Written for LexDAO.

The nature of trust in our society has grown from varying levels parallel to socioeconomic development. Beginning with informal contracts built on mutual aid (the human nature to insure one another), to trust being placed on governmental systems today (in exchange for civic behaviour), and perhaps in the future, on an open-source code of absolute neutrality (decentralised bitcoin and altcoin networks)  — cryptocurrency laws.

Hitherto, the nature of trusts has evolved from social to institutional and proceeds to touch upon distributed ledger technologies. This commentary highlights how the trustless nature of the latter has paved modern solutions in overcoming the shortcomings of the former two.

(1) Social trust allows for contractual mistakes

Contractual mistake involves misunderstandings or misalignments of expectations between parties in a contract, often leading to unintended consequences or breaches of the agreement.

Context: Anderson’s gambling woes

In The Paper Chase, Episode 114, a social contract is formed between Anderson and his study group. It is founded upon the principles of collaboration, shared responsibility, and a common purpose. An expectation of mutual contribution and the reliance on each other's efforts to achieve their collective goal of succeeding in law school is underscored by one of the group members, Ford, who states: "the group, we work together, share alike the five of us.”.

Thus, from a legal perspective, the study group's arrangement can be considered an implied contract, where the exchange of services (collaborative analysis and note-taking) and reliance on each other's contributions create a binding obligation, built on good faith and fair dealing. By agreeing to be part of this study group, Anderson has entered into an informal contract that carries with it certain obligations and responsibilities.

However, Anderson engages in gambling with a group of 3L students, which results in him receiving a bad cheque for $800. By providing Anderson with a cheque that cannot be cashed, the 3L students have intentionally deceived him and caused financial harm. Anderson's gambling activities and the resulting bad check lead to a breach of trust with his study group. By prioritising his personal interests and engaging in risky behaviour, Anderson fails to fulfil his obligations to the group and jeopardises their collective success. Evidenced by Ford's statement, "It's our work, our careers, you are letting us down, Anderson. [24:00] "

Anderson's breach of this implied contract, through his gambling activities and neglect of his responsibilities, constitutes a contractual mistake that undermines the trust and expectations of his study group. Fortunately, this contractual error can be mitigated with technologies today. [3]

Modern solution: Smart Contracts

Emerging technologies offer powerful alternatives to informal agreements that still rely on social trust. Today, smart contracts can be used to codify and enforce social contracts, ensuring that all parties adhere to the agreed-upon terms and reducing the risk of contractual mistakes. By automating trust, smart contracts ensure that all parties fulfil their obligations. For instance, Decentralised Autonomous Organizations (DAOs) are community-governed organisations that operate on such smart contracts.

An example of smart contracts is the MultiSig (multi-signature) wallet, which are specialised smart contracts for transactions. These digital wallets heighten the security of transactions, alleviate the effects of a breach on others (decentralising roles), and retain transparency (being an auditable account).

To elaborate, multisignature wallets require the approval of multiple parties to process transactions, fostering collaboration and joint decision-making. By implementing flexible "M-of-N'' signature schemes, users can tailor the wallet's security and operational requirements to their specific needs. Additionally, it offers enhanced access control, allowing users to assign specific roles and responsibilities to different participants. This ensures strict control over digital assets and enables a clear separation of duties, reducing the risk of a single point of failure. Lastly, transparency and auditability are inherently optimised, as transaction policies, signers, and actual transactions are made publicly available on-chain or in the code. This allows for clear accountability and enables anyone to audit the wallets to ensure the safety and security of funds.[4] [5] [6] [7]

Unlike the study group's informal agreement, smart contracts codify the terms of the arrangement and automatically enforce them, reducing the risk of contractual mistakes. By leveraging the trustless nature of blockchain technology, smart contracts offer a more secure, transparent, and accountable framework for maintaining social contracts.

