Irving Wladawsky-Berger: Platforms, Blockchains, and the Evolution of Trust

“In primitive economies, people traded mostly with members of their village and community,” wrote David Brooks in a June, 2014 NY Times OpEd, - The Evolution of Trust. “Trust was face to face. Then, in the mass economy we’ve been used to, people bought from large and stable corporate brands, whose behavior was made more reliable by government regulation. But now there is a new trust calculus, powered by both social and economic forces.”

Brooks’ article focused on the rise of the on-demand economy, - aka, the collaborative, sharing, peer-to-peer economy, - and in particular on the surprising success of Airbnb. Rooms for rent in boarding houses and child and pet care services are nothing new. What’s new is the impact of technology, platforms and blockchain in particular, on the growing on-demand economy. Companies are being disrupted as consumers are now able to deal with each other bypassing traditional hotels and taxi services. All kinds of on-demand products and services are now coming to market.

The on-demand economy wouldn’t be possible without the mobile devices and platforms that enable peer-to-peer transactions among individuals any time and place; the digital payment systems that reliably and securely broker the transactions between buyers and sellers; and the social reputation systems, where people rank buyers and sellers, - a critical requirement for the smooth functioning of collaborative markets like Airbnb. In the digital economy, our online reputations follow us everywhere, whether we are the renters or the ones renting, the service providers or the service consumers.

The competitive advantage of on-demand companies is their ability to aggregate lots of resources from their suppliers and integrate them with the trust needed to attract customers. The classic hotels business is based on integrating property with trust, that is, the rooms they make available to customers with the trust created through their brand and reputation that attracts customers to come stay in the hotel. Trust has been the hotel’s key barrier to entry from individual competitors with rooms to let.

Airbnb and similar companies have totally shifted this dynamic. Lodgings have now been commoditized. Airbnb offers more than 3 million listings in over 65,000 cities in almost 200 countries around the world. Its competitive advantage is its Internet-based reputation systems for trust between hosts and guests, based on the ratings of over 200 million guests. By integrating its reservation and trust management systems, Airbnb has been able to achieve an extraordinary global scale in less than a decade.

Despite its original grass-roots nature, the on-demand economy is now mostly owned by venture capitalists and other investors. New firms continue to enter the market in segment after segment, bringing together consumers and providers of goods and services with their highly scalable platforms and innovative applications. This new class of on-demand companies rely on freelance workers and asset providers instead of on a classic company workforce and assets.

Should we bemoan the fact that some of these on-demand startups have joined the ranks of billion-dollar unicorns, or should we just accept that this is the way capitalism has always worked and celebrate their innovative business models?

As this 2015 Financial Times article noted, on-demand communities “have been delving deep into what it means to be running a collaborative business model within a capitalist framework. Are the two even compatible? Or is there a fundamental conflict at the heart of an industry that preaches collaboration but, due to being radically commercialised by venture capital money from Silicon Valley, also needs to profiteer from the goodwill of others if it’s to remain viable?”

Dominant on-demand companies are likely to trap their freelance workers and asset owners in a kind of digital serfdom because their all-important digital reputation is only associated with the platform of a specific company. Instead, these freelancers should have fully portable digital credentials and reputations. “How else can you take your reputation and your accumulated credit with you to another territory or platform without having to start again? How can you ensure freedom and preserve your reputation if every time you change your mind about where you want to engage in bartering or sharing online you’re going to have to start with a zero reputation score?”

On-demand companies represent a growing segment of the overall platform economy. Network effects drive the economies of scale of successful platform companies. The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users. Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.

“Over the past 20 years the economy has progressively moved away from the traditional model of centralized organizations, where large operators, often with a dominant position, were responsible for providing a service to a group of passive consumers,” wrote Primavera De Filippi in a recently published Harvard Business Review article, - What Blockchain Means for the Sharing Economy. De Filippi is a researcher at the National Center of Scientific Research (CNRS) in Paris and faculty associate at Harvard’s Berkman Klein Center for Internet & Society. She’s also a co-founder of COALA, the Coalition of Automated Legal Applications, a multidisciplinary initiative focused on the impact of blockchain technologies on society.

“Today we are moving toward a new model of increasingly decentralized organizations, where large operators are responsible for aggregating the resources of multiple people to provide a service to a much more active group of consumers… The problem with this model is that, in most cases, the value produced by the crowd is not equally redistributed among all those who have contributed to the value production; all of the profits are captured by the large intermediaries who operate the platforms.”

“Recently, a new technology has emerged that could change this imbalance. Blockchain facilitates the exchange of value in a secure and decentralized manner, without the need for an intermediary… With a blockchain, software applications no longer need to be deployed on a centralized server: They can be run on a peer-to-peer network that is not controlled by any single party. These blockchain-based applications can be used to coordinate the activities of a large number of individuals, who can organize themselves without the help of a third party. Blockchain technology is ultimately a means for individuals to coordinate common activities, to interact directly with one another, and to govern themselves in a more secure and decentralized manner.”

Trust is one of the key attributes associated with blockchain technologies. A 2015 Economist issue called blockchain “The Trust Machine,” and noted in one of its articles that blockchain “offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. It is a way of making and preserving truths.”

Trust was also prominent in a recent survey conducted by IBM on the state of adoption of blockchain. The study interviewed almost 3,000 C-Suite executives from over 80 countries and 20 industries to learn about their company’s blockchain plans. 8 percent of respondents were early adopters, already involved in blockchain pilots and experiments, while 25 percent were considering but not yet ready to deploy blockchains.

The IBM study analyzed the responses of the early adopters to figure out what’s driving them to embrace blockchain at this early stage. It found that early adopters viewed blockchain as a kind of trust accelerator, helping to build trust in several ways: increased transactional transparency, higher data quality and accuracy, increased trust in transaction reliability, and improved security against fraud and cybercrime.

De Filippi noted that blockchain can support a new kind of platform cooperativism - “where users qualify both as contributors and shareholders of the platforms to which they contribute. And since there is no intermediary operator, the value produced within these platforms can be more equally redistributed among those who have contributed to the value creation.” Her article cited a few such recent startups in social networks, marketplaces and transportation.

“There’s nothing new about that, you might say - haven’t we heard these promises before?,” she adds in conclusion. “Wasn’t the mainstream deployment of the internet supposed to level the playing field for individuals and small businesses competing against corporate giants? And yet, as time went by, most of the promises and dreams of the early internet days faded away, as big giants formed and took control over our digital landscape.”

“Today we have a new opportunity to fulfill these promises… If we, as a society, really value the concept of a true sharing economy, where the individuals doing the work are fairly rewarded for their efforts, it behooves us all to engage and experiment with this emergent technology, to explore the new opportunities it provides and deploy large, successful, community-driven applications that enable us to resist the formation of blockchain giants.”