A View on How Boson Protocol Works

Lecturer at Queen Mary University of London and an advisor to Boson Protocol, Dr. Zeynep Gurguc shares the inner workings of what makes our technology so innovative.

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BosonProtocol

6 min readNov 9, 2021

Clearing and settlement systems are the backbone of any market structure. Markets would simply break down without an efficient, reliable and secure settlement system for market transactions.

In a traditional clearing and settlement system, one party that holds sufficient funds in its account can pay another party to consume a good or service via an intermediary. This intermediary is specialised in the clearing activity and aggregates all transactions for different parties and settles the net amount needed for the exchange to take place.

A payment settlement refers to the completion of an exchange and the obligations towards the transfer of payments. This two-way example may be simple, but traditional payment infrastructures rely on accounting activities among multiple parties. The process is even more cumbersome for international transactions. Participants sometimes have to take active initiative to monitor if the payment has indeed cleared.

Distributed Ledger Technology (DLT) based solutions can potentially offer greater efficiency, speed, security, automation, transparency, and traceability as well as higher resilience for payment settlement systems. DLT can facilitate “the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers” (IMF 2020).

Especially in the context of cross-border and/or cross-currency transactions, DLTs can enable the settlement of payments without the need of a trusted third party acting as an intermediary — we call this trustless systems. In this context, Boson Protocol is an almost trustless protocol that enables smart contracts to exchange crypto assets for services, goods, physical as well as digital products, while minimising the need for intermediaries or dispute resolution.

Incentivising the right behaviours

Boson Protocol is designed to handle refunds, expiry and complaints via an incentive-compatible and implementable mechanism with the objective to maximise quality redemption transactions. By using smart contracts, Boson ensures that payment and exchange of items and services happen together or not at all.

A traditional contract is an agreement or a legally enforceable tool that allows us to match actions and payoffs with different contingencies. Accordingly, smart contracts are rules that are executed and governed by computer code to account for various eventualities. With a well-designed contract, we should be able to minimise opportunistic behaviour that may arise during or after a settlement is made, namely moral hazard. This is one of the primary targets of Boson Protocol’s settlement mechanism.

However, whether automated or not, the main challenge is related to contracting. In economics, we acknowledge that almost every contract is incomplete by definition, since we face “bounded rationality” and “ignorance.” Both of these concepts relate to the fact that not all contingencies in a contractual relationship can be defined or accounted for (Maskin & Tirole, 1999).

On the one hand, bounded rationality relates to the fact that we are intendedly rational; however, due to cognitive costs or other concerns, we may behave differently from how traditional models based on fully rational, narrowly-selfish individuals may behave. On the other hand, we often talk about markets being efficient on their own but this efficiency can only be achieved in the case of complete information, i.e. where all the parties involved in a relationship possess the same level of information and are aware of the full picture.

When we face asymmetric information, for example, when the seller knows more about the quality of their product than the buyer, we need to devise additional systems that will ensure the efficiency of the system. We also have to acknowledge that most decisions are associated with risk, and uncertainty — different contingencies for which we can calculate the associated probabilities accurately or not necessarily — but more importantly, ignorance, where we have not even considered an eventuality may be a factor (the “unknown unknowns” Rumsfeld refers to in his famously ridiculed 2002 speech).

Game Theory coupled with blockchain technology

These are the reasons why even with a fully automated system we need a dynamic structure that is capable of adapting and evolving as the “unknown unknown” arises. This is the mindset we retain while designing the Boson protocol and the associated ecosystem, and also the reason we call the protocol “almost” trustless. Accordingly, we analyse the Boson mechanism, which relies on a two-sided deposit structure as a dynamic game that evolves while allowing its participants to build reputation, also taking into account that these participants may be subject to bounded rationality, social preferences, or strong altruism.

The summary of the mechanism is as follows: we differentiate the participants in the game as buyers and sellers and analyse what happens between a representative buyer and a representative seller. Our main goal is to ensure that sellers are indeed incentivised to provide the goods and services they have promised, and that they provide these goods and services with high quality. In order to do so, we introduce the fact that sellers lose their deposits if a complaint is launched, and vary their penalties on these deposits depending on whether they have admitted to such a complaint or not, i.e. reward truthful reporting (the main objective of any incentive-compatible mechanism). Second, we incentivise buyers to redeem the products and services they have committed to redeem by motivating them to fulfil their promises of redemption (they lose deposits if they do not go ahead with the transaction).

This assures that the structure is implementable and at the same time remains incentive-compatible since it ensures that a buyer is penalised for not redeeming a product or service when the seller is at no fault, while the seller is penalised in varying degrees for not fulfilling its promise to the buyer. For a settlement system to be operational, we need to maintain the position that if the promises towards the settlement are not fulfilled by either of the parties, the parties involved in the transaction will suffer consequences. The deposit system of Boson Protocol facilitates this, i.e. enables transactions while minimising the number of contingencies that require dispute resolution by a third party.

We still keep the option for dispute resolution to account for contractual incompleteness explained above. However, we are still in the process of testing how salient the existence of a dispute resolution provider (DRP) must be in such an automated system. On the one hand, we acknowledge that the mere presence of a DRP, especially being observed by a DRP (famously known as the observer effect in physics), may change the incentives of the parties involved and they may become more willing to comply with the rules of the game. For example, literature on dictator games, where the decision maker decides how to allocate resources among two people, suggests that the players with the dictator role may become more benevolent when observed by the experimenter (e.g. Koch & Normann, 2008). We also recognise that there may be hidden costs associated with control (Falk & Kosfeld, 2006). Previous literature shows that parties exhibit more trustworthy behaviour if they perceive trust from others, and a control mechanism that is too salient may in fact inhibit trustworthy behaviour in an interaction.

My colleague Dr Akaki Mamageishvili and I, along with the rest of the Boson team, are working on these aspects: thinking about the theoretical implications of two-sided deposits and their magnitude, the existence and salience of dispute resolution, the behavioural implications of modeling buyer and seller behaviour taking into account that some portion may be rational, while others may be inequity-averse, or may exhibit distrust aversion.

About the author:

Dr. Zeynep Gurguc is a Lecturer at Queen Mary University of London, and an advisor to Boson Protocol. Zeynep specializes in the fields of Experimental and Behavioral Economics, Game Theory, Climate Change Mitigation, Sustainability, and Blockchain.

About Boson

At Boson Protocol, we are creating a decentralized commerce ecosystem that everyone can use and anyone can trust.

Boson Protocol is a decentralized infrastructure for enabling autonomous commercial exchanges of anyThing, specifically off-chain items. Boson is a peer-to-peer system which replicates the benefits of a market intermediary, without the disbenefits of centralized systems.