Blockchain Technology

1 Introduction

 Since the introduction of Bitcoin in 2008, there has been a proliferation of interest in a digital technology called Blockchain. It has been argued that Blockchain can sustain any transaction of value, be it monetary or information, in a manner that is secure and completely independent of interpersonal trust. At the same time, this technology is perceived to be so secure and reliable that The Economist named it a “trust machine”. (October 31, 2015). Yet, due to its relative novelty, there is still little theoretical and empirical research on whether and how this technology may affect human-to-human trust relations. At the theoretical level, there seems to be an unaccounted disagreement about whether the technology works independently of interpersonal trust by shifting people's trust towards trust in the technology itself or it affects interpersonal trust. Therefore, the aim of this paper is to provide a better understanding of the effects Blockchain technology on trust. Is Blockchain a trust-free and/or trustbuilding technology? Based on the insights from the literature on institutionalized control, we argue that Blockchain is a trust-free environment that would crowd-out trusting and trustworthy behavior from the human relationship and set forth a set of hypotheses based on this conceptualization of Blockchain. We test these hypotheses by carrying out an online experiment based on Berg et al.’s (1995) trust game with anonymous participants, recruited from the Amazon Mechanical Turk. We run two experimental treatments: a simple trust game without the social history report and an adjusted trust game in which we operationalized the key aspect of Blockchain-based smart contracts — ex-ante specified actions with automatic enforcement. The experimental results indicate that Blockchain-based smart contracts would not omit trusting and trustworthy behavior from human relationship. On the contrary, the participants in the Blockchain treatment exhibited more trusting and trustworthy behavior compared to the baseline group, indicating support for the claim that this technology might indeed be a “trust-building machine”. Therefore, the results of this paper could be of importance to policy makers interested in the application of the technology in the economic and political areas in which a lack of trust represents a serious impediment for development. The remaining of the paper is structured as follows: in the second section, we present the key features of Blockchain technology in general and smart contracts as a case of its application. In the third section we review previous research on trust and Blockchain technology and present our theoretical framework. In the fourth section we present the experimental design and hypotheses together with a short summary of the experimental protocol and features of Amazon Mechanical Turk. We analyze and discuss the results in section 5 and 6, respectively. Finally, concluding remarks are presented in section 7.

2 Blockchain Technology and Smart Contracts

Originated back in 2008, Blockchain is a decentralized, distributed peer-to-peer network that stores data about all previous activities carried out by the network’s users (Nakamoto, 2008; Raval 2016; Swan 2015). Each user (node) has a copy of the complete data of all previous activities, making the Blockchain different from other traditional databases known for a “single point of failure” (Zambrano, 2017). Since the same data is stored on multiple locations at the same time (decentralized), a loss of one copy of the data would not affect the network and the data availability. On the other hand, a loss of data that is stored in only one central repository would mean that the information stored on it does no longer exist. Blockchain is a distributed network, meaning that the enlargement of the dataset is not possible without the agreement of everyone in the network. This means that the new block of information (e.g. a new set of Bitcoin transactions) is added to the dataset only after a process of “mining” is applied. In this process, some of the nodes use the computing power of their computers to find a solution for a highly complex mathematical problem through which they confirm that the new block of information is consistent with the previous information stored in all previous blocks. By doing so, the new block is added to the existing ones in a way that it becomes impossible to tamper with the whole content of the dataset. In return, nodes that perform the “mining” receive monetary compensation in return for the work that they have done. Due to these properties, Blockchain technocolgy provides a way to secure the content of the data from loss and unilateral retroactive change. Furthermore, since the enlargement of the data is not possible without the agreement of everyone in the network it is argued that there would be no need for trust between the users in order for it to function properly (De Filippi 2017; Hawlitschek et al. 2018). Interestingly, for the same reasons Blockchain technology is also argued to be a “trust machine” (Economist, Oct 31, 2015).

