In 1993, eminent Harvard scholar Robert Putman published a seminal book which studied the difference in performance between cities in northern and southern Italy. Putman labelled the cause of the difference between the performance of these two groups of cities as ‘social capital’ – features of social life, networks, norms, and trust that enable participants to act together more effectively to pursue shared objectives.
Trust is a central tenant of our institutional and economic world order. We know that it is not possible to have strong social interactions for human groups of over 150 persons. This is known as Dunbar’s number and institutions emerged approximately 10,000 years ago in order to break this limit. Since the first form of institutional order, trust has been a centralised activity. This is best explored in the banking and finance world.
The Medici family of the Florentine Renaissance realised the importance and potential of setting up an intermediated system of trust in finance and banking. They were true disruptors and through their thinking and actions set in motion today’s interconnected system of global finance. In essence, they figured out how to intermediate between savers and borrowers, all for a fee. By creating a central ledger which kept track of all debts and claims, the Medicis created a powerful centralised system of trust. With the help of their specialised intermediating services, strangers that previously had no way of trusting each other to do business could now do so. The Medicis thus created the centralised ledger which organised, expanded and shared society’s debts and payments. It made way for an explosion of mercantile trade and global finance. By creating a central system of trust and putting themselves in the middle of it, banks became very powerful. This is what gave rise to the behemoths of Wall Street, which would ultimately take the world to the brink of disaster in 2008. Commenting on the economic crisis of 2008, UK Chief Rabbi Jonathan Sacks held that “what has been lost is trust, our trust in those we chose to look after our affairs, and trust is the basis of society.”
With the publishing of the article on bitcoin signed by Satoshi Nakamoto in 2008, a new paradigm was proposed to create trust in what appeared to be a broken world. The simple genius of the proposed technology – blockchain – is that it cuts away the middleman yet maintains an infrastructure that allows strangers to deal with each other since the infrastructure itself creates and maintains the trust mechanism. This is a revolution insofar as for the first time since the birth of institutions, a technology creates a system of trust that does not rely on a central authority but, instead, on all the members of its community of users. It does this by taking the all-important role of ledger-keeping away from the centralised financial institutions and handing it over to a network of autonomous computers, creating a decentralised system of trust that operates outside the control of any one institution. This is a complete game-changer and has the potential of revolutionising business systems and processes across a wide range of industries from supply-chain management to medical records to music rights to identity management.
Blockchain is more about revolution than evolution since we have been raised and educated in a centralised world and, therefore, feel insecure about decentralised systems. However, given the current mistrust towards institutions, decentralised systems have a great opportunity to create a new world order in which one can think differently, where authority is not necessarily represented by a centralised institution but by a combination of community and algorithms. The legal implications are immense; but we are witnessing a revolution in the building and managing of trust.