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Blockchain as a Platform

  • Florian GlaserEmail author
  • Florian Hawlitschek
  • Benedikt Notheisen
Chapter

Abstract

Digitalization is a ubiquitous term and refers to the digitization of processes and information alongside improvements, innovations, and reinventions that are enabled by increasingly powerful information technology. Today, nearly every industry sector is affected by digitalization and is facing threats and opportunities through new possibilities. With the rise of the digitalization, the platform approach has become the dominant strategy for large companies to operate an extensible, digital medium of exchange for products, information, and services. A large share of companies with the highest market capitalization based their business on platforms (e.g., Apple, Alphabet, Amazon). The earlier evolutionary stages of today’s digital platforms were two-sided markets, where two groups of users exchanged goods and every internet user could take the role of either a buyer or a seller (e.g., eBay). Over the last decades, it became a common decision to open up a platform to third-party service developers who could reuse the platform’s core functionality to build complementary components. This opening up of platforms is referred to as “permissionless innovation” (de Reuver et al. 2017). A digital platform is defined as “a system that can be programmed and therefore customized by outside developers users and in that way, adapted to countless needs and niches that the platforms original developers could not have possibly contemplated” (Parker and Van Alstyne 2017).

Keywords

Blockchain Platform Institution Governance Trust Blockchain engineering IT infrastructure Institutional economics Markets 

Introduction

Digitalization is a ubiquitous term and refers to the digitization of processes and information alongside improvements, innovations, and reinventions that are enabled by increasingly powerful information technology . Today, nearly every industry sector is affected by digitalization and is facing threats and opportunities through new possibilities. With the rise of the digitalization, the platform approach has become the dominant strategy for large companies to operate an extensible, digital medium of exchange for products, information, and services. A large share of companies with the highest market capitalization based their business on platforms (e.g., Apple, Alphabet, Amazon). The earlier evolutionary stages of today’s digital platforms were two-sided markets, where two groups of users exchanged goods and every internet user could take the role of either a buyer or a seller (e.g., eBay). Over the last decades, it became a common decision to open up a platform to third-party service developers who could reuse the platform’s core functionality to build complementary components. This opening up of platforms is referred to as “permissionless innovation” (de Reuver et al. 2017). A digital platform is defined as “a system that can be programmed and therefore customized by outside developers users and in that way, adapted to countless needs and niches that the platforms original developers could not have possibly contemplated” (Parker and Van Alstyne 2017).

Given the definition above, we can derive features that distinguish a platform from a two-sided market : the openness to innovation through third-party developers. That is, platforms provide application programming interfaces (APIs) which grant developers access to core functionalities provided by the platform for integration of extended functionality, external services, or platforms. A recently emerging type of digital platforms is blockchain systems. Although they can be considered platforms according to the discussed definition, they fundamentally differ with respect to the provision of their core functionality.

A blockchain is a distributed, immutable, append-only database without a central authority that orders and validates transactions to keep data consistent across multiple nodes. In public blockchain systems, every internet user can operate a node and access core functionalities by simply downloading and running a client software. In public blockchain systems, the core functionality is transacting system-inherent tokens. For the Bitcoin platform, sending a (fraction of a) Bitcoin (token) represents the core functionality of the system. The term ‘distributed ledger technology’ (DLT ) is often used interchangeably but extends the notion of a blockchain to a system type that comprises systems under centralized control (permissioned/private systems) of a single organization or a small group of organizations and might apply differing mechanisms to validate transactions and to retain consistency of data. Besides, the term ‘blockchain’ is often used interchangeably to refer to the underlying data structure, a specific type of decentralized database system, or the network as a whole including users and smart contracts. In contrast, DLT is neutral regarding technical peculiarities and always refers to the distributed system that tracks changes to data and ensures its consistency through a consensus mechanism among group of users with potentially conflicting interests.

