As the year wraps-up, it is the season when we feel good will towards all. I am reminded that our economy works because of the trust that we each have in each other. The information economy has enabled us to interact with a wider range of parties than ever before and, more importantly, develop a level of trust in those relationships.
In the past, companies offered a huge range of services because it was their brand that provided trust. Today, specialisation is the name of the game with the internet offering research and reviews for potential customers. New platforms are allowing individuals to directly engage others for car rides, accommodation and ad-hoc tasks. These are only possible because identity and assurance of quality are offered through the power of the crowd.
Arguably, our individual reputation is more important today than ever before. It is harder for an unscrupulous business operator to move to a new town and have their history disappear. Even without a perfect identity system, companies and individuals are part of social networks and subject to reviews online which are hard to purge.
That isn’t to say that there aren’t bad operators taking naïve consumers for a ride. However, it is arguably harder than ever to maintain a false façade in the era of social media. Fake identities, where there are a substantial number of social connections, tend to fall apart quickly. See Login with social media.
When people trust each other, there is the ability to navigate inevitable disagreements. Contracts describe the business relationship between two parties. From time-to-time, interpretation of a contract is open to question and we use courts to find a solution. The investment required in a legal process, both in cost and time, means that it is usually a last resort.
At the same time as technology is providing a means of better identifying parties who want to do business, and providing a basis for trust, an alternative where no-one needs to trust anyone is emerging. So-called “trust no-one” business using blockchain is exciting entrepreneurs and innovators the world over. Of particular interest are forms of smart contracts which are being used by cryptocurrencies to provide rules-based settlement of agreements.
Smart contracts use code to define every rule and exclude the opportunity to escalate to a third party given that the funds are locked through cryptography. The great thing about computer code is that it removes ambiguity. The trouble with computer code is that there is always the opportunity for a bug to emerge and, with no room for human intervention, there is little ability to escalate to solve the problem.
We’ve seen this in action through an issue of Ether, one of the cryptocurrencies: ‘$300m in cryptocurrency’ accidentally lost forever due to bug. In this case the development community had to consider whether to wind everything back, effectively reversing time. Given the small number of transactions actually happening using smart contracts and cryptocurrencies, these issues represent a material proportion of the activity.
Perhaps the choice is like a safe. Do we lock our assets away in such a way that only we hold the key, with there is no recourse if something happens to that key, or are we willing to trust at least a few such as government or financial institutions? Stories abound of these lost keys and the heartbreak that follows (for example, see Don’t tell my wife).
Although it seems initially appealing to hand over the role of courts, banks and other institutions to technology, the downside of removing human judgement and failsafe measures is larger than the overhead that they add to our economy. Ultimately, though, doing away with trust means that all business is semi-anonymous and becomes transactional. Without human interaction, the temptation to try and cheat grows, probably at least as fast as the smart contract technology closes each loophole and corrects each bug.
It is ironic that with all the concern over trust in currency and contracts, our major business tool remains email. Our email largely relies on trust given that few verify the identity of the email sender. This is the ultimate proof that trust works in business given identity could be (and really should be) easily solved by the addition of digital signatures.
Rather than give up on millennia of business enabled through trust, we should embrace the Russian proverb (made famous by Ronald Reagan): “trust, but verify”. By the smart use of social media, identity and exciting business platforms we can enable an enormous volume of business to be done with little overhead. The exceptions should then be escalated to institutions such as courts run by humans not computer code.