Trust is a significant aspect in the assimilation of a currency.
By JOHN OREDO
Blockchain is being touted as a new technological genie being unleashed from its bottle. Through Blockchain, the epicentre of trust is about to diffuse, it is said. Blockchain is the technology behind cryptocurrencies such as bitcoin and ether. Blockchain can be characterised as a class of technologies that facilitate validated, tamper-resistant transactions that are consistent across many network participants. Simply put, blockchain can be thought of as a large distributed database or spreadsheet that guarantees a ‘single truth’ across participants who may or may not trust each other. Blockchain has been referred to as a distributed ledger system because it mimics large databases and spreadsheets. It is therefore not surprising that the financial industry has been in the forefront about expressing interest in blockchain. Even though most blockchain applications are still in test environments or sandboxes, it is strongly believed that blockchain is already disrupting the financial sector. Disruptive technologies are game-changers that follow the spoor trails of a paradigm shift.
Paradigm shifts in tech
It is estimated that in computing, new paradigms emerge in the order of one per decade. The first four decades of the Internet spawned the e-mail, the world wide web (www), social media, big data, cloud computing and the nascent Internet of Things (IoT). All these technologies have been great in reducing the costs of information exchange. Blockchain aims at creating a world wide web sort of value. Block chain should be seen as a trust protocol for value in general since it is a digital ledger of economic transactions which can be used to record virtually everything of value including death and birth certificates, marriage licenses, titles of ownership, insurance claims and anything that can be reduced to computer code. In a country like ours which is riddled with the vice of fake certificates, blockchain can be used by institutions to record, validate and commit to a tamperproof distributed ledger system.
The capitalist edifice
The capitalist paradigm was ushered in through the shift from a subsistence economy to a market economy controlled by private owners and from production for use to production for exchange of value and profit. But for exchange of value to take place, there must be a medium of exchange. In modern economies, money is not only used as the medium of exchange but also as a unit of account and store of value. But for money to perform the stated functions, it must be backed by trust. Blockchain technologies are being hyped as an answer to the question of trust regarding exchange of economic goods.
Why ‘money’ has intrinsic value
For much of the past 2000 years, moneys have been ambiguously positioned between an intrinsic value and a state guarantee of their acceptance. Before money, human societies exchanged goods and services directly and as societies grew, more complex commodity monies like peppercorns, cowrie shells, copper, silver and gold held sway as means of exchange. All these forms of money worked because people believed in them, more so because the metals had intrinsic value. In short, money works because people believe in it. This belief is embodied in trust. But with turpitudes of modern economies and political systems behind them, could people be losing trust on money?
Financial trust models
It is important to note that money is a product of culture and as culture gets transformed, the notion of trust about money also gets gradually transformed. It is evident that since the advent of digital technologies, the nature of how people trust and who they trust has dramatically morphed. In her book Who Can You Trust, Rachel Botsman, asserts that trust has evolved through three distinct frameworks. First, Local trust frameworks which operate within the boundaries of local communities. The community exchange systems rely heavily on local trust frameworks and money is not an issued currency but a metric score of who did what for whom. Second, the institutional trust frameworks which are an intermediated trust through a third party. The third party is usually a trusted entity like a commercial bank, the central bank or an online payment agent like PayPal. The last one is the distributed trust framework, which is still in its infancy. The distributed trust model is seen as a new trust paradigm in the sense that it is likely to disrupt our understanding of money and the role of the State in money systems. Even though there are varying opinions on whether cryptocurrencies are really money or just assets, but whatever it is, cryptocurrencies will disrupt the concept of money and state power over money.
The explosive growth of the sharing economy has facilitated the gradual shift from institutional trust models to distributed trust models. Distributed trust is the reason why consumers can rate service providers. It is this same distributed trust model that is behind blockchain and its applications like bitcoins or ether. These cryptocurrencies could be the future money operating out of the ambits of governments and monetary institutions. The hype aside, blockchain is still an immature technology that is yet to be assimilated within our socio-economic systems.
Dr. John Oredo is an Information Systems expert and a Lecturer in the Faculty of Arts, University of Nairobi. Email: firstname.lastname@example.org