Smart contracts are a second core functionality of most blockchain systems. They are small code snippets that are published in the blockchain system by a participant and can subsequently be used by other participants or contracts. Smart contracts are triggered through a transaction that is sent either by a user or by another smart contract during that other contract execution. This interaction of contracts enables complex systems of interacting services that are implemented in the form of smart contracts. The functionality programmed into a contract can range from performing additional checks regarding a token transaction (for instance, to enable conditional payments) or represent a whole service logic, for example, an escrow mechanism or an asset registration service. The control over a contract and hence also the control of the implemented service is defined by the creator of the contract. Control can be left to its creator, another user in the system, or no specific entity at all. The latter setup, autonomy of control, renders the contract an autonomous entity or agent in the system who acts according to its programmed logic, no matter who interacts with it. This last possibility enables a new kind of autonomous service system that can enforce programmed logic, free of any third party’s influence, and allegedly requires no trust in a third party to actually execute the service.

These briefly outlined properties render blockchains a potential infrastructure for various (novel) business models in today’s digital platform economy, ranging from P2P sharing and P2P lending, over autonomous asset registries, to completely crowd-based financing and investing. Although blockchain technology has been around for nearly a decade (Nakamoto 2008), few sociotechnical challenges have been sufficiently researched and few best practices to address key challenges have been developed. The goal of this chapter is to arrange blockchain technology within the concept of institutions and explain and discuss two resulting key challenges—governance and trust—of such decentralized and potentially autonomous service systems, by drawing upon research on incumbent digital platform models.

Blockchain Systems as Open Digital Platforms

Conceptualization and Sociotechnical Challenges

From an abstract perspective, blockchain systems can be analyzed on two distinct layers: the fabric layer and the decentralized application layer (dapp or application layer) according to Glaser (2017). The fabric layer comprises the P2P communication, consensus, and database management components. The application layer includes all services and features implemented in the form of smart contracts and is relying upon the functionalities provided by the fabric layer. Application layer services can be (re)used by other users in the same blockchain system. A smart contract-based service, for example, can require services of other smart contracts or might require token transactions on the underlying level for performing its service (Fig. 4.1).
Fig. 4.1

Technical layers of a blockchain system, based on Glaser (2017)

A visualization of the technical layers is depicted in Glaser (2017). Both layers of a blockchain system are providing core functionalities that are open to be used or extended by users of the system. Hence, blockchains are open platforms, and therefore research on and knowledge about digital platforms and blockchain share a common ground.

A crucial difference to digital platforms is, however, that blockchains do not provide a common application programming interface (API) to interact with service interfaces, but the possibility to deploy code onto the platform’s fabric layer which is shared by all users. To set up a smart contract, a user has to attach code to a transaction and send the transaction into the network. Other nodes in the system receive the transaction, attach it to the blockchain of transactions according to the consensus mechanism, and can thereafter retrieve the code of the contract from the blockchain database. Thus, once a smart contract is deployed in the blockchain, its code is available at every node for execution whenever a user calls the contract. Put differently, the functionality of the entire platform can be extended by any user through deployment of smart contracts onto the fabric layer.

Incumbent digital platforms are usually governed by larger corporations or organizations that have full control over additional features provided for the platform. The governing company is in control of the technical APIs of its platform or in control of the extensions that are available and published for the platform. For example, Google governs its android platform’s Playstore, and Apple is in control of iOS’ App Store, while Facebook is in control of its platform’s APIs.

In summary, blockchains’ core functionalities are solely developed and operated by a multitude of open-source developers (that develop the fabric layer) and participants (‘miners’ that validate transactions) in a globally distributed system with extending functionality provided by users (on the application layer). There does not have to be a single organization or corporation that is coordinating the development or overseeing the operations of the fabric layer. Although, in practice, a crowd/privately funded organization is often in charge of coordinating the selection and implementation of future features of a fabric layer.

