What is a trustless money system?
The terms ‘money’, ‘currency’, ‘money system’ and ‘monetary system’ all appear frequently in this article. Understanding their respective definitions is crucial, as they are not interchangeable.
Even though Satoshi never mentioned the now commonly used term ‘trustless’, it accurately captures what he meant in his words cited in the previous section.
Therefore, what characteristics must a money system possess to be termed trustless? The widespread opinion since the launch of Bitcoin says that there are two essential components of a trustless money system:
No central authority holding influence over the money supply or ownership For a money system to be considered trustless, there must be no central authority with influence over either (i) the money supply or (ii) individuals’ holdings.
- A central authority holding influence over the money supply can devalue the money by (excessively) increasing the money supply. This causes inflation (also known as arbitrary confiscation, hidden tax or taxation without representation) which disproportionately affects the working class and those on low incomes.
- A central authority holding influence over the ownership of money (individuals’ holdings) has the power to freeze bank accounts; seize funds from bank accounts; halt transactions to unauthorised payees; and so on.
Peer-to-peer transactions without a third-party middleman Transactions in which a direct exchange occurs between a seller and a buyer without the need for one or more trusted intermediaries (or third-party middlemen).
As soon as one or more third parties are required to facilitate a money transfer, trust is automatically implicated, as both sides become dependent on these third parties for the transaction to occur successfully.
So, as Satoshi points out in