Friday, January 4, 2019

Blockchain and trust

Arnold Kling responds to Andreesen and Horowitz on a variety of issues. Here's his comments on blockchain and trust:
Andreessen and Horowitz are bullish on blockchain. Horowitz sees blockchain as a general-purpose technology for providing trust.

I disagree. In the context of business, trust means that you believe that the other party will do what it has promised. For that belief to be justified, you need credible evidence that the other party has kept similar promises in the past and has the incentive to continue to do so in the future.

I think that trust is too subtle and nuance to be “solved” by blockchain. Instead, we need an intricate interlocking arrangement of institutions to provide trust. We need a government in which officials who don’t take bribes are generally better off than those who do. We need businesses with valuable reputations that they do not want to lose. We need low-cost mechanisms by which people can reward cooperators and punish defectors, so that the trustworthy survive and the untrustworthy get weeded out.

There is always an incentive for people to signal that they are trustworthy when in fact they are not. This means that we need institutions to develop that make it costly to signal trustworthiness unless you really deserve it. No single institution can solve this problem. It requires layers of institutions, including governmental institutions.

There are many, many ways to cheat in a transaction. I can sell you property where I do not actually have a title recognized by the authorities. I can sell you a property that has environmental hazards that I did not disclose. I can sell you a property that is not zoned for the type of improvement you want to put on it.

Recording the transaction by blockchain does not by itself prevent me from doing any of these things. Of course, if the government recognizes a blockchain as its official title record, then the blockchain technology would be involved in the transaction. But without government sanction, a blockchain title record would be of little or no use in a dispute.

As far as I can tell, blockchain can only help to prevent one type of cheating: digital forgery. If blockchain is going to have a killer app, then it has to enable a transaction to take place where the only impediment to undertaking such a transaction currently is the threat of digital forgery. I cannot think of such transactions.

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