While this holds for the fabric layer, smart contracts can be written by any participant who might be a single user, a nonprofit organization, or a corporation. These properties render a blockchain system a decentralized, open digital platform that provides a set of core functionalities for others to build upon, which is, however, changing over time through contributions of arbitrary other users. This allows blockchain-based platforms to function as a decentralized institution that enables and implements new forms of governance mechanisms. However, the distributed nature of such systems also requires a new form of governance mechanisms as neither the fabric layer nor the application layer has a central authority that can deliberately impose binding processes. Given the inherently distributed nature of public blockchain systems, previous approaches might apply to some degree but are challenged by these new and pervasive sociotechnical interaction mechanisms.

The openness of public blockchain systems further implies that smart contract code can be developed and deployed by any participant. Relying upon services provided by publicly available smart contracts requires trust. On the one hand, the user has to trust in the correctness of the code. This requires the user to trust the developer of the code and the code that it performs exactly the way the user expects it to do. The alignment of expectations and reality regarding performed functionality of code might be possible for simple contracts but becomes nearly impossible for complex service networks that are composed of a multitude of interacting contracts.

If these trust requirements are fulfilled, the actual execution of the code in its unchanged version is comparably reliable, that is, ‘trust-free’, as the code is deployed into a large distributed system and once deployed cannot easily be manipulated or changed. This resembles the actual meaning of a stipulated enforcement of a ‘smart contract’ as by proposed by Szabo (1997).

However, this trust-free property is limited to the consensus regarding smart contract code execution and data that is generated within the blockchain system (i.e., trust in system information about token transactions between users). As soon as external data might be required for a smart contract to execute (e.g., sensor data, financial time series data, or any other data describing the state of the physical world), additional trust in the externally provided data is needed.

These two issues induce two severe sociotechnical challenges, governance and trust, if blockchains are to become ubiquitous and utility-bearing parts of our future digital economies and societies. The remainder of this chapter discusses these two challenges in more detail and in explicit sociotechnical and socioeconomic contexts.

Institutional Characteristics and Governance Implications of Blockchain-Based Platforms

Institutions form the core of any governance mechanism. To create a rudimentary understanding of institutions and how they work, this section gives a brief introduction to the field of institutional economics, builds on this foundation to arrange blockchain technology within the concept of institutions, and discusses the resulting governance implications.

The Role of Institutions

To provide a common starting point, we follow North (1991) and define institutions as “[…] humanly devised constraints that structure political , economic, and social interaction” (North 1991, p. 1). As such, they consist of both formal and informal rules that take the behavior of individuals into account. These behavioral factors comprise the impact of agency costs (Jensen and Meckling 1976), the consequences of separation of ownership and control (Fama and Jensen 1983), the relevance of property rights associated with interactions (Demsetz 2000), the social costs generated by external effects (Coase 2013), and the impact of transaction and coordination costs on organizational structures (Williamson 1979).

The purpose of institutions is to structure interactions and organize human behavior by constraining action spaces, attributing a set of possible reactions to possible actions, and collectively assigning a function to objects. We can formalize this perception by the saying X counts as Y in C
$$ \mathrm{X}\to \mathrm{Y},\mathrm{in}\kern0.28em \mathrm{C}, $$
(4.1)
where X stands for the domain of physical and nonphysical objects that are allowed by the institution (i.e., the action spaces), while Y is the function assigned to them. C represents the institutional environment that defines the manifestation of X and Y and the relationship between them. It restricts the available set of actions in X by specifying which objects belong to X and assigns a possible set of functions Y to these objects. These enabling rules are embedded in the transformation function and allow individuals to act within a specific spectrum. Both restricting and enabling rules are equally important as they depend on each other.

This way, institutions impose consistency on human activities, which allow interacting parties to “[…] create stable expectations about the behavior of others” (Hodgson 2006). The resulting order of social life and interactions reduces transaction costs as institutions prescribe the behavior of individuals to reduce the need for costly information and enforcement activities (Coase 1937; Jensen and Meckling 1976; Williamson 1979).

