Jan 20, 2022
Broken Trust is Bad for Business and Society
The importance of trust and what technology can do about it
Trust is core to all human relationships and a linchpin of economic and social systems. However, over the years, the world has turned into a less trusting place.
The 2007–08 financial crisis and subsequent economic recession, in particular, did a lot of damage to the trust that people had in the financial system. This eroding trust also applies to other institutions and businesses — e.g. social media companies and other large multinational corporations. Organizations behind applications we use and online services we subscribe to, are using data and the data of many people combined, for their own purposes — and this may happen with or without our consent, even with regulations and security measures in place. For example, as part of the Cambridge Analytica scandal in 2018 — reportedly — personal data from over 87 million Facebook users had been improperly obtained and misused by the political data-analytics firm. The coronavirus pandemic has amplified this growing trend of generalized distrust, including distrust in public institutions and information sources.
With trust being foundational to business, its erosion has serious implications for the economy. Economist and Nobel laureate Kenneth Arrow once wrote that “Virtually every commercial transaction has within itself an element of trust…It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” We build and maintain trust by acting credibly and reliably, as well as fairly and transparently. When trust is lost, that’s just bad for business.
In a previous post entitled Reflections on the Future of Digital Money and Payments, I pointed out that as a consequence of the 2007–08 financial crisis — in an atmosphere characterized by eroding trust — the launch of the Bitcoin cryptocurrency in 2009 was no surprise, especially from the perspective that our financial system needed to fundamentally change. Simply put, Bitcoin was created to circumvent currency control by any centralized authority and simplify online transactions by cutting out intermediaries.
Blockchain and associated technologies — not to be confused with Bitcoin and other cryptocurrencies, which are applications of the technology — propose a way to create networks that operate on a golden standard of the truth — truth by consensus — that is sufficiently accepted by all participants. Although blockchain — and distributed ledger technology more broadly — cannot fix everything trustwise, it does reduce an important trust problem in multiparty scenarios — it provides a consensus-based system that immutably records changes of state in a dataset and does not allow any single party to one-sidedly alter the data either accidentally or in bad faith.
Blockchain and associated technologies will not bring about a ‘trustless’ utopia — a world that doesn’t need trust because technology takes care of it (well, that’s hardly an utopia in any case) — but they help improve our collective trust — among participants in a network — and do this in an efficient and inclusive way. Blockchain/DLT does not need to be perfect (what is perfect, anyway?), it just has to be better than the alternatives.
Additionally, blockchain-based systems are typically implemented using open source software. Put differently, not only the use of the technology is multiparty, but its development too. This means that there’s a whole community behind it, and the development of the code is done both collectively and in the open. As opposed to the closed source or proprietary approach, open source software allows users to evaluate and improve the code. Transparency helps establish confidence in a technology.