(2) Institutional trust is inherently fallible: The Paper Chase Episode 402

Economic torts involve intentional acts that cause financial harm to another party, often through deception, misrepresentation, or interference with contractual relations. The legal system has a duty of care to protect citizens' rights and uphold justice. The failure to do so, resulting in wrongful arrest and incarceration, can be viewed as an economic tort.

This situation is depicted in the Paper Chase episode 402: The fallibility of institutional trust and the impact of economic torts is demonstrated through the wrongful arrest of Franklin Ford, a law student whose stolen identity was used to commit felonies in California.

Context: Identity Fraud

The character Ford is pulled over when running a stop sign and is arrested on an out-of-state felony warrant for grand fraud and unlawful flight to escape prosecution. Despite Ford's protestations of innocence and his insistence that he has never been to California, the police dismiss his claims and proceed with the arrest. From the outset, Ford's dialogue emphasises his belief in his innocence and the error in his arrest. He asserts, "there has been a mistake, it's a mistake[5:28]," and "I am not a criminal. I am a law student."

In the episode, the breach of institutional trust is further compounded by the denial of Ford's basic rights and the abuse of power by those in authority. When Ford asks to make a phone call, a right afforded to arrested individuals, the deputy dismissively responds, "I'm not going to tell you again[12:40]," and "Take your right and shove it. Now, just sit there and shut up[13:00]." When those entrusted with upholding the law and protecting citizens' rights instead violate them, it undermines the foundation of institutional trust and raises questions about the legitimacy of the entire system.

The erosion of trust extends to the larger institutional framework of the legal system. It highlights how the centralised nature of the legal system can lead to a lack of accountability and resistance to correcting mistakes. Despite having compelling evidence of his innocence, Ford finds himself trapped in a bureaucratic nightmare, unable to secure a timely resolution to his case. As his lawyer, Golden, explains, "Even if I could get all the documents signed to notarize today, it's still too late for tonight's arrangement and the court doesn't sit on Sunday[29:00]." The system's inflexibility and resistance to admitting fault erode trust and leave individuals like Ford feeling powerless in the face of institutional failures.

The wrongful arrest and incarceration of Ford constitute an economic tort, as they result in substantial financial harm and damages to his education, reputation, and emotional well-being. The legal system's failure to properly verify Ford's identity and investigate his claims of innocence represents a breach of their duty of care and an intentional interference with his rights and interests.

The fallibility of institutional trust in a centralised system, as depicted in episode 402, can have far-reaching consequences for the people it serves. It can lead to a loss of faith in the fairness and integrity of the legal system, a reluctance to engage with or rely upon institutional processes, and a sense of powerlessness in the face of injustice.

Moreover, the breach of institutional trust can have a disproportionate impact on vulnerable and marginalised populations, who may already face systemic barriers and biases within the legal system. The episode alludes to this through the mention of the Jeter case, in which a young black man was wrongfully convicted and imprisoned, highlighting how institutional failures can perpetuate and exacerbate existing inequities[35:01]. [8]

Modern solution: Blockchain-Based Digital IDs and ZKPs

Centralised identity systems, as depicted in The Paper Chase episode 402, are inherently prone to errors, abuse of power, and a lack of accountability. The wrongful arrest and incarceration of Franklin Ford, due to identity theft and the legal system's failure to verify his claims, exemplify the devastating consequences of institutional trust failures.

In such centralised systems, individuals have limited control over their personal data and are at the mercy of authorities who may make mistakes or abuse their power. The bureaucratic inflexibility and resistance to admitting fault further erode trust and leave victims like Ford feeling powerless in the face of injustice. An alternative to this system is adopting a decentralised ledger to contain information.

Crypto-based regulations prevent such harrowing economic torts (identity fraud or misidentification) caused by institutional trusts. Decentralised tools like blockchain and zero-knowledge proofs (ZKPs) today are feasible alternatives to prevent economic torts caused by institutional trust failures.