As highlighted before, institutions can be formal or informal, and thus do not require an explicit representation in order to exist and be relevant (Hodgson 2006). In addition, they form either directly or indirectly as a result of the combined effort of a society and its individuals (Tuomela 1995). Formal institutions are written rules that prescribe specific behavior and provide a basis to enforce it. In case of violations, they also specify sanctions that allow a (centralized or decentralized) authority to enforce the previously agreed arrangement. Informal institutions, on the other hand, are usually not available in an explicit form and manifest on the basis of reciprocity as individuals implicitly agree on them by behaving accordingly. In addition, enforcement is not specified in advance, and instead violators are punished by spontaneous feedback of the society (e.g., by exclusion). Independent of their formal or informal nature, institutions can form either spontaneously, which is when their existence leads to an improvement for a society as a whole (Foss 1996), or as a result of a conscious design (Smith 2003). In the case of a conscious design, the individual agents that form a society negotiate rules to govern interactions in their social and economic life in order to reach some superordinate goal. Figure 4.2 summarizes the dimensions of institutions and illustrates their assorted characteristics. It is important to note that institutions—irrespective of their level of formalization and their origin—are not fixed and are subject to change as societies evolve over time (Ostrom 1986):
$$ \mathrm{X}\left(\mathrm{t}\right)\to \mathrm{Y}\kern0.28em \left(\mathrm{t}\right),\mathrm{in}\kern0.28em \mathrm{C} $$
(4.2)
Fig. 4.2

The dimensions of institutions

To ensure that they adapt accordingly, rules have to be renegotiated or adapt implicitly, as the sociotechnical and economic environment evolves continuously and interacting individuals change their behavior.

The Blockchain as an Institution

Based on the understanding of the role, characteristics, and key components of institutions developed in this section, we apply this understanding to blockchain-based platforms.

First, we will take a look at the key components, namely, restricting and enabling rules that span the governing scope and define the fashion of order an institution establishes. Transferring this concept to blockchain systems, the fabric layer restricts the action spaces of its users by setting the boundaries of the technical infrastructure, thus constraining the scope of possible application scenarios. As highlighted in the section ‘Conceptualization and Sociotechnical Challenges’ and Glaser (2017), the fabric layer specifies the characteristics of a blockchain system and thus determines its application domain and scope of governance. Building on the fabric layer, the application layer empowers individuals to shape the way they interact with each other. It enables users to assign a function to the generalized IT artifact defined by the fabric layer and engage in concrete interactions, by allowing users to tokenize values, provide and use services, and conduct transactions.

The fabric layer of the Bitcoin blockchain, for instance, is specified to conduct transactions between pseudonymous counterparties without a central intermediary while allowing only a highly limited incorporation of program/software logic via opcodes. In consequence, the action space is constrained to actions related to transferring some number values between users. However, this limited functionality enables its users to use Bitcoin as a peer-to-peer payment system. In other words, it allows the users of Bitcoin to act within a given spectrum and provides a common understanding of the Bitcoin system as an electronic cash system.

In contrast, the Ethereum blockchain goes beyond the concept of a pure cryptocurrency and incorporates a shared global infrastructure that allows the implementation of smart contracts by intentional design. As a result, it enables a variety of assigned functions that range from the simple functionality of a cryptocurrency known as Ether, over transaction systems (Notheisen et al. 2017a), to decentralized autonomous organizations (Jentzsch 2016) and marketplaces (Notheisen et al. 2017b). This functional scope has multiple advantages, such as the automation of governance, but also impedes the development of a common understanding of its assigned function(s).

Second, we arrange the blockchain protocol, which includes fabric and the application layer, as well as adjacent processes such as protocol development and maintenance within the institutional dimensions introduced (see Fig. 4.2), in order to highlight and understand the multifaceted nature of blockchain-based platforms.

