The Residential Library

The sometimes demented, frequently irreverent, and occasionally stupid musings of Ron Hargrove

Who Can You Trust?

By Rachel Botsman   [2017]

What do Uber, Airbnb and Alibaba have in common? They’re each the result of a revolution in the way trust functions in our society.
We are more likely to trust others if we know they have more to lose than to gain by betraying our trust. An early example of this principle was the Maghribi traders of the 11th century in what is now Morocco. They wanted to ship their goods to the profitable but distant markets of Sicily. To do so meant they had to use intermediaries. But how could they trust that they wouldn’t be cheated by the intermediaries or the Sicilians? They used a rating system for the other parties and if a group’s rating got too low, they excluded them from their business networks so that they would lose out on future profits. It was a revolutionary innovation that is still used in the business world today.
The 3rd trust revolution is underway
1. Local trust. At one time this was the only kind of trust available to conduct business. It was face-to-face and traded was conducted in small, tight-knit communities.
2. Institutional trust. When industrialization came along, trade was conducted from ever greater distances so local trust didn’t work. Banks, governments and courts became more important because they could provide the trust that business requires for more elaborate systems of credit and trade.
3. Distributed trust. We are now transitioning into new form of trust partly because we’ve lost some faith in our institutions. This form of trust uses ratings systems of both buyers and sellers similar to the one used by the Maghribi traders. Many of us now trust peer ratings systems more than advertised claims of institutions and big businesses.


Institutional trust won’t survive the age of digitalization
Transitions to new forms of trust are scary. Can you imagine the first person that accepted a piece of paper money in exchange for something of inherent value? But each new form has been more efficient and empowering. Plus people are becoming skeptical of institutional trust. For example, in the crash of 2008, the greed and chronic malpractice of institutions that we had trusted was plain to see.
The internet continues to provide more transparency into institutions and their trustworthiness. An example was the release of the Panama Papers that exposed institutions that provided elaborate tax-avoidance schemes for wealthy people.

Social media has proven completely untrustworthy given the epidemic of false news stories it circulates.


How distributed trust works

One technique for establishing distributed trust is holding buyers’ money in escrow until they are satisfied with the product. Alibaba and others do this. Another technique is the system of rating sellers, and in some cases, buyers. Examples are Amazon, Uber and drug dealers on the dark net.

Ratings increases trust to such an extent that personal jobs are being allocated to complete strangers. The app UrbanSitter connects parents with potential babysitters.

Like anything else, ratings systems can be abused. For example, China has a voluntary system of rating citizens for what it calls trustworthiness, but which is really an assessment of their loyalty. And in 2020 it will become mandatory for all citizens. Sesame Credit and China Rapid Finance are the two companies tasked with awarding everyone their score. If they find critical comments on social media, for example, they will lower that person’s score. Your score could also be hurt just for being friends with someone who makes an anti-government remark. A low “trustworthiness” score will make it more difficult to get travel visas, more difficult to get hired and less likely to receive state benefits. It will even make it less likely that your profile will come up on dating sites.


Blockchain technology will revolutionize the way we trust each other

Blockchain will eventually record all meaningful transactions. For those concerned about the history of a diamond or a car, for example, blockchain will provide the complete histories. It will even make it easy to identify fake news.

Blockchain will also change the old system of institutional trust that relies on highly-paid experts such as lawyers and realtors. This is because they promise to make easily available all the data we need to make informed decisions. Middlemen will be redundant as blockchain enables peer-to-peer business without them.

%d bloggers like this: