Though cryptocurrencies offer the idea of a trustless future, the future of blockchain technology and transactions is very much tied up with the need to establish, maintain and build trust. Nearly all the major business models that are envisioned for blockchains will depend upon something managing assets and information beyond the blockchain itself, making trust part of the equation.
Almost all the new blockchain business models emerging depend on trust and external data sources to succeed. Fiat currency-backed stablecoins depend on a match between the value on-chain and the value of assets in an off-chain bank. Financial instruments that are triggered based on off-chain activities or pricing are also dependent on external data feeds, as are supply chain business models.
All business agreements are based on the exchange of one item of value for another, often subject to specific terms and conditions. If any of those assets or the data necessary for the terms and conditions exists off-chain, then you must trust at least one other party in the agreement to be providing truthful information.
That does not mean the value proposition of public blockchains evaporates the moment you leave the realm of cryptocurrencies. However, it does become more complex as there are many different options for how to build trust into business models.
Centralized systems require you to trust a single party. Blockchains offer many choices. As blockchain technology matures, one of the crucial business advantages of the ecosystem will not be the lack of trust, but the rich set of choices of whom you trust.
Further, centralized systems do not offer you a choice of who you trust. You must trust the operator of the network, and that trust is often an all-or-nothing proposition.
Selling your product in a digital marketplace? Chances are you agreed that the marketplace operator can set fees, change them and adjudicate disputes when and how they please. They are free to shut off your account or change the terms of the deal whenever they want. If you don’t trust them, you are free to not join the marketplace, but that may not be a commercially viable choice.
Decentralized systems have no central authority with equivalent power. Instead, there are a range of options. Top of the list are oracles, which are going to become increasingly critical for verifying off-chain data. Tied closely together with oracles are algorithms that are designed to reward reliable behavior and punish bad behavior, and wherever possible, to do so based on multiple redundant sources of data. These algorithms include economic incentives for people to trust but verify.
When it comes to applying human judgment, there are two major options: the wisdom of crowds and the rigor of experts. Crowd-sourced decision-making fits with the governance models of many blockchain systems, but it can also turn key decisions into a popularity contest. What’s right isn’t always what is popular. Rigorous external expertise, the kind you get from auditors and external specialists, has its own appeal and is already widely used in the legacy world of audits of all kinds, from financial statements to security systems.
The history of off-chain trusted systems shows that there is no one perfect method, group or system that works all the time and in every situation. Auditors get bamboozled, crowds are duped, and algorithms prove over and over again that they can be hacked and manipulated.
What is different and exciting about the world of public blockchains is that the future is one in which being trustworthy isn’t just a part of business, it is itself a competitive business.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.