On Crypto and Trust Minimization

What does it mean to trust someone? Usually, that person (or company, or technology) can take actions that share a bunch of characteristics: the action has a material impact on us, we cannot directly observe the action or judge its consequences relative to alternatives at least until later, and we have an expectation that the other will act in a way that is primarily to our benefit as opposed to their own.

One way to tell that trust was involved in a relationship is when we discover that the person (or company, or technology) acted in a way that harmed us and benefited them. At that point we feel betrayed. This provides a useful distinction between the concepts of trust and reliance. We rely on a clock to tell time. When the clock breaks we will feel disappointed. But when we buy a clock from someone who tells us it a working clock, we trust them and when it doesn’t work, we feel betrayed (thanks to philosopher Annette Baier for this distinction).

There are many different mechanisms for maintaining trust, such as reputation, bonding, repeated interactions (loyalty), professional codes of conduct, regulation, etc. Trust is an essential facilitator of a broad range of interactions and relationships, societies, economies with high levels of trust can accomplish a lot more than those without.

Here is an example of trust through loyalty. When Susan and I lived in Munich, our apartment was close to the famous Viktualienmarkt, a beautiful old fashioned market in the middle of town. There are many sellers or fresh fruit and vegetables in the market but we would always go to the same vendor. The following was a routine occurrence.

Vendor to tourist in front of us: [Loudly] The oranges are fresh from Spain and super juicy!

Vendor to us (regulars) seconds later: [Hushed] Don’t have the oranges today, they are terrible.

We could trust the vendor to not sell us bad oranges because we were loyal customers who provided steady business.

Now some people have been saying that crypto is exciting because it has “trust built in.” I, however, prefer a different formulation, which is that crypto systems are “trust minimized.”

To see the difference, let’s look at the example of buying oranges. A blockchain based market for oranges does not automatically mean I will only buy juicy oranges. In fact, in most crypto marketplaces I will know less about the seller than I did with our local vendor (who was at the same place every day and whom I knew by name) and may be buying from different vendors so that loyalty at the vendor level may not be available as a trust mechanism. But let’s envision that every orange when it is picked is stamped with a code which is registered on a blockchain together with a proof of location. Now I could scan an orange in the market and look up for myself where and when it was picked.

Among other things I could thus determine for myself whether the orange is in fact from Spain and how recently it was picked. But we see now that this system is only “trust minimized.” Trust hasn’t been built into it nor has it been entirely eliminated. For example, if the payoff was big enough, someone might truck oranges to a region to pretend that they picked them there. And my local vendor can still add value on top of such a trust minimized system. For instance, they could cut open an orange from each batch and let me sample it.

So what would we gain from a trust minimized system? To stick with the example one can see how the tracking system would dramatically reduce the ability of intermediaries along the supply chain to mess around (for instance by substituting orange from one region for another). This matters a lot in markets where I as a customer don’t have a relationship with the intermediary and where the intermediary is potentially powerful (e.g. due to scale economics in distribution) relative to both the grower and the vendor.

We live in a world where large corporations (especially ones with scale or network effects) have often abused trust due to a misalignment of incentives driven by short-term oriented capital markets. There are different ways of tackling this problem, including new regulation, innovative forms of ownership and trust minimized crypto systems.