Trust, Game Theory and Blockchain: The Absolute Truth about Blockchain Technology

‘Explain blockchain in two words’.

It has been a good amount of time since I started working as a blockchain consultant. I remember when I was going through my initial training at Deqode, I read up countless articles, several books on the subject, talked to countless people in the industry – but I couldn’t find a standardized definition of what blockchain is. And this was a big issue – because a big part of my job profile requires explaining blockchain to C-level execs.

One of my biggest takeaways from this was that maybe this is why people are running away from the technology – it’s the classic fear of the unknown.

Anyway, I kept reading up on blockchain – and parallelly, I was reading on another seemingly unrelated subject called game theory. In particular, I grew fascinated by a game theory experiment called ‘The Prisoner’s Dilemma’.

The Prisoner’s Dilemma

For the uninitiated, game theory is a branch of mathematics that studies the strategic interaction among rational actors. The prisoner’s dilemma is an experiment analyzed in game theory that shows why a group of people might have a problem cooperating, even when it seems like they’d all be better off by cooperating.

In this thought experiment, there are two criminals who are brought in for questioning for their suspected participation in a crime. Both are in separate interview rooms, and let’s assume they’re called prisoner A and prisoner B. (hence, the name), and are potentially facing life imprisonment.

In the scenario, each can choose either to rat on the other person or to stay quiet.

Now, cops put on several conditions. If prisoner A and prisoner B both stay quiet, then they both walk free. This is clearly the best outcome. But if A talks while B stays quiet, then the cops will put B away for life, and let A off with only 3 years in jail. The same is true if B talks. Now the cops put another condition that if they both end up talking, they both go to jail for, say, 10 years. This is better than life but worse than going free.

Say you’re prisoner A. You don’t know what is going on in B’s mind. Logically, you will find out that it’s better to talk. If both of you stay quiet, you get to leave. But, if B talks and you stay quiet: you go away for life. On the other hand, if you talk, the worst thing that can happen is that you get 10 years.

Thus, in situations like this, the cops end up with everyone talking – even though they’d all be better off if no one talked. Because of lack of trust between the prisoners, they lost their freedom.

Industries moving towards digitization are finding themselves in a somewhat similar situation right now. Automation has had the greatest impact on how businesses operate – cutting their costs, increasing their productivity and speeding up their work. But despite this digital transformation, businesses have time and again struggled to automate the foundation of trade:

Trust.

Every person on the planet who has ever made a purchase, from buying something off eBay to purchasing a house, knows how complex it is for two parties to complete a transaction. Funds must be verified, disclosures must be made in writing, asset transfer needs to be done, and so on.

This is where businesses have a few questions that need to be answered.

• Does this party actually and legally own the asset I want to buy?
• Will this party actually give me the amount they promised?
• How can I ensure that this party delivers the goods once I give them the money?

Usually, these questions are answered by third parties. This is the biggest issue – the lack of trust between the participating parties, and forced reliance on third party.

This is where I feel blockchain comes into play.

The answer to ‘explain blockchain in two words‘, from what I’ve deduced, is ‘Automated Trust’. It doesn’t really matter how many offbeat use-cases the technology has, but the central, the core use-case of blockchain would always be automating trust. Blockchain can significantly reduce the operational friction, costs and headaches associated with business processes – hence is a key technology that companies associated with financial services, supply chain, energy, healthcare, retail, and automotive sectors are exploring.

Here, businesses have to keep in mind that blockchain is not a cure-all. There are very specific use-cases where blockchain could help businesses. Companies need to figure out which places actually need trust to be automated, and then proceed with them instead of blindly replacing their DBs with blockchain.

The companies who provide blockchain development also need to understand the same. The POCs that merely replace centralized DB with blockchain without understanding if the technology is actually ‘automating trust’ is harming the industry in general. Companies need to invest more in educating their clients, rather than spending purely on development. I’ve seen a lot of companies trying to play Mark Antony to Julius ‘Blockchain’ Caesar.

Little do they know, they’re playing as Marcus Junius Brutus.