Blockchain Fundamentals for Web 3.0: -

PART I

Blockchain Foundations

Chapter 1

Restoring Trust with Blockchains

What’s inside: Globally, we have a crisis of trust in our governments and institutions. This chapter explains the movements to establish trust through the decentralization of value, identity, and data ownership. These movements are part of ‘Web 3.0’, the idea that individuals rather than institutions should control and benefit from online social and economic activities. Blockchain technologies are the digital infrastructure for these movements. Blockchain technologies are designed for peer-to-peer online activities, with no central control. Many view blockchains as the best solution to some of world’s most pressing problems, from income disparity to climate change.

Learning objectives:

• Describe the role of decentralization in restoring trust in social and economic activities

• Compare the ‘Internet of Information’ with the ‘Internet of Value’

• Compare centralized/federated identity models with self-sovereign identity (SSI)

• Compare surveillance capitalism with individual data ownership and monetization

• Explain how blockchains enable an ‘Internet of Value’, SSI, and individual data ownership and monetization

1.1. Trust is the foundation of a well-functioning society

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.

Satoshi Nakamoto, inventor of Bitcoin¹

Although this is a book about technology, we are going to start our learning journey with the very human notion of trust. Trust is the foundation of a well-functioning society. High levels of trust in social institutions and economic markets promotes stability, prosperity, security, and wellbeing. Low levels of trust in social institutions and economic markets promotes instability, hardship, insecurity, and ill-being.²

We can conceive of trust as a sort of mental calculus that pervades every relationship we have. Take a moment to think about the relationships in your life. Whom do you trust and why? What are the limits of your trust in each relationship?

Trust can be defined formally as the degree to which subject A has confident positive expectations that object B will fulfil its obligations in context C to limit L.³ For example, perhaps you (subject A) trust your neighbor (object B) to collect your mail (context C) while you are on vacation (limit L), but you do not trust them to open your mail and pay your bills, thus your trust is contextual and limited. In this example, the object of trust is another individual, i.e., another single human being who is your neighbor.

We also apply the mental calculus of trust to formal institutions, like companies, government agencies, universities, hospitals, charities, and religious organizations. Which institutions do you trust and why? Perhaps you trust your university to provide a quality education for four years. Perhaps you trust your election commission to count your vote in every election. Perhaps you trust your charity to allocate your donation of $100 to those it promises to help.

The object of trust could also be a community—defined as ‘a group of people who come together for a common purpose/interest’—such as a neighborhood watch, an open-source software community, or a computer gaming community. In contrast to an institution, a community is not a legal entity. Which communities do you trust? Perhaps you trust your neighbors to watch over your property. Perhaps you trust a Reddit community to answer your questions on your favorite computer games.

Let’s flip the question to: whom do you distrust and why? Distrust can be defined formally as ‘the degree to which subject A has confident negative expectations that object B will fulfil its obligations in context C to limit L’. Distrust in social institutions and economic markets results in fear and anxiety. In the quote above, we see that Satoshi Nakamoto, the inventor of Bitcoin, distrusts banks.⁴ We will learn that one of Bitcoin’s main features is to ground trust for economic activities in an incentivized community rather than in institutions.

We can also apply the mental calculus of trust to technologies. Which social media sites do you trust to connect you with family, friends, and interest groups? Which e-commerce platforms do you trust to buy and sell goods and services? Which online payment services do you trust to pay your debts?

When a technology is the object of trust, we need to consider two contexts for trust: trust in the technology’s functionality, such as the technology performs as expected, and trust in the governance of the technology. Since all technologies are created, operated, and used by human beings, humans govern it. Your trust in the Facebook application to keep you connected to friends is a separate mental calculus than trust in the Facebook company (now ‘Meta’) to govern the application in your best interests. Research shows that people trust technologies based on many technical and governance factors, including the technology’s reputation; transparency (understanding how data is collected, processed, stored, and used); ease of use and perceived usefulness; the quality of the services; the performance in terms of availability, response time, and reliability; the costs in relation to benefits; the perceived risks, positive past experiences, and the reputation of its creators and operators.⁵

Thus far, we have argued that trust is the foundation for well-functioning social institutions and economic markets. While we hope that you are fortunate enough to trust many individuals, institutions, communities, and technologies, when we widen the aperture of trust to a global scale, the levels of trust are quite low in many places. Global surveys tracked the percentage of people from 1993 to 2004 who agreed with the statement, most people can be trusted. Sweden consistently ranked highest with over 60 percent of the respondents agreeing; the United States (US) hovered around 35 to 38 percent; Peru was among the lowest with under 10 percent.⁶ More recently, the 2021 Edelman Trust Barometer found that the majority of 33,000 global respondents believe that government leaders (57 percent), business leaders (56 percent), and journalists (59 percent) are purposely misleading people by saying things they know are false. Based on an overall trust index that measures competency and ethical behaviors, Edelman reported significant drops in the index from 2020 to 2021. For example, in the two largest economies, the US’s trust index dropped 18 points and China’s dropped by 5 points. According to the authors, the survey reveals a widespread mistrust of societal institutions and leaders around the world.⁷ Many people hope to restore global trust by decentralizing activities with the help of blockchain