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Can Smart Contracts Help Democratize Trust?

5 minute read
Liraz Margalit avatar
Game theory teaches us that trust drives the economy. Yet in the digital sharing economy, trust is limited. Isn’t time to democratize trust?

“Trust, but verify” — Russian Proverb

Trust is the cornerstone of human society and economy. Trust is so basic, in fact, that its emergence is often framed in evolutionary terms, notably by Dr. Joyce Berg in her groundbreaking 1995 study, “Trust, Reciprocity, and Social History.”

Yet in the more than two decades since Dr. Berg’s research, the massive scale and velocity of the digital revolution, along with the intricacies of the sharing economy, have stretched traditional models of trust to their limits. These models simply “do not scale to the scope, spontaneity and agency required in digital business,” noted Gartner analysts (paywall) recently. 

In the digital universe, identity itself is amorphous. This makes trust — in keeping with the Russian proverb — radically harder to verify. Individuals with the right skillset can independently enable trust using tools like smart contracts. And the rest of us can use recognized third parties (think of eBay and similar platforms) to verify our digital transactions — as long as we’re willing to share a slice of each transaction with them. 

But as the sharing economy enters its second decade, we're not seeing the expansion its proponents predicted. The reason? Trust — or lack thereof. Trust remains “one of the biggest barriers to sharing economy adoption,” according to eMarketer. The widespread democratization of ownership and consumption that was the dream of the sharing economy remains unrealized. A key reason for this is that the tools of establishing decentralized trust, which is crucial in a shared economy where goods and services may not even be physical, are simply too complex for mass adoption.

In other words, if we want the democratize the economy, we need to first democratize trust.

Game Theory: Understanding the Value of Trust

Game theory, and specifically the Trust Game, can explain the value of trust in human interaction. 

In this exercise, two individuals (we’ll call them Players A and B) are given an amount of money. Player A must choose whether or not to share part of his money with Player B. If he chooses to share, the amount that player B receives is tripled by the facilitator — meaning if Player A gives Player B $1, Player B actually receives $3. Knowing what he received from Player A, Player B is then given the same choice.

Assuming the economic principle of rational self-interest would apply here, the researchers predicted that Player A would give Player B nothing. After all, what guarantee does he have that Player B will give anything back?

But here’s the thing: the researchers were way, way off. In 30 of the 32 trials, the Player As gave the Player Bs on average over 50% of their money. What can we learn from this? Among other things, these researchers demonstrated that trust is at least as basic (if not more) to economic transactions as self-interest. 

So, trust is a proven economic enabler, and arguably an evolutionary advantage. Trust and positive reciprocity are aspects of everyday life. Indeed, in most places lost personal items are returned to their owners, unlocked doors are not opened by strangers, and contractual obligations are most often met. Trust is the glue of society and drives the economy. It has been shown to increase organizational efficiency and improve economic outcomes. Researchers have demonstrated a positive correlation between higher trust and higher GDP per capita. High levels of trust are associated with efficient judicial systems, high-quality government bureaucracies, lower rates of corruption, and more. 

Despite all this, William Shakespeare once wrote, “Let every eye negotiate for itself and trust no agent.” We all know from personal experience that trust is certainly not a given in every interaction.

Learning Opportunities

But what if it was?

Related Article: How to Handle the Crisis of Consumer Trust

Is it Possible to Guarantee Trust?

Classic game theory tells us how trust plays a crucial role in the economy. But what if trust was neither granted nor accepted, but rather simply a given?

In the absence of trust, we have established mechanisms of enforcement. We create and sign contracts, and these are upheld in courts of law, if necessary. The justice system can provide recourse if one party violates an agreement. This recourse only comes ex post facto, however, and losses can easily be incurred. Thus, it’s not ideal. And because of this, millions of economy-expanding transactions never happen.

In the digital era, enforcement can be built in to contracts using blockchain technology. Smart contracts lock in trust by ensuring that any agreement be upheld automatically. If the terms are not met, the payment is not made. In the words of their inventor, computer scientist Nick Szabo, “A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.”

In other words, with smart contracts, trust is no longer a factor in deciding whether or not to do business. The contract itself both stipulates the terms and enforces them. It is a nearly ironclad guarantee that what is supposed to happen, will happen.

Related Article: Blockchain for Business: Ready or Not, Here it Comes

The Bottom Line

Trust is central to human economy, but the sharing economy demands a rethinking of how we relate to trust in commerce. Smart contracts have been shown to be a viable vehicle for eliminating trust as a factor in decision making. The trust economy represents a remarkable power shift from large, centralized trust agents to the individual. Democratizing access to smart contracts will stimulate and democratize the shared economy heralding a new, "post-trust era" of business.

About the author

Liraz Margalit

Liraz Margalit, PhD, is a digital psychologist, customer & user behavior specialist, and an international keynote speaker. She integrates cognitive psychology and behavioral economics perspectives to analyzes consumer behavior and deliver actionable insights for business stakeholders.

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