Building Trust and Confidence in Systems Via Blockchain Protocols is a critical question and challenge for the Blockchain community.
A significant challenge facing most policymakers in Europe and North America is re-establishing institutional trust amongst their citizenry. A major impact of the 2008 financial crisis and the collapse of large financial institutions such as the Lehman Brothers was the erosion of institutional trust.
A sufficient level of systemic trust is vital in maintaining the stability of economic, political, and social systems. Conversely, a low institutional trust could threaten these systems with unrest endangering the soundness of the market-based economy.
As an illustration, the financial crash’s effects on systemic trust in Europe led to a push for abolishing free-market systems. Research, for instance, shows that anti-capitalist sentiments rose in some European countries past the crunch, with more citizens viewing globalization as a threat to their economic welfare.
As per the 2009 Edelman Trust Barometer, 65% of European citizens felt that their governments should impose nationalist policies for greater control over their economies after the economic crunch. As per the Trust Index, only 49% of global citizens showed trust in institutions in 2009.
Institutional trust was lower in the US, where only 38% of its residents trusted that businesses would do what is right by the people. More data by Pew Research shows that trust in economic and political institutions is still marginal, a decade past the financial crisis.
It has been on a steep decline since 1958, and only a few American citizens now place trust in institutions and governments. Moreover, wars, worsening economic struggles, and scandals have eroded public trust, crashing it to all-time lows after 2007.
Unfortunately, governments are still squandering the left-over trust their citizens place on them. To illustrate this point, growing income inequalities and the mismanagement of the Covid-19 pandemic have left Chinese and US citizens more distrustful of the authorities.
The 2021 Edelman Trust Barometer shows that the citizens of the world’s biggest economies are hemorrhaging trust capital in their national governments. For example, the US and Chinese citizens’ trust index is 40% and 30%, respectively.
So, besides calls for nationalist policies, another widespread effect of low systemic trust is a clamor for stricter regulatory laws on economic activities.
As per a 2020 Gallup poll, US citizens want more government intervention in their systems. Then, as per the Pew Research Center, 68% of Americans feel that major tech businesses have too much influence on their economy. 55% of them want the government to regulate these institutions.
Building Trust and Confidence in Systems Via Blockchain Protocols
Code as a regulator
“Code is Law” enthusiasts believe that code is a better arbitrator and regulator than national governments. Code will not fall to human judgment or error. It is impartial, instant, autonomous, and has no processes.
Code can build self-patrolling neutral systems that enforce rules a priori or before the fact. To this end, computer scientists and programmers are looking longingly to a future where code runs the show in financial transactions, work environments, and industry.
Blockchain technology is a good example of the use case of “Code is Law” regulatory mechanisms in online environments. Blockchain technology uses distributed ledger technology (DLT) to record, share and track data across vast networks.
It is an open-source technology whose benefits include decentralization, transparency, and data immutability. In addition, blockchain technology can create trustless systems using code.
As the world becomes clouded by mistrust and people spend more time on online platforms, national government regulation will become more complex. Most online platforms have user bases that dwarf that of most nation-states. These platforms’ governance is different from that of democratic states.
Blockchain technology’s code is a game-changer as regulation becomes problematic. Its trustless systems can inject confidence in digital transactions, lowering systemic trust in financial and social agreements.
How blockchain protocols can build confidence in systems
Protocols are procedures that govern and regulate the functions of a blockchain network. They are blocks of code that govern data transfer on blockchain networks. They also dictate how various devices react, store and access a blockchain network’s data.
Consensus algorithms, for instance, facilitate the creation of error-free, censorship-resistant, and immutable block data. In addition, DLT infrastructure supports open, decentralized networks and helps enforce a consensus on disparate nodes.
On the other hand, smart contracts are codes that will automatically execute a function when parties to an agreement fulfill all predetermined conditions. Blockchain technology’s trustless frameworks can eliminate untrustworthy and opaque systems amongst users that subject themselves to its code as a regulator.
They will enjoy benefits such as enhanced security in transactions and transparency. In addition, decentralized networks will protect sensitive data through end-to-end encryption, keeping it free of authorized access and fraud.
Their privacy protocols can anonymize personal data. Open blockchains store data in transparent databases in multiple locations. Here, network participants can view all transaction data using a blockchain’s block explorer.
Then all blockchain records have date and time stamps. This process eliminates all forms of fraud and enhances traceability. Blockchain records have audit trails that offer the provenance of every crypto asset that originates from their databases.
High levels of traceability can expose weaknesses eliminating counterfeiting, theft, and other forms of loss. Moreso, blockchain networks are not paper-heavy and are therefore not prone to human error as their traditional counterparts.
They run free of third-party mediators and are cheaper, faster, and more efficient. In addition, code eliminates friction and the constant need to reconcile ledgers which creates loopholes that erode trust in centralized systems.
Automation via code through smart contracts eliminates reliance on human intervention in agreements enforcement or regulation.
Blockchain technology is a confidence-building machine.
Researchers PrimaveraDe Filippi and his team describe blockchain technology as a “confidence machine .”Code as law regulators such as blockchain technology does not expect automatic trust from their users.
A dictionary definition of trust is the belief in a person or entity’s truth, ability, or reliability. It is a belief that an establishment or intuition is sincere, good, or honest. The global financial crisis and subsequent bailouts of ‘too big to fail’ institutions revealed that capitalism was fragile and its institutions selfish.
The resultant quantitative easing (QE) rounds were proof governments might not do what is best for the people. Blockchain technology and decentralized finance, first popularized by the Bitcoin network, build trust in systems through predefined rules.
It cannot depart from the laws written by code unless by third-party operator intervention. It is, therefore, a naturally trustworthy regulator. Beyond building trust, blockchain builds confidence in public systems too.
Confidence is a belief or feeling of reliance on a person or entity. It eliminates all expectations of risks and provides an attitude of assurance. A public blockchain such as Bitcoin is a confidence-building network. While it has been in operation since 2009, it has not failed in its mandate as a censorship-resistant payment network.
Bitcoin’s blockchain data has not been hacked in 13 years since its inception. Likewise, Ethereum is a confidence-building network, proving that blockchain nodes can amicably disagree and democratically follow the code’s longest chain rule.
When a hacker drained the Ethereum DAO funds in 2016, Ethereum nodes made a vote and followed the update that had the ‘the most work .’They made a hard fork in the main chain, reversing some of the DAO’s lost funds.
Savvy public institutions can restore trust and confidence in their systems using distributed ledger technology. Moreover, blockchain technology code is open source and has undergone intense scrutiny by skeptical scientists and technologists.
Its unique blend of economic incentives and game theory schemes can revolutionize how people and systems coordinate and engage in economic and social transactions. That said, ‘code as law’ systems are fallible to forces that affect their architecture, such as the Transmission Control Protocol/Internet Protocol.
Blockchain networks are dependent on the internet, and the “net neutrality” phenomenon could affect the function of their regulatory functions. Then, as per Harvard professor Lawrence Lessig, code is a fair arbitrator, but it’s not entirely neutral.
In his book ‘Code and Other Laws of Cyberspace”, professor Lessig warns that the architects of code have leveraged it to build unjust systems in the past. Therefore, there is a growing need for decentralized autonomous organizations (DAOs) that oversee the regulatory mechanism of the decentralized space.