Online marketplaces can be either centralized or decentralized. Ebay is one of the most popular centralized online marketplaces, while OpenBazaar is by far the most popular decentralized online marketplace. Online marketplaces rely, in a way or another, on creating a reputation system for both sellers and buyers, which is a common denominator between centralized and decentralized marketplaces. In most cases, reputation is expressed in the form of a 5 star grading system, in addition to user generated reviews which are visible to all users across the marketplace’s network.

“Trust is Risk” is a recently proposed reputation system, that is especially designed for decentralized online marketplaces, where the level of trust, given by each user to the others across the marketplace, is quantified in monetary terms. “Trust is Risk” is centered on assuming that trust is directly proportionate to risk. To flesh out this idea, let’s assume Adam and Judy are two users across a given decentralized marketplace, Adam’s level of trust in Judy can be represented by the maximum amount of money Adam can lose, when buying from Judy, whatever the strategy she chooses to use.

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The reputation system works via “lines of credit”. Adam (A) joins the marketplace’s network through explicitly entrusting an amount of money to another user across the network, e.g. his friend, Judy (B). If Judy (B) has already entrusted an amount of money to a third user, Tom (C), then Adam (A) indirectly trusts Tom (C), since if Tom (C) have had the intention to act dishonestly, he would have already stolen the amount of money entrusted to him by Judy (B). Accordingly, Adam (A) can now engage in economic transactions with Tom (C). Figures (1) and (2) illustrate how “lines of credit” work.

Figure (1): A indirectly entrusted C an amount equal to 10 bitcoins

Figure (2): A indirectly entrusted C an amount equal to 5 bitcoins

How Does “Trust Is Risk” Works?

To implement Trust is Risk’s lines of credit, bitcoin is used via proposing a new wallet type that permits non-exclusive possession of coins, as coins are stored in shared accounts that are materialized via 1 of 2 multi-sigs, a bitcoin construct that enables either of the two pre-defined users to spend the coins stored in a shared account’s wallet. Notation 1/ {Adam, Bob} represents a 1-of-2 multi-sig which can be spent by either Alice or Bob. The order of names, in notation 1, is irrelevant as either user can spend the coins. Nevertheless, the user depositing the money initially onto the shared account is relevant, because he/she is the user risking his/her money.

The proposed reputation system alters the user’s experience in a subtle yet massive manner. A user won’t have to base his/her trust towards a seller on stars or reviews, which aren’t expressed in the form of monetary units. Simply enough, he/she would simply consult his/her wallet to determine whether a seller is trustworthy or not, and if proven to be so, up to which amount of monetary units, expressed in bitcoin. The system works as follows:

In the beginning, Adam transfers his funds from his personal bitcoin wallet to 1-of-2 multi-sig bitcoin addresses shared with his trusted friends. This is called “direct trust”. The system is agnostic to how users determine trustworthy players throughout these direct 1-of-2 deposits i.e. “direct trust”. However, these deposits include an objective value which is visible to all users that can be used to evaluate the level of subjective indirect trust towards other users across the network.

Let’s assume Adam is browsing through the listings of a seller, Tom. Instead of the traditional stars, Adam views a positive value which is calculated by his wallet reflecting the maximum sum of money he can safely pay to buy from Tom. This value is called “indirect trust” and the paper presented an equation for its calculation, yet this technical jargon is not the main scope of this article.

Trust is Risk will attract a large number of users due to many reasons including:

1- One would have access to rather hard to access stores.

2- Two friends can formalize mutual trust in between themselves via entrusting an equal amount of money to each other.

3- The system will be valuable for companies that often subcontract others as it will enable them to express their trust towards them in terms of bitcoin monetary units.

4- The system can also be utilized by governmental authorities to directly entrust individuals with money and confront them via corresponding legal actions whenever trust is misused.

5- The system represents an investment by itself as it provides a new arena for financial activities.