The security writer and author Bruce Schneier, in an article about blockchain that we will refer to in a future post:
I listed [in his book Liars and Outliers] four very general systems our species uses to incentivize trustworthy behavior.
The first two are morals and reputation. The problem is that they scale only to a certain population size. Primitive systems were good enough for small communities, but larger communities required delegation, and more formalism.
The third is institutions. Institutions have rules and laws that induce people to behave according to the group norm, imposing sanctions on those who do not. In a sense, laws formalize reputation.
Finally, the fourth is security systems. These are the wide varieties of security technologies we employ: door locks and tall fences, alarm systems and guards, forensics and audit systems, and so on.
Then he paraphrases another writer who described four trust architectures:
The first is peer-to-peer trust. This basically corresponds to my morals and reputational systems: pairs of people who come to trust each other.
His second is leviathan trust, which corresponds to institutional trust. You can see this working in our system of contracts, which allows parties that don’t trust each other to enter into an agreement because they both trust that a government system will help resolve disputes.
His third is intermediary trust. A good example is the credit card system, which allows untrusting buyers and sellers to engage in commerce.
His fourth trust architecture is distributed trust. This is emergent trust in the particular security system that is blockchain.
This immediately brought me back to a recent post, where I said that blockchain-based solutions that tried to reinvent parts of the regulated financial system were doomed to face heavy opposition from regulators and incumbents. This makes it clear why. Regulators are institutions, representatives of leviathan trust above. Incumbent players in finance are intermediaries, pillars of the third trust system above.
A blockchain based system that looks to obviate the need for either of these systems is going to be blocked by both of them. A blockchain based system that seeks the blessings of either of these system renders the blockchain superfluous. It follows that blockchain use cases that will really succeed are those that are either unregulated, or existing regulation has utterly failed at.