TLDR: We discuss the views of entrepreneurs Prof Seth Copen Goldstein and Prof Cemil Türün on the role of Identity and Reputation in smart contracts. Based on their thoughts, we also reflect on some potential considerations that may have to be explored in the near future as smart contracts continue to gain prevalence.
Humans have always seemed to have an innate tendency to assess the feasibility of a transaction based on the identities of the parties involved. Long before the first specie were ever issued in approximately 550 BCE, merchants tallied transactions on tablets and dunned bad debtors. Later, in the 17th century, merchants would record identities and quantities of grain in town ledgers.
Today, the idea of a reputation-based economy has returned in the form of a distributed ledger containing yet another evolution of ledger-held escrow, in the form of smart contracts. Professor Seth Goldstein and Professor Cemil Türün, discussed ideas surrounding the role of reputation, identity, and trust in distributed ledger-based personal tokens and smart contracts and the projects they’ve created.
Professor Seth Goldstein from Carnegie Mellon University is the founder of ZUZLabs, a financial inclusion platform that combines lending and payment on a single distributed ledger-based system. ZUZLabs empowers local business owners to raise capital by issuing tradable claims for future purchases to trusted individuals in their communities. This fulfills the need for local businesses traditionally underserved by financial institutions, such as minority owned businesses, microbusinesses and young startups with unestablished credit histories to access financial resources. With this, they are better supported to compete in an environment that tends to favour Multinational Corporations (MNCs) and e-commerce giants. (11:40)
Professor Cemil Türün from Boğaziçi University founded and runs Defterhane Protocol, which has developed a Turkish decentralized credit creation instrument (debt ledger and by extension a credit creation instrument) inspired by the 40-year-old Turkish Vadeli cheque system. (03:30)
The Turkish Vadeli Cheque system
The Vadeli cheque system, which is Defterhane’s proof-of-concept, involves postdating a cheque (typically by up to six months) and trading it as a security within the commerce community to make payments or settle debts until the loan “matures” and the cheque is cashed. This industry currently generates around USD 1 trillion in financial activity in Turkey alone.
A key similarity between ZUZ and Defterhane is the concept of creating and circulating value through minting credit “tokens,” which are tradeable within a community, based on an issuer’s reputation. Here, trust acts as a proxy for a credit score and the local community relies on it to keep capital circulating.
One of the novel advantages of both ZUZ and Defterhane is that the power to determine creditworthiness goes to individuals instead of large financial institutions that may have different priorities than the communities they serve. The primary means through which an individual determines whether to lend money to a supplier or wholesaler their identity and reputation. Here, the concept of identity and reputation are inextricably linked, yet distinct as Goldstein and Türün discuss.
It might be important to distinguish between the different types of trust that are in play: 1.) trust between individuals, 2.) trust in a system and 3.) trust in a platform. Establishing trust in each of these is a prerequisite to doing so in the next. (19:30)
For Defterhane, trust between individuals and trust in the Vadeli cheque system has been well established for decades, hence their main challenge revolves around leveraging this trust to inculcate trust in the Defterhane platform.
ZUZ is brand new. Credit-based cryptocurrencies are practically non-existent within the US. While ZUZ isn’t a cryptocurrency itself, there is little precedent for the concept of tradable debt that is valued on reputation (rather than credit scores).
ZUZ relies on the familiarity between individuals and businesses within a community. Goldstein discusses how ZUZ enhances this trust through the use of protocol. A public ledger documents every transaction on the platform for all of its consumers to see. As more transactions take place involving merchants, more evidence of creditworthiness and reputation is generated on the ledger for individuals to rely on. He also discusses how many such mechanisms and protocols can be built into the platform to develop trust from the bottom-up.
The concepts of identity and privacy are inherently contentious. While establishing identity helps increase trust in a transaction, there are many transactions that people seek to make anonymously, something Türün agrees is very human. However, as Goldstein alludes to, smart contracts now allow them both have the ability to ensure veracity from knowing an identity, while also allowing people to benefit from some attributes of anonymity. (26:00)
One means of doing this would be to have an anonymous or pseudo anonymous identity A be verified by another well reputable identity B, which indicates on a public ledger that it trusts A. Here, as long as B trusts A, A can then benefit from the secondhand reputation of B, while maintaining his anonymity. (26:50)
Does this mean that we can support large levels of pseudo anonymity in smart contracts if we can ensure every anonymous identity can be linked to a non-anonymous or real identity through a “trust chain”? Furthermore, when the idea of privacy within the context of revealing identity is considered, it may be important to discuss the distinction between the ability to be anonymous and the ability to be forgotten. With pseudo anonymous identities carrying out transactions on a distributed public ledger, the former is presumably easier to ensure than the latter. However, which of these are users generally seeking? Which can pose a greater risk in governance and enforcing future legislation on this matter? Which of the two, if any, can a system support while handling defaults?
It is also worthwhile to consider the longer-term implications of having entities with pseudo anonymous identities engaging in and trading with smart contracts. One consideration is the idea of securitization of well-reputed pseudo-identities.
What are the ethical and regulatory concerns involved when established or desirable pseudo identities can be traded as a commodity? Can we accidentally create systems where we can purchase reputation, which in anonymous smart contracts is equivalent to purchasing a credit score?
Another sphere to be considered are the legal and regulatory implications involved in deciding how much anonymity to give to one’s identity in smart contracts. As Goldstein and Türün both agree, this decision is one that is highly specific to each community’s commerce environment.
A community that prioritises promoting entrepreneurship might be far more liberal with anonymity than one that prioritizes protecting customer rights. Moreover, emerging trends in adjacent fields such as deepfakes or government surveillance may add new dimensions that one must consider. Despite the questions raised, Goldstein and Türün’s discussion demonstrates the vast potential that smart contracts, anonymous or not, possess to reshape commerce as we know it.
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