Turning Point: Interest in blockchain technology surges as it spawns a highly volatile virtual currency market.
Blockchain is far more than just the technology underlying Bitcoin, the cryptocurrency. It is a tool that promises to decentralize the structures governing all economic transactions and, in the process, redefine our concept of trust.
This is the most revolutionary and innovative aspect of blockchain. But its promise could be undermined.
Trust — the basis of social and commercial interactions — has been guaranteed for centuries by institutionalized trust providers, such as hierarchically organized companies and other third-party authorities. These trust mechanisms have worked for offline business models, but they are becoming obsolete in our hyper-connected digital world.
In the digital-platform economy, trust is best fostered by those who control the platforms. These are tech giants, like Uber and Airbnb, which are replacing the institutionalized trust providers and becoming the keepers of our digital identity and our trustworthiness. They control the mechanisms that build trust upon transaction-based feedback, establishing community-based reputations through the star-score rating system.
In the past few years, however, some open platforms, such as Twitter, have become increasingly restrictive. Things have turned sour, as developers and early users feel betrayed. They had been promised open platforms but that dream was snatched away.
Moreover, incidents involving several tech giants, such as Facebook, eBay, Uber and Experian, have shattered their credibility as reliable keepers of our data. Our fear of surveillance and data misuse has grown.
Thanks to blockchain, people are now able and eager to take on the platform owners by engaging directly with one another via peer-to-peer, or P2P, distributed networks that run on a commonly agreed-upon set of rules. The resulting machine-driven trust allows users to avoid the fallout from centralized trust mechanisms, such as third-party control or unauthorized surveillance.
In fact, the large centralized trust enforcers may soon give way to decentralized trust systems and P2P network-enforced reputation systems that blockchain makes possible.
Under such systems, algorithms confirm the authenticity of each transaction and can record each party’s identity, along with their trust and reputation rating, in the blockchain, which acts as a kind of ledger. Misbehavior is prevented because it is impossible to tamper with or falsify the ledger, and accountability is improved because all actions can be independently audited by any participant.
The benefits of a decentralized system are clear: Users are able to build trust without involving a third party. Group cooperation is enhanced. Fraudulent transactions are minimized. In addition, users can build their personal reputation across multiple platforms, and they can not only control their vast transaction data but also build and manage their own digital identity — bypassing the surveillance of the tech giants.
It is Uber without Uber, Airbnb without Airbnb.
This evolution is already happening. Payment and financial services providers like PayPal are being challenged by Ripple or Circle. Social media and networking services like Twitter and Facebook face competition from decentralized platforms such as Steemit or Akasha. Decentralized apps — software making decisions and acting autonomously — can be created and deployed on different blockchains like Ethereum or EOS. These are just a few examples.
This beguiling transformation seems too good to be true, and distributed systems based on blockchain face a conundrum.
In modern large-scale P2P markets, trust and growth are at odds: The more a network grows, the less trust users often place in it. But user growth is essential to the success of the P2P platform economy.
This problem can be solved by making it harder to join the network (reducing user growth) or by centralizing control to a handful of trusted coders or nodes (reducing decentralization). Unfortunately, the blockchain community seems to favor increased centralization.
Apart from business-to-business platforms, which generally run on top of private blockchains where governance is centralized by design, the fastest, most secure and most rapidly growing P2P platforms are based on public blockchain networks — which are all centralized. A handful of people make and enforce the rules.
For example, only a small group of “superpower” miners — those who tally and authenticate transactions — secure the majority of Bitcoin transactions, while a small core of developers make the vast majority of changes to Bitcoin’s protocols.
For Ethereum, the largest public blockchain stack, adopted by thousands of P2P platforms, the situation is even worse. The top five mining pools secure as much as 80 percent of the transactions in the ledger. The developers are concentrated as well: 20 percent of Ethereum’s core code was written by the same coder.
Machine-driven trust is about to jump from systems controlled by tech giants to systems controlled by a small group of anonymous tech gurus.
If only a few members have the ability to edit the system’s ledger and control the protocol, where are the open, transparent, free-to-use and universally accessible blockchains that so many hoped would bypass third-party control and surveillance?
Ultimately, this new frontier of managing trust in the digital world presents a rather stark choice: Either we bargain away our privacy to centralized but accountable trust providers or we keep direct “control” of our data via a trust machine run by a limited group of anonymous people who could go rogue.
These governance problems undermine the credibility of blockchain as a trust machine for the new P2P economy. It seems that synthetic trust among peers is not supported by a solid set of principles. This lack of trust inevitably atomizes the community and fragments group solidarity, as evidenced by the many chains that have forked off from the original protocols of Bitcoin and Ethereum.
For the time being, there is warfare to control those blockchain systems, and not a new common good that the technology still has the potential to deliver.