Trust Changes the Economy of Scale

Chris Dixon said: “Trust is the best building block” and he’s right. For the first time in digital history we have assets that can’t be copied and trust that arises out of math and game theory rather than arbitrarily placing it in the hands of organizations.

This transition is important for users, service providers and organizations. Digital trust has the potential to change the economics of software delivered services, and, increasingly, almost everything is becoming a software delivered service.

It’s a widely accepted theory that transaction costs are what leads to centralization and the formation of firms. Automation of the interaction between entities (people and corporations) will tilt the economics towards smaller, specialized organizations and away from vertically integrated behemoths.

The basic idea of transaction costs is that every business interaction incurs some cost. For example: the cost of searching for a provider, or evaluating a new provider. Therefore, it’s often cheaper for an organization to form and hire internal resources which do not incur those costs, even if they are less efficient.

If one could remove the search costs then the more efficient, specialized organization should succeed in the market. This is precisely what digital trust on DLT platforms is starting to enable.

Farms and Airports

Let’s take two scenarios. One which already exists and one theoretic. Starting with the real.

http://agunity.com/ is building a blockchain system for small farmers. They have at least two successful pilot programs, in Kenya and Papua New Guinea. AgUnity talks about why trust is important for small farmers: https://blog.agunity.com/2018/09/why-trust-matters.html . Cooperatives allow smaller farms to compete at a global scale and to team up by using their collective purchasing power to buy larger ticket items (like tractors). Previously, cooperatives were often hampered by poor record keeping and corruption. Adding digital trust that cannot be manipulated by anyone (including AgUnity) allows these cooperatives to flourish and actually participate in global (or at least national) markets. One of their pilot programs saw a 3x output in a single year.

I often use the example of an airport as a thought experiment of where this digital trust can lead us. At the moment, every airline has their own ground crews, fueling trucks, tanks, etc. Transaction costs discussed above is why these corporations end up in this state. However, one can imagine a world where trusted software creates an efficient market and allows smaller, more specialized firms to create an efficient system.

Imagine that as the airplane is coming in for a landing, its software is putting out requests for fuel trucks. An independently owned fuel truck is bidding on the refuel using both its cost and speed of refuel (say, current location at the airport, pump speed, etc). All of that information is trustable (and, importantly, accountable) because it is built on a DLT system. The airplane itself can select a refueling partner that is waiting for it at just the right moment, at just the right terminal in order to maximize its turnaround time (and therefore usage). If the company can put trust into the information coming from these smaller providers, the smaller providers can specialize more and put more resources into making their individual service more efficient; something the airline wouldn’t be highly motivated to do.

The beauty of putting both these ideas side-by-side is that really the airport is just an extension of what’s already working for small farmers in a social-good setting. Efficient, trustable markets allow smaller players to flourish.

Are we there?

In a word: no. However, the building blocks are getting created. The hype of blockchain got far ahead of the actual existing tech, but there are projects out there building the necessary building blocks. My company, Quorum Control GmbH is building Tupelo which is purpose-built for these real-world scenarios where trust and privacy are both needed to facilitate interaction. We’re also seeing a lot of research in the decentralized exchange markets (for example 0x protocol).

One thing is for sure, this tech is going to change business as we know it.

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Topper Bowers
Topper Bowers is a Columnist at BlockTelegraph. He is an entrepreneur and engineer with over 20 years experience building software people want. He combines deep technical knowledge with proven executive skills. He consistently pursues tech that betters people’s lives—whether he’s designing user interfaces, managing world class teams, or building high volume distributed systems for large nonprofits and Fortune 50 companies. He’s a former Y-Combinator founder (Summer 2012) with deep knowledge of distributed systems and distributed ledger technology.

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