Blockchain Performance Bond
Performance Bonds have been around since 2,700 BC. The romans developed laws of surety around 150 AD, the principles of which still exit. Typically, Performance Bonds are issued by banks and insurance companies in favor of a beneficiary and on behalf of a principal.
The beneficiary is entitled to make a claim to recover losses if the principal fails to fulfill the task specified in the contract. If it is a valid claim, the bond issuer will pay reparation, which cannot exceed the bond amount. The issuer will then try to get back any claims paid from the principal.
The blockchain performance bond developed by Token Changer represents a radical departure from the traditional notions of how a performance bond is created and used.
The Token Changer performance bond is a smart contract that runs on the Ethereum blockchain. Anybody, can create a bond in minutes by depositing ether in the smart contract. In other words, bond creation is cheap and decentralized.
Because bond creation is cheap and decentralized, the bond can be used in so many applications beyond the traditional use cases. Let’s take a closer look how the performance bond works.
Bond Writer
Writing a performance bond involves submitting bond details and ether to the smart contract on the ethereum blockchain. Bond details include the ethereum keys of the bond beneficiary, the arbitrator and supreme arbiter. The beneficiary cannot be changed at a later date, but the arbitrator and supreme arbiter can be changed later.
Bond Beneficiary
Writing a bond doesn’t make the bond active. The beneficiary needs to activate the bond by sending ether (percentage of the bond value) to the smart contract. Sending ether to activate the bond aligns incentives for both the writer and beneficiary. Both parties now have a stake in conducting the transaction in a manner that does not result in a dispute. If neither party files a dispute before the expiration of the bond, the smart contract settles the bond by refunding writer and beneficiary ether deposits.
Bond Expiration
Once a performance bond is activated, it can only be settled at the expiration of the bond. Furthermore, counterparties can only file a dispute before the expiration of the bond. So, timing is everything. The smart contract uses ethereum blocks for timing purposes.
During bond creation, the writer specifies the expiration time of the bond in ethereum blocks. Before the bond expires, the beneficiary can extend the bond up to the maximum number of blocks originally specified by the writer.
In order to stop the beneficiary extending the bond expiration time indefinitely, the writer can remove the bond extension option at any time after bond creation.
Bond Arbitrator
The bond writer or beneficiary can appoint an arbitrator. However, both counterparty have to approve the appointment before it takes effect. In the event that the bond writer or beneficiary files a dispute, the arbitrator then has to decide how to apportion the ether deposited by the bond writer and beneficiary.
Supreme Arbiter
To prevent possible collision between the bond arbitrator and a counterparty, the judgement of the arbitrator is not final. The smart contract will not settle the bond until the appeal period (in ethereum blocks) expires. During the appeal period, any counterparty can appeal the judgement to the supreme arbiter. Who then delivers the final judgement.
Both bond arbitrators and supreme arbiters are qualified and registered on the smart contract by Token Changer.
Conclusion
The above description models the behavior of the Token Changer performance bond. The smart contract code is verified and available for inspection on the ethereum blockchain. The Token Changer performance bond can be used to build a wide variety of trustless markets. It’s application is limited only by our imagination.
