There’s no data feed that tells us if your house was painted blue or if it’s the right color blue, unless somebody sets up a drone with a color analysis tool and they generate that data.”

“Which, by the way, could be possible right?” Fridman asked. “If there’s enough demand.” 

“I think you have it unbelievably right, because there are already insurance companies that use drones to monitor construction sites from overhead and see how many people are wearing hard hats,” Nazarov agreed. “And if the percentage of people wearing hard hats isn’t sufficiently high, then the policy is voided.”

Nazarov said he believes the insurance world will pioneer this type of hybrid smart contract because it’s such a data-driven industry. Fridman called on his own experience working with semi-autonomous vehicles to describe how better data could rewrite the insurance industry.  

Instead of relying on “crude” basic demographic information like age and gender, Fridman suggested that “high-resolution” information about an individual (should they choose to provide it) could empower people to negotiate better deals. “Grounding that insurance in a more and more accurate representation of reality might just have transformative effects in society.”

Nazarov said hybrid smart contracts can solve trust issues and privacy concerns by holding and evaluating user data without sharing it with the insurance company. “Suddenly you’ve solved another trust issue, because an autonomous piece of code can evaluate information separately from the interests of both of the counterparties.”

Listen to episode #181 of the Lex Fridman Podcast with Sergey Nazarov.

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