TRUST AND TRANSPARENCY
In a Facebook survey done in 2016 asking millennials if they trust banks, 92% of them said they do not trust banks.
In contrast to this, the blockchain is creating a new form of native digital trust that is significantly absent in existing institutions today.
This loss of trust in centralized institutions is one of the hallmarks of many post-industrial societies today. In a world of trusted centralized institutions, few would take interest in a distributed system that requires a paradigm shift in thinking.
These token economies are going to gain the trust that is lost from our existing institutions by being more transparent and the fact that they are auto-enforced by code.
Blockchains are a technology of transparency. Public ledger systems let us see all the interactions in the whole system – even if those interactions are anonymous – and this is very different to the world we live in today.
The closed nature and misalignment of interests within centralized institutions of today reduces their capacity for transparency.
Facebook does not tell you that they are making a profit out of you, with your data and the advertisements they deliver to you because there is a subtle misalignment of interests there and they don’t want that to be transparent. Likewise, their algorithms are black boxes, they don’t want others to know about them.
Centralized systems create many boundaries that block the flow of information across the whole network and increase its overall opacity.
Gavin Wood a co-founder of Ethereum describes well the kind of economy that we have created with centralization when he says, “the world is much like a set of walled gardens, within the garden you’re free to play, you are taken in if you accept the authority of the household that actually owns the garden. But it’s very difficult to get between the gardens in reality. This boils down to banks and various financial institutions making it very difficult and timely reconciling transactions that go between them. But the more important thing is that as individuals and small business owners it’s very difficult for us to interact with each other if we don’t yet know or trust each other. Instead we have to go to these guardians of society, these intermediaries, these trusted authorities the middlemen in order to interact.”
When you remove the centralized component in these networks you also remove the wall around them that they create, which can work to greatly increase transparency across whole networks. By switching to a peer-to-peer model, you switch to a model based upon direct feedback loops between peers. To get that dynamic real-time information feedback loop you need transparency. The information has to actually flow directly instead of being mediated.
By aligning the interests of the network, you can make transparency possible as people have less of their misaligned incentives to hide from each other. When things are on the blockchain then everyone can go and audit what has happened. This is like finding bugs in open source software where “many eyes make all bugs shallow.”
Part of the problem with centralized systems is that they are vulnerable to a rich get richer lock-in effect.
The issue with the centralized model is that large organizations get capital easier, greater liquidity and they get to dictate terms because they are seen to be more efficient and stable. This makes it more difficult for new startups to compete.
When the Internet started it was built on open protocols like email or TCP/IP and everyone was able to create. It was easy to discover websites. That’s not true in the internet anymore.
Closed networks like Facebook or Twitter are gated communities that use their user data to gain an advantage.
If you are a startup they also have the potential to shut you down as soon as you compete with them or violate their terms of service.
Once a centralized organization of this kind has grown it is very easy for them to become extractive, because it is difficult for people to change providers. Any system that becomes extractive will not want you to know that it is such and this will again reduce transparency in the system.
One of the major challenges faced by organizations today is rapidly escalating complexity within almost all domains.
As our environments become more complex bureaucratic organizations have responded to that by creating more subsystems – more specialized departments and domains – the result being that things have been broken up into these different silos.
These silos provide the organization with some of the specialized capabilities for it to respond to the increased complexity within its environment. But at the same time have the effect of locking information about what’s going on inside because they don’t want to share that information; because they’re afraid competitors or customers will take advantage.
The more complicated things get the more we basically break things up and the more fractured and siloed the system becomes.
The greater the resistance to the overall flow of information within the system and the greater the overall opacity.
Blockchain networks enable us to collaborate within large networks, connecting horizontally and replace proprietary technology with open source protocols, greatly increasing transparency on the network.
This transparency can be used to reduce risk and uncertainty and thus reduce costs. With the blockchain – because everything is digitally native – we can have the actual information about transactions within the network. And we can, for example, lend against that with minimal risk.
If there is a smart contract that an organization pays you every month then you can use that to get a loan against it with minimal risk and thus minimal cost.
Also because these may be smart contracts you could just adjust those contract so that the capital is automatically routed to the lender as payback. Also no one can run away with the money because it is controlled by the network which reduces risk again.
Likewise the network could control for bad actors routing the finance around them.
Just as the underlying technology is based upon a proof-of-work or proof-of-stake system, so to a true services economy that the blockchain enables should be based on outcomes delivered. Unlike selling products which are all about the promise of a functional system, services can be measured according to the actual functionality delivered; the work delivered instead of simply being given a product that may or may not function well. The proliferation of sensing and big data analytics will enable us to measure and quantify our economies in unimaginable ways and in so doing begin to track the actual functionality delivered, which is at the end of the day what people really want, or are increasingly wanting as the so-called “burden of ownership” of the industrial age product-based system starts to take hold within consumer societies.
An “outcomes” system of this kind is again just one more way that a blockchain based economy could work to better match the information layer of token exchange with the underlying flows of real value.