Blockchain, the platform for trust and social scalability

by etnbrd
February 26, 2018

This post was initially written for the OuiShare Magazine.

How exactly is the blockchain expected to change our economy? It is less about removing the middleman than automating its function: providing trust. And coincidentally, it also challenges the existence of omnipresent brands.

So you have heard about the Bitcoin insane craze in the past year or so. Along with the crazy price surges and spikes, incredible stories of instant fortunes, and other tragedies.

Among all of that, you might have also heard that the blockchain will disrupt our economy, and change the face of the world, forever. You might even have heard that the blockchain is revolutionary because it removes the middleman, the intermediary, this damn crook who takes x% of your transaction — the bloody thief — for doing its job.

I believe this shift is way more important than saving a few percentage fees.

But before we begin to grasp its impact on the economy, we shall refresh our perspective on the latter. Bear with me for a few paragraphs devoid of any mention of blockchains.

The cornerstone of our economy

In his paper “The Nature of the Firms” (1937), the economist Ronald Coase challenged the existence of the cornerstone of our economy: companies. After all, production could be organized solely by individuals contracting with one another.

Ronald Coase

He observed that in an open market, apart from the price of the good, the transaction itself implies some additional costs. One must pay for the cost of research, coordination, contracting and establishing trust.

So, at some point, a company emerges to internalize the production of such goods and absorb these costs.

Yet, other expenses emerge with the internalization of the production. The more a company grows, the more its management is likely to make mistakes in resource allocation.

The transaction costs drive a company to increase in size, to grow; while the costs of management mistakes hold back this growth. Thus, Ronald Coase explained, the balance between these two costs determines the size of a company.

The problem of trust

The advent of communication technology and transportation drastically reduced both of these costs. These innovations allow us to travel around the globe in a day, to communicate instantly, to get up-to-date metrics, to contract with people and to wire them money to the other side of the planet…

Technology has expanded both management and transactions to a global scale. In other words, with the same costs, a company is now able to meet a bigger demand, increase production, and delegate more easily any non-core business to contractors.

However, technology cannot scale the establishment of trust in a transaction, yet. Hence it cannot reduce this particular cost.

Building relationship is essentially done the same way now than it was four hundred years ago: either by meeting people, getting to know them and following your gut feelings (experienced trust) or by reputation (transitive trust).

In the framework of Ronald Coase, the cost of establishing trust is reflected in the cost of establishing a reputable brand, which decreases inversely with the size of the company. In other words, this balance of costs favours the emergence of bigger companies over smaller ones.

Brands in Time Square

Is this article even about blockchain? Yes, hold on for a couple more paragraphs.

Rating, the substitution for trust

The core concept behind the collaborative economy is a scalable substitution for trust. It introduced the peer-rating system to scale the reputation — the transitive trust — beyond a circle of acquaintances. You trust your Uber driver / eBay seller / Airbnb host because of its 4.7-ish rating and reviews. He cannot possibly be a sociopath because KatyB76 gave him 5 stars just yesterday.

Still, these ratings imply trust in a third-party, the platform. The latter is far from ill-intentioned: it benefits from its transparency and (ironically) a good reputation. But there is a limit to its ability to avoid counterparties to game the system. It is quite easy to discard an old reputation with a new account or to buy a fake reputation out of thousands of likes, followers, ratings and so on… Did you know that 5K Instagram followers cost only $39.99?

Finally, we get to the point.

Digital tangibility

The blockchain takes a completely new approach to trust by shifting the entity we place our trust in: from independent third parties (banks, platforms…) to a common system (blockchain). To provide this trust, the latter restores back a property that was lost in the digital world, which I call “digital tangibility” in lack of a better word.

Remember Face/off, the 1997 movie where John Travolta and Nicolas Cage switch faces? 20 years after, it is still just a movie

Tangibility is the property of the material world upon which our ability to trust is based.

From your experience and because of the limits of physics, you don’t expect something to evaporate, or multiply overnight. It is quite handy to rest assured that your house or your friends won’t disappear without leaving a trace. If you build a relationship with a customer, a contractor or a friend, these will last for as long as you recognize their identities. And because of this tangibility, it is hard enough to impersonate, or conceal a physical identity so that it doesn’t become a threat — outside of movies.

Yet, the digital world was not built on the same base. The whole point of computer science is reproducibility. If your computer can do everything mine can, it could surely imitate mine. Or imitate my friends, to take advantage of my trust for them. Or imitate my bank to fetch my credentials and take over my account — that’s called phishing. This reproducibility makes identities much easier to counterfeit.

Blockchain, with the help of cryptography, restores this tangibility back into the digital realm. Asymmetric cryptography allows signing a document so as to prove its origin. These proofs are impossible to counterfeit. Therefore, they can hold some value, roughly like a bank check has a value because of your signature on it. Hence, on the blockchain, these proofs represent the transactions.

The blockchain then ties together these proofs, so that it is impossible to take them apart nor modify them. It is immutable, you can only append more transactions. And because the transactions hold value, everyone is willing to hold on to this digital agglomerate, and never let go of it. Similarly to the physical world, a blockchain is ensured to never disappear nor be modified in an untraceable way. And voilà, you get digital tangibility.

Trust automation

By introducing this digital tangibility, the blockchain could become the technology on which to build the tools to automate trust. A more reliable option than the current rating system used in the collaborative economy. That means trusting an entity not based on the reputation of its brand, but on its history, immutably engraved in a blockchain.

Because of this tangibility, a blockchain has the potential to be as trustworthy as physical, self-experiences. It would mean trusting your barbershop not because you read its reviews, but because you somehow experienced firsthand all of the haircuts he gave to other customers.

The shift in scale could be compared to the one generated by driverless cars. If there is no more need for a driver, there could be cars everywhere, circulating faster and more efficiently. The blockchain is what would allow driverless transactions.

Smaller companies could benefit from the ability to display the same trustworthy reputation as overwhelmingly big brands. Their smaller size would become an advantage over bigger actors, by being more versatile, attentive and reactive to their customers. It could lead to a decline of the omnipresent corporations, being replaced by many smaller entities. And maybe — well, just maybe — diluting the money and power of the former back into more hands.

This is what Nick Szabo — the guy who most probably invented the Blockchain, but actually denies it — calls Social Scalability.

Imagine that instead of the reassuring habits of big known brands, you relied on an automatic and impartial rating system to make your choices as a customer. A system that could — in some yet unknown way involving a blockchain — account for the quality of every single transaction and externality of every economic actor.

Would you still fall back on the average fast food quality, when you could try a local restaurant vouched by hundreds of customers? Would you still choose your clothes because of some ads hijacking your head every few meters, rather than their quality or the alignment of the brand with your values? Would you still buy the toothpaste with the shiniest packaging, when you can be sure another one is more suited for your teeth?

I would definitely not.