2.1 Smart Contracts

Smart contracts are “contractual clauses embedded into hardware and software in such a way that makes breach more expensive” (Raskin, 2017 p. 320). Yet, due to the 2 lack of technology, it became possible to actually implement the concept only after the emergence of Blockchain. Utilizing the previously described characteristics of Blockchain technology, smart contracts are now understood as agreements with automated execution (Raskin, 2017 p. 306). Parties involved in such contractual relations agree ex ante on a set of conditional statements that are encoded in the smart contract. When these conditions are met, the agreed provisions are executed automatically. Compared to traditional contracting, smart contracts have two key properties. Firstly, smart contracts need support neither of the legal profession nor of any institutionalized contract enforcer (Sklaroff (2017). In other words, smart contracts are a phenomenon of the “private social ordering” (Sklaroff 2017 p. 268), which would require interpersonal trust. However, the verifiability and transparency of the Blockchain-based transactions seem to eliminate the interpersonal trust requirement. Secondly, some legal scholars argue that the logic of smart contract enforcement is completely different to traditional contracts, which are enforced in a court after an alleged violation of a contract has happened. Smart contracts, on the other hand, prevent the possibility for unwanted behavior before it occurs, thus making the court process obsolete (Werbach and Cornell, 2017). 

3 Theoretical Framework

3.1 Previous Research on Blockchain and Trust

The existing empirical research on trust and Blockchain provides two major findings relevant for this paper. Firstly, it is argued that existing Blockchain-based applications may require trust. Fröwis and Böhme (2017) discuss conditions under which a smart contract is “trust-free” and analyze all smart contracts published on Ethereum. Their findings suggest that two out of five smart contracts require trust in “at least one third party” (Fröwis and Böhme, 2017 p. 370). These contracts lack the “immutability of the control flow” which means that their content can be changed unilaterally even after they are signed (Fröwis and Böhme 2017 p. 357). Yet, this problem emerged due to the lack of expertise with contracts coding and is therefore not an intrinsic general failure of the smart contracts. Similarly, Sas and Khairuddin (2017) argue that the main reason for transaction insecurities are due to a human factor, such as protecting passwords for Bitcoin wallets or failures to reverse wrongly initiated transactions. By interviewing the users of Bitcoin, 3 Sas and Khairuddin (2017) found that decentralization, deregulation, miners’ expertise and reputation are all contributing to trust in the technology. However, these are exactly the properties of the technology that are believed to bring about its “trust-free” feature. Therefore, there seems to be a discrepancy between the Blockchain-based systems as a concept and practice (Fröwis and Böhme, 2017), that requires further examination

3.2 Blockchain as a trust-free environment 

We argue that the view of Blockchain as a “trust machine” (Economist, 2015) or as a technology that allows a system to be “trust-free” (Beck et al. 2016 for example) is based on two distinct concepts with radically different theoretical implications. The most prominent difference between these two conceptions is based in whether this technology is seen as a producer of interpersonal trust within the network or not. Blockchain as a “trust machine” would produce more trust among the network’s users.If Blockchain is understood as a “trust-free” environment, no clear expectations emerge regarding trust gain or loss within the network. Therefore, if Blockchain is a “trust-free” system, does it affect trust and, if so, how? In the remaining of this section, we present our argument that Blockchain will crowd-out trust through a mechanism of control. The literature on trust is in consensus that trust has two key aspects. An actor who trusts is expressing a willingness to be vulnerable and has a positive perception of the intentions of the other party (Rousseau et al. 1998). If the actor does not have such willingness and/or believes that the other party has ill intentions, she will not trust that other party. The willingness to be vulnerable is often understood as a form of risk that is integral to the definition of trust (Gambetta 1988; Hardin 2002). For example, Gambetta (1988) argues that in a trust relationship, a trustee has to have a possibility of betrayal or defection in order for one to say that the relationship between these individuals is one of trust. Therefore, if the settings that govern the relationship are fully determined that the trustee cannot betray or defect the trustor — such as the case in Blockchain-based smart contracts — one cannot argue that the relationship between those individuals is based on trust. Smart contracts govern relationship between humans in accordance with encoded immutable rules. Since the parameters of permissible and impermissible behavior (and sanctions for such) are specified ex ante in smart contracts, risk (of betrayal or defection) is no longer part of the interpersonal relationship. In other words, in smart contracts the possibility of the trustee’s potential betrayal is eliminated, and this leaves no room for the trustor to wish to be vulnerable. If the risk (of defection) associated the human 4 (contractual) relationship is absent in smart contracts, this supports the argument that Blockchain is an environment that is independent of interpersonal trust.