A year back, Brazil leveraged on a blockchain-based digital ID system, it is apparent that technologies are reliable in enhancing security, privacy, and trust in digital interactions. The immutability and decentralisation of blockchain makes it more resistant to fraud and data breaches, reducing the risk of identity theft and economic torts and enhancing security. A decentralised identity system can streamline administrative processes and reduce the time required to resolve identity-related issues, mitigating the bureaucratic problems faced by Ford.[9] [10]

On the other hand, technologies such as ZKPs benefit the user by enabling them to selectively disclose identity attributes, giving them greater control over their personal data and enhancing confidentiality. Strikingly, transparency is maximised with privacy, a dichotomy well maintained only by crypto-based systems; Transactions and identity claims on the blockchain are publicly verifiable. Harnessing blockchain and ZKPs allow central entities to retrieve data easily as well, speeding bureaucratic processes. Interestingly, crypto systems are completely flat and decentralised, which allows it’s protocol to be neutral to all users, which abolishes systemic prejudices by centralised legal systems. [11]

The access to government records are simplified and secured on a crypto blockchain, offering a trustworthy alternative to traditional identity systems, reducing the risk of economic torts and restoring faith in institutional processes.

Conclusion

By leveraging cryptography and game theory, blockchain based systems aim to minimise the need for blind faith and offer a rational basis for trust. Logically, trust can only be placed on an entity to a limited extent, because anything beyond becomes excessive, and allows for it to get ruptured — In response to trust, no entity can deliver absolute fulfilment, unless the responsibility of upholding it is distributed; As Gavin Wood, a prominent figure in the world of Web3, aptly states, "Less trust, more truth" is the mantra for the future. [12]

Other opinions: Trust limitations of DLT systems (To be edited soon)

References:

[^1]: Gavin Wood (???), TEDxVienna Commodifying Trust and Disrupting the System https://www.youtube.com/watch?v=UIBR99gOLOQ

[^2]: Schmück, Kilian (2022). Less Trust, More Truth: Affordances of Distributed Ledger Technologies for Decentralized Platform Ecosystems. Diss. Universität St. Gallen. link What are smart contract wallets? (n.d.). Retrieved from https://cointelegraph.com/explained/what-are-smart-contract-wallets

[^3]: (N.d.). “The Paper Chase” Episode 114. Retrieved from https://youtu.be/1PckgJMT62Q?si=Ygh_-4s6cypUHE-c [

^4]:Pomerantz, O. (2022a). Security choices and multi-signature wallets. Retrieved from https://blog.logrocket.com/security-choices-multi-signature-wallets/

[^5]:Pomerantz, O. (2022b). Security choices and multi-signature wallets. Retrieved from https://blog.logrocket.com/security-choices-multi-signature-wallets/

[^6]:d, U. (2023). What are Multisig Wallets and how do they work? Retrieved from https://www.coindesk.com/learn/what-are-multisig-wallets-and-how-do-they-work/

[^7]:Nomzy-kush. (2023). The power of Smart Contracts: Automating Trust in the Digital age. Retrieved from https://dev.to/nomzykush/the-power-of-smart-contracts-automating-trust-in-the-digital-age-3bko

[^8]: (N.d.). “The Paper Chase” Episode 402. Retrieved from https://youtu.be/YctrUtSCqMs?si=spjLJKyuUjC8epwv

[^9]: Kumar, M. (2024). Brazil launches National Digital ID system powered by Blockchain. Retrieved from https://blockchain.oodles.io/blog/brazil-national-digital-id-system-blockchain/

[^10]:Pereira, A. P. (2023). Brazil rolls out blockchain-based Digital ID. Retrieved from https://cointelegraph.com/news/brazil-rolls-out-blockchain-based-digital-id

[^11]: Papadimitriou, T. (2023). Zero-knowledge proofs: Empowering digital identity on the blockchain. Retrieved from https://www.linkedin.com/pulse/zero-knowledge-proofs-empowering-digital-identity-papadimitriou/

[^12]:Edelman, G. (2021). The father of web3 wants you to trust less. Retrieved from https://www.wired.com/story/web3-gavin-wood-interview/