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What about blockchain, cryptography, decentralisation…?

Photo of old enigma machine
An Enigma machine, used for enciphering messages during World War II. It was one of the first practical applications of cryptography (the word that forms the first part of cryptocurrency).

Subsequently, even if a trustless state is not achievable with digital money systems, it appears that ‘trust minimisation’ is at the heart of many cryptocurrencies (at least to a certain degree).

However, it is essential to comprehend the rationale behind this. In reality, this is not because blockchains or cryptography are trust-minimising technologies, but rather because (1) all transactions and processes in the system are 100% transparent, (2) the responsibility for the operation of the system is distributed among many parties, (3) these parties are liable for fraudulent behaviour, and (4) anyone can use the system without revealing their identity.

  1. Transparency:
    In a DLT system, transparency means that the rules of the game are clearly defined and accessible to all; that compliance with these rules is easily verifiable by all; that the source code is publicly available; and (for most cryptocurrencies) that all transactions, including the entire transaction history are publicly visible. Obviously this results in maximum transparency and transparency is the key to building trust. (Needless to say, user confidentiality is not part of this transparency. Bitcoin, for instance, is ‘pseudonymous’, meaning the identities behind transactions are not stored on the blockchain.

  2. Decentralisation:
    When a system is controlled by a single authority, all the trust required (to make that system work) is demanded by that authority. As history has shown us, this authority has complete freedom of action and is highly likely to exploit this position of power at some point. As soon as a second party with equal rights joins the system, the likelihood of untrustworthy behaviour decreases dramatically, as coordination between these two parties then becomes necessary. If there is secret collaboration between several parties to the detriment of others, this is known as a conspiracy. The more operators with equal rights join this system, the more difficult and therefore improbable a conspiracy becomes. This means that as the number of operators in a system increases, the required level of trust in each participant decreases logarithmically.

  3. Liability of operators:
    In every social system, whether it be a state, a school, a family, a club, etc., there must be rules that allow people to coexist peacefully. However, these rules only make sense if there are consequences for violating them. And depending on the consequences of undesirable behaviour, people in this system adhere to the rules more or less strictly. This implies that the real question shouldn’t be about the severity of consequences, but rather which consequences are chosen to achieve rule-abiding behaviour. However, just as with child rearing, opinions regarding the effectiveness of consequences vary greatly. But one thing is certain: If members of a social system did not fear any consequences for undesirable behaviour, this would not only result in chaos, but it would also encourage certain individuals to seize power within the system (or at least try to). And once they have gained power, they would use that power to game the system for their own benefit. Consequently, every social system requires rules. In the case of Bitcoin, the consequences for not following the rules are that all the work that was done with electrical power is discarded, resulting in a financial loss.

  4. Privacy:
    First, it should be noted that privacy and confidentiality are not interchangeable terms. Even though all Bitcoin transactions are visible to the public, Bitcoin’s protocol does not store (and thus can’t reveal) the identities of those involved. Above all else, it is crucial to recognise that privacy is a basic human right that is an essential component of greater freedom. The term ‘privacy’ encompasses a variety of facets, including financial privacy. However, anyone who wishes to open a bank account is required to provide identification, so all financial transactions can always be attributed to a specific identity. This means that bank employees can always see how much money you earn, how much you own, and what you spend your money on. Besides, credit card companies can create a tracking profile for each individual based on the information about when, where, and what they purchased. Obviously, government interference in people’s bank accounts, such as freezing or even confiscating funds, is far more severe. And this is precisely why privacy helps to build trust.

Therefore, the combination of transparency, decentralisation, liability of operators, and privacy protection of users in blockchain-based systems ensures that users are more likely to trust such a system than a system where:

  • All decisions are made by a small group of people;
  • one has little or no insight into, or influence over its processes;
  • the operators of the system are not liable for their actions and don’t have to fear any consequences even in case of exploitative behaviour;
  • all transactions of all users can be thoroughly screened by the operators; and
  • decisions are routinely made to the operators’ advantage and to the users’ detriment.

It is thus the characteristics of a decentralised money system like Bitcoin why many individuals view it as more trustworthy than the alternatives (especially the fiat monetary system). For example, decentralisation enables users to have less faith in individual operators, however, it simply distributes rather than eliminates the need for trust.

It is essential to understand that regardless of a system’s trustworthiness, the overall level of trust a user must have in a money system is always the same independent of the money system. Simply put, it’s just easier for a user to place all the required trust into a trustworthy system rather than an untrustworthy system.

So, is blockchain, cryptography, and decentralisation the answer to the trust issue? Not alone.

Is blockchain, cryptography or decentralisation necessary to solve it? Yes it is.

Consequently, if the combination of blockchain, cryptography, and decentralisation is only a portion of the solution, then something else must be required to provide a working solution.

In order to unravel what this needs to be, we first have to agree on certain terminology surrounding trust, as trust seems to be a very blurry term among DLT enthusiasts and is used differently by a lot of people in this space. Since clarity is the key, let’s unblur it in the next sections.