Episode 12: Web 3.0, a tool for perfect information transparency?

As a reminder, a public blockchain, such as Bitcoin, allows continuous, complete and publicly accessible recording of all transactions on the network. It also allows members to verify the value of past transactions, to verify the accuracy of updates under the proof-of-work consensus mechanism, and to determine whether the interacting parties possess legitimate property to exchange the value. By leveraging a shared and verified database of distributed ledgers, blockchain attempts to redesign information ecosystems in a transparent, immutable, and reliable way. A subject just as interesting as the current hype about virtual currencies.

This state induces two consequences in terms of economic functioning: moral hazard, which consists in causing one’s behavior to change negatively once the transaction has been carried out (for example, the fact of not repaying one’s credit installments after it has been granted) and anti-selection, that is to say when the information hidden, or not revealed voluntarily, impacts the exchanges in the trade. Adverse selection can even disintegrate an entire market.

The example of the car dealership

George Akerlof was awarded the Nobel Prize in Economics in 2001 for his article “Market of lemons”. In it, the American economist takes the example of the used car market to highlight the adverse selection mechanism. A market made up, on the one hand, of half of good quality vehicles (value of 15,000 euros), and of the other, half of poor quality vehicles (value of 5,000 euros). In this example, only the sellers know which car belongs to which group (good or bad quality). Buyers are themselves aware of the distribution of quality but are unable to identify among the cars on sale which are of good or bad quality. Contrary to what one might think, the price never tends towards the average of 10,000 euros. Why ? Since at this price the sellers lose 5,000 euros by withdrawing good quality vehicles from the market. And in this context, buyers are not ready to take the risk of paying 15,000 euros for a vehicle that is potentially of poor quality. This anti-selection mechanism discourages transactions and can even lead to market suppression. This strict example proves that we regularly, if not all the time, need information to carry out transactions in our society.

To fight against this complete lack of information and anti-selection, several “legal means” are placed. In the previous example, the registration certificates and the technical inspection, for example, make it possible to limit the asymmetry of information between the seller and the buyer and the effect on the price is immediate. A buyer will, of course, be prepared to pay more for a vehicle that has passed a technical inspection than one that has failed.

The financial limit of legal means

These legal means include relatively high costs for market players to limit and reduce this information asymmetry. These legal means must be powerful to guide the players to make rational choices in order to allow prices to be set that reflect the information as best as possible. These legal means must necessarily come from authoritative institutions that are trusted and widely recognized for market players, whether public or private. Via these legal means, as we saw in the previous example, these institutions, which play the role of trusted third parties, in this case the State, have control over the asymmetry of information. We could easily juxtapose this role with that of banks and insurance companies which, thanks to a skilfully constructed rating system, makes it possible to detect good and bad payers and thus minimize the risk of moral hazard (non-repayment of credit or even false declaration of insurance). An asymmetry of information that only benefits one of the two parties in the exchange. But even the uberized economy is not immune to these biases. Peer-to-peer exchanges are not really. Trust passes through these intermediaries: Le Bon Coin, Uber, Airbnb, Individual to Individual… All of them position themselves as trusted third parties and master the asymmetry of information. This industrialization of legal means delegated to trusted third parties is by definition costly, since they are suppliers of the sacrosanct trust which is monetized by the “legal means” that consumers are ready to pay for peace of mind. (Episode dedicated to the notion of trust: here)

Blockchain: a possible symmetry?

This technology is essentially intended to be transparent and provides absolute traceability. A characteristic that makes it possible to generate almost perfectly neutral information. Let’s get back to Georges Akerlof. If all vehicle information were stored in a public Blockchain, the cost of discovering the intrinsic quality of the information would become almost zero. The buyer would have all the elements at hand to make a rational decision in full knowledge of the facts without having to trust the seller’s statements and/or resort to costly legal means. I also wrote an article that highlights concrete cases of traceability via a blockchain (click on this link to discover it).

Nor does it mean that the public Blockchain is a sort of perfectly transparent open ledger conducive to economic spies where it would no longer be possible to protect any personal data, industrial secrets, state secrets, etc. For a blockchain to work in our current economy, the disclosure of certain information must be possible only within a small group of operators. Only public information (public key) can be consulted. the Zero Knowledge (ZK) proof (proof of zero-knowledge disclosure) allows in cryptography to prove to another actor that one holds information without producing it. It is therefore possible, for example, to prove, in a cryptographic way, that we know where a person is geographically located without betraying his position. Another example would be, within the framework of the Bitcoin Blockchain, to prove that I hold bitcoins without disclosing my signature and my public address Zero Knowledge Proof). Without this feature, it would be possible to leverage publicly disclosed information from our business partners to improve our competitiveness and maximize our own earnings. It’s not economically viable.

The asymmetry of identity attributes

The lack of verifiable identities emerges as one of the major problems of the information age, leaving room for identity theft, privacy violations, new and existing forms of surveillance, and even more. other forms of fraud. Citizens today are not in control of their online presence, which not only causes immediate problems, but erodes long-term trust across the entire data ecosystem. As part of this, and as an example, the Massachusetts Institute of Technology (MIT) is in the second year of a project providing students with blockchain-based digital degrees. While still dependent on the Registrar’s Office, the project aims to provide alumni with greater control over their credentials and the ability of others to view them.

It remains to be seen whether blockchain technologies will provide a distributed, more egalitarian and democratic alternative to the institutional solutions in place. Likewise, recent developments towards more private and permission-based blockchains may actually create new information asymmetries or reinforce existing ones instead of dismantling them. Let’s digest this additional episode before finding a new episode very soon which demystifies a new facet of Web3.

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Episode 12: Web 3.0, a tool for perfect information transparency?

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