The fabric layer, which forms the technological foundation of each blockchain system, is usually the result of a conscious design of a small group of core developers that coordinates to achieve a common goal, such as providing a fully decentralized electronic cash system in the case of Bitcoin. The resulting system aims to contribute to a collectively determined goal of society by reducing the coordination efforts of individual agents required to achieve this goal. With respect to blockchain technology, such a goal could be the transfer of assets between interacting parties without relying on a central authority. However, whether a specific blockchain fabric becomes widespread standard or fails to establish in the institutional landscape cannot be enforced by the protocol itself but is rather determined implicitly by its actual use.

If a user does not agree with the proposed protocol, he or she can provide an update to the system to which other users can switch if they prefer the proposed update. As a result, the compliance with a specific blockchain fabric is enforced via network effects based on the implicit vote of users by joining a proposed protocol or protocol update or sticking with the incumbent system version.

In addition, blockchain fabrics that have the reputation of not functioning well or giving unfair advantages to a specific group of users are also punished by social feedback (i.e., a bad reputation), which in turn leads to an absence of users.

In most cases, the fabric layer is maintained and updated by an open-source community or an organization that is based on an open-source community (examples include Bitcoin Foundation or the Ethereum Foundation). These maintenance mechanisms form as a result of an evolutionary cultural process within the specific communities and often build on the altruistic aspiration to improve the underlying protocols. Compliance with specific rules, customs, and manners within these communities is usually enforced by social feedback.

The application layer, which embeds payment services, smart contracts, and other functionalities, results from the conscious design of the fabric layer, which enforces the compliance of interacting agents with their previous commitments based on technical specification of the blockchain system (Beck et al. 2018). More specifically, individual agents can only engage in a transaction with assets for which they can provide a verifiable proof of ownership (e.g., by referencing to received transactions stored in older blocks), and the settlement of a transaction takes place as a direct consequence of the consensus mechanism. The same logic applies for contractual agreements implemented in smart contracts and nonmonetary transactions within more complex smart contract-based platforms.

Figure 4.3 summarizes and illustrates the arrangement of the blockchain’s institutional characteristics within the dimension of institutions introduced in the section ‘The Role of Institutions.’ In total, this illustrates how blockchain systems resemble the key components of institutions and highlights the enforcement channels that blockchain technology utilizes in order to govern the interactions of individual users of an open platform.
Fig. 4.3

The institutional dimensions of blockchain-based platforms

Implications for Platform Governance

As a result, of its institutional and technological features, blockchain technology has the potential to reshape the way platforms, in general, are governed. The following section highlights a potential path of such a transformation along the core value propositions of blockchain technology—the improvement in transparency resulting from the current and complete record, the decentralization of consensus authority, and the automation of enforcement. Eventually, we illustrate how platform governance might change in the future.

First, the more current and more complete information about ownership structures (Yermack 2017) facilitates the dissemination of information among platform users in real time and allows them to make more informed decisions. The resulting technical establishment of the accountability of individual users (Beck et al. 2018) leads to a reduction of the uncertainties that interacting parties face under asymmetric information (Notheisen et al. 2017a). Further, it mitigates free-rider problems (Yermack 2017) that arise in economically and socially opaque environments. In addition, the historical record of interactions reveals entanglements among individuals thereby disclosing potential conflicts of interest (Yermack 2017) that might impede platform efficiency. However, the increase in transparency also raises some issues with respect to the incentives of users to contribute to the consensual agreement, as the disclosure of formerly private information reduces the rents individuals were able to generate from this informational monopoly. Furthermore, the visibility of unique identifiers and related transactional histories raises privacy concerns (Beck et al. 2018; Böhme et al. 2015) that need be considered when designing blockchain-based platforms.

Second, the decentralization of consensus facilitates the decentralization of decision rights (Beck et al. 2018) and enables the resolution of disagreements and conflicts without the involvement of a centralized arbitrator (Beck et al. 2018). As a result of this diffusion of authority, individuals themselves, supported by the scrutiny and wisdom of the crowd, become the sources of authenticity (Morabito 2017). In combination with the irreversibility of transactions, this shift ensures the correctness of the stored record and ensures the provision of a tamper-free database to the provider and the users of a platform alike. In addition, the reliability and quality of the stored information do not depend on the judgment and ability of costly auditors, and data integrity becomes independent of the integrity of individuals (Yermack 2017). However, the absence of a central authority and the resulting transmission of decision rights and consensus authority to the heterogeneous crowd of individual platform users require an effective alignment of individual incentives and collective interests (Beck et al. 2018). When the incentives to participate in the costly consensus process are not properly aligned with the users’ individual interests and motivations, their contributions may be insufficient or even malicious, which eventually threatens the integrity of the entire platform (Beck et al. 2018).

Third, as highlighted in the section ‘Conceptualization and Sociotechnical Challenges,’ blockchain technology automates the enforcement of agreements between interacting parties. These agreements can range from simple monetary transactions at a single point in time, such as in the Bitcoin system, to a contractual nexus of multiple interactions between multiple parties at multiple points in time. Smart contracts provide a tool to govern such complex interaction patterns by autonomously enforcing the rules defined by the ecosystem of the platform and the agreements specified in multilateral negotiations and encoded in the smart contract itself (Beck et al. 2018). The resulting automation of enforcement enables leaner and simpler contracts (e.g., fewer covenants in debt contracts, see Yermack (2017)), reduces opportunistic behavior of individuals, such as balance sheet fraud, and alleviates the scope of manipulative actions (Yermack 2017). In addition, it facilitates the replacement of (government) entities that manage property rights of physical and digital assets by blockchain-based equivalents (Morabito 2017).

However, it is important to keep in mind that blockchain technology and smart contracts will not be able to replace the negotiation of agreements. Instead, lawyers will no longer draft extensive paper documents but rather encode the results of their negotiation in self-executing legal documents based on smart contracts (Morabito 2017). So while the blockchain may be able to reduce coordination costs, this negotiation of process might entail a substantial amount of new coordination costs (Beck et al. 2018).

An important prerequisite for these new coordination costs is some sort of common language that allows lawyers and developers a joint understanding of the concluded agreement (Al Khalil et al. 2017). In addition, the finality of the data stored on the blockchain leaves no chance to correct undesired outcomes or to react to unexpected events. The resulting immediateness of transactions and triggered agreements increases transaction risks (Böhme et al. 2015) and can cause hazardous feedback loops (Paech 2017) as smart contracts cannot be breached (Morabito 2017).

Besides the potentially beneficial impact of blockchains on the governance of platforms, maintaining and updating the underlying blockchain infrastructure, especially on the level of the fabric layer, raises new governance problems itself (Yermack 2017). One way to maintain a blockchain system is to utilize the open-source community as a governance institution (see Fig. 4.3). In such a governance system, a change in the source code of the fabric layer can be initiated by every user, and system-wide adoption requires a majority of nodes to implement the update on their device. This passive process of adoption puts powerful individuals in a dominating position and makes blockchain-based platforms vulnerable to sabotage by malicious users that distribute updates that favor themselves by exploiting collective action problems (Yermack 2017).

The distribution of such asymmetrically favorable updates might be detrimental to other, less powerful users and is pronounced in systems with more heterogeneous user bases (Paech 2017) and on platforms, where individuals show more distinct collusive tendencies. The empirical findings of Wang et al. (2017) reflect this imbalance and indicate that while individuals value decentralization within the application layer, they do not value decentralization with respect to the governance of a fabric layer (Wang et al. (2017).

In consequence, it remains necessary to delegate the responsibility for maintaining the network and to ensure compliance with the socioeconomic and legal environment a platform operates in to some governing entity (Paech 2017). Although the increase in transparency, the decentralization of authority, and the automation of enforcement shift trust toward a more technical, algorithmic notion (Lustig and Nardi 2015), the trust of users in the governing entity still plays a crucial role in order to ensure the efficacy and efficiency of blockchain-based platforms.

Trust in Blockchain Systems

Many of the governance features highlighted in the previous section build the ‘trust-free’ nature of blockchain technology. The term trust-free refers to the ability of blockchain technology to create an immutable, consensually agreed, and publicly available record of past transactions that is governed by the whole system (Hawlitschek et al. 2018) and therefore should be considered a mainly technological feature in the first place. In addition, the section ‘Implications for Platform Governance’ highlights that trust still plays an important role with respect to the governance of the system. This section builds on these presumptions, elaborates the trust-free property, and discusses which trust relationships prevail or even gain importance in blockchain-based platforms.

Blockchain systems are increasingly taken into consideration to form the basis of different types of digital platforms. Given the characteristics of blockchain technology, it is possible to assume that as long as the platform remains a closed-up, purely technical ecosystem, it can be in fact considered trust-free (Glaser 2017). However, such purely technical platforms do rarely exist in the real world. Instead they form the basis for a variety of whole microeconomies that need to be managed by platform providers (Parker and Van Alstyne 2017). This shifts the purely technical view on blockchain-based platforms to a sociotechnical perspective (de Reuver et al. 2017). As a result, the notion of a trust-free blockchain system as underlying infrastructure for platforms should be critically assessed and discussed.

Leaving the realm of blockchain systems as purely technical concepts, it is viable to revise the notions of trust and trust-freeness in greater detail. Across disciplines, trust is usually considered as a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another (Rousseau et al. 1998). Therefore, trust-freeness is a property that is hard, if not impossible, to achieve for a platform (notwithstanding the use of blockchain systems as a technological basis). From the perspective of information systems (IS) research, different trust relationships matter for users. For example, users need to trust the IS, the provider of the IS, the internet (as an enabler for using an IS), and the community of internet users (Söllner et al. 2016). We propose that the same holds true for platform users.

In fact, the trust relationships in a platform microeconomy can even be more complex, especially for the case of two-sided markets. The notion of blockchain-based platforms for peer-to-peer sharing is not only in the center of the (popular) scientific discussion (Hawlitschek et al. 2018), it has already begun to enter the global market . The Universal Sharing Network (USN) of the German company Slock.it, for example, can be considered as a digital platform with an extensible codebase (de Reuver et al. 2017). In contrast to most posterchild examples of the sharing economy, such as Airbnb or BlaBlaCar, the USN is based on an open-source infrastructure on which blockchain application modules can be deployed, enabling third parties to on-board any object to the USN1.

In the following we will outline which trust relationships matter for blockchain-based platforms. We guide and exemplify these considerations based on an example of a peer-to-peer sharing economy platform and—in doing so—illustrate why even blockchain systems require trust.

The engineering of two-sided markets is a particularly difficult task, since markets need to attract participants that take both the roles of consumers and providers in order to facilitate market growth and stability (Teubner and Hawlitschek et al. 2018). Therefore, a set of different user perspectives has to be taken into account to understand the different trust relationships in two-sided blockchain-based markets in detail (see Fig. 4.4). In contrast to ISs with a rather homogeneous user base, at least two different user types need to be distinguished, that is, consumers and providers. Since two-sided platforms may well benefit from a possible dual role of users acting as both consumer and provider (Stummer et al. 2018), it is also worthwhile to extend this categorization by a third type: the prosumers (Ritzer et al. 2012).
Fig. 4.4

Prevalent trust targets in two-sided markets from a blockchain IS users’ point of view, based on Söllner et al. (2016)

Obviously, the segmentation of the user role in at least two subtypes is accompanied by a need for trust between these roles. Especially in the context of peer-to-peer sharing, interpersonal trust plays a significant role (Hawlitschek et al. 2018; ter Huurne et al. 2017). In particular, sharing economy platform users need to believe in each other’s ability, benevolence, and integrity to develop transaction intentions (Hawlitschek et al. 2016). Furthermore, following the work of Söllner et al. (2016), a set of further trust targets is relevant to understand the use of information systems. For blockchain-based information systems, we adapt and summarize these targets as the information system itself, the platform provider(s), the platform’s blockchain infrastructure, and the community of users.

Trust in the information system includes both layers of the blockchain system that are the application layer and the fabric layer. Therefore trust in the IS is a rather broad concept comprising multiple aspects, such as the tokenization of the ecosystem value, the immutable decentralized database, the decentralized permissioning, as well as autonomous and user-controlled services. Importantly, the perception of the trustworthiness of the different layers and corresponding components will largely depend on the user type. While inexperienced and less tech-savvy users may perceive the IS mainly through the presentation layer, expert users may have the ability to dig deeper into layers and evaluate the blockchain system’s components.

Blockchain systems and their components are operated by both open-source developers (developing the fabric layer) and participants in a globally distributed system (developing on the application layer). Consequently the community of open-source developers can be considered as the blockchain platform providers. Trust in the platform provider(s) is therefore necessary to prevent an absence of users (e.g., due to the perception of unfair or fraudulent implementation). In the same way, the participants in a globally distributed system can be considered as the community of users. Following Söllner et al. (2016), we argue that blockchain systems can provide effective support to their users only if the community of users offers valuable services or information. Thus, trust in the community of users describes an individual’s belief that the community of users provides services and information reliably, benevolently, and with integrity.

Finally, users of a blockchain system need to trust the underlying technology itself—that is, the blockchain. Trust in the blockchain becomes necessary due to the high complexity of the technology. Since in most cases users will not be able to fully understand the mechanics of the underlying blockchain technology, they will need to trust in its reliability. This is comparable to the more established institution-based trust in the internet (Söllner et al. 2016).

Summary and Conclusion

The institutional characteristics of blockchain technology help to structure and organize the interactions on these platforms by facilitating a common understanding of a platform’s functionalities and imposing consistency to individual users’ behavior. In this context, the fabric layer, which usually results from the conscious design of an informal group of developers and is maintained by spontaneously evolving open-source communities, sets the boundaries for interactions of users and the scope of application domains. The concrete manifestation of the fabric layer, and thus the characteristics of a platform, is determined implicitly by the informal feedback of user adoption. Building on the fabric layer, the application layer enables individual users to implement various features based on smart contracts. The services and applications resulting from this conscious design reshape governance mechanisms within platforms and redefine how users interact with each other. Their transparent, autonomous, and distributed nature has the potential to reduce the negative effects of information asymmetries, democratize decision processes, secure property rights, simplify contracting and enforcement, and limit opportunistic behavior. However, these features also increase transaction risks and raise privacy concerns. In combination with the governance of a blockchain-based platform, mastering these challenges requires a new notion of trust. The core dimensions of this new notion of trust are the trust in the information system and the deployed algorithms, trust in the providers of the platform infrastructure (i.e., the blockchain providers), and trust in the community of users. It is this user and developer base that maintains and secures the fabric layer which fuels the variety of applications and services built atop the application layer. This trust remains a central facilitator of the adoption of blockchain-based platforms, in particular when it comes to intersections with the real world and the governance of the system itself.

Footnotes

Notes

Acknowledgments

The authors are listed in alphabetical order, and all contributed equally to this book chapter. We thank Christof Weinhardt for his support and Christian Saur for his assistance in writing this chapter. Finally, financial support from Börse Stuttgart is gratefully acknowledged. The funders had no role in the content, structure, or preparation of this chapter.

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Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Florian Glaser
    • 1
    Email author
  • Florian Hawlitschek
    • 1
  • Benedikt Notheisen
    • 1
  1. 1.Karlsruhe Institute of TechnologyKarlsruheGermany

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