I promise this isn't a generic anti-crypto rant, but rather a specific anti-crypto rant:

There are many projects in this space that try to replace what they perceive as flawed legal systems with perceived "perfect" (or at least better) digital, automated systems.

And I definitely understand that urge: there are many problems with various legal systems ranging from annoying (like being slow and very disparate around the world) to massive (biases, lack of access for those who need it most).

So aiming to improve that situation is understandable. And being pessimistic about the chances of fixing those systems with the "normal approaches" (i.e. politics) is equally understandable.

Where these projects usually break down though is that they generally lack an understanding of what makes legal systems so hard to get right: no one has found a reliable way to encode a non-trivial part of the law into something that a computer can decide reliably and without wrong decisions. (there are of course other difficulties, but this is the most lenient one for the current topic).

People with a technical background (which includes me) are often frustrated how laws and legal documents like licenses are at the same time both written in an arcane inaccessible language and also very much prone to interpretation. We assume, based on the languages we interact with, that a sufficiently complex language should allow a strict, formal interpretation of some truth value ("was this contract followed by both parties?").

But the reality is that contracts (just like most laws) are intentionally written with some subjective language to both account for real world deviations and avoid loopholes.

It's incredibly easy for a law to apply when it's not meant to (or the opposite: to present a law as not being meant to apply to a certain situation when the authors were very aware of the implications) or to not apply due to some technicality.

And for all the wrong in legal systems that exists we have not yet found abetter way to solve this than (hopefully neutral) arbitrators that interpret the text and underlying intentions.

And all the crypto schemes categorically decline that: their stated goal is to not have a human in the loop anywhere. That would be fine if they also solved the above problems in some other way, but none that I know of even attempt to do that. They simply pretend that perfect, decideable contracts are possible (even easy!) and never unfair.

Whether that error is based on ignorance or on something more sinister is up to the reader to decide.

What problem is this solving?

Yes, but your naive (in the game theoretical sense; I'm not calling you naive) scheme is ripe for abuse.

The depositee (for lack of a better word) has no incentive to he honest in this scenario. He can lock the deposit, and even if he can't get it without consent of the depositor, the depositor is out money unless he "comes to consensus" with the depositee. It's lose lose for him, he would Either take half his deposit than lose it all. The depositee then has an incentive to hold him hostage, which means the scenario is not trust less for the depositor.

One way to do this is if the contract says "the depositor will not store this specified set of files with these hashes" that way it could he programmatically proven to the contract that the rules weren't violated. But then you need to know beforehand every file you don't want them to store, this is infeasible.

This is why most schemes like this have some type of arbitrator, a third party that gets paid to resolve disputes. But then at that point, IMO you're back where you started: going to court. There are very few niche scenarios where this scheme is better than the status quo.

Isn't this the point of escrow? I trust that more than I trust anything remotely related to crypto.

What do you mean by "cloud space"? Is it on a cloud drive somewhere or my own computer?

Because if they want extra cloud space it's cheaper and safer to just buy it from an established provider.

If they want to store their data on my computer, what guarantees do I have to offer in therms of availability and speed of access?

Do I have to keep my PC turned on at all times? What happens if I lose internet connection? Can I restart my pc after an update? Do I have to ensure redundancy? How do I compensate them on data loss?

If they don't want to use a provider like Google, Microsoft or Dropbox, then why? Do they want to store something questionable or illegal?

amount of ETH in a smart contract

I don't have cryptocurrency. So that's a no go overall. And making a wallet so I can purchase some ETH to enter into a contract is enough trouble for me to look elsewhere for the same services.

If the person doesn’t respect their engagement, they must be penalized. In this scenario, there is no legal tool to ensure this.

Surely if there has been a breach in contract then this could still go to court? Suing for a breach in contract is a thing. Admittedly this is far less convenient than a smart contract to handle this.

I don't think smart contracts (contracts administered by programming), are inherently a bad idea: but having them be so strongly tied into cryptocurrencies does make it a lot less attractive as a tool to a lot of folks. If I could deposit real world currency into them to use as escrow instead of having to go through ETH, I probably would have no problem entering into one with lower stakes for failure to follow through.

No because it can’t be revoked when unintended consequences that neither party wants occurs

So essentially, a "trusted third party" mediation but the TTP is a bot.

No, but mostly for very boring reasons that have nothing to do with the technology:

1. I... don't even know two people outside of family I would trust with a deposit (any deposit, in any amount) -- e.g. pay me 10% in cash right now or I'll claim you breached the terms of use, keeping your deposit hostage.

2. Wonder if someone can find a way to do something vastly illegal with the cloud resources that makes me more money than the deposit? Or just blackmail me? So I'd need a normal legal contract with the other party's real name to avoid this liability. At which point the whole smart contract is arguably superfluous.

3. There ARE normal legal tools that handle this. You can put money in escrow at a bank, or use a lawyer. It's... actually a pretty normal thing to do in many industries. It's not particularly expensive as far as I know. There are problems with it, but none of them are of the form "Oh no, if only we used a trustless system with no middleman!"

4. Finally one technical point: smart contracts are only trustless if I'm a programmer and the smart contract source code is provided (in which case there's no money to be made providing the service, as I can just copy your work and it's a race to the bottom). Or if I'm familiar with assembly language (which I am), in which case it's an unproductive use of my time and a lawyer or bank is much much cheaper than my time spent as an auditor (I could be working on other things). So it's a bit hard to come up with any sort profitable enterprise, and most programmers I know strongly prefer to be paid for their time.

NB I've written various smart contracts for amusement (on various testnets only). I haven't found anything I'd want to use them for in production. It was a fun academic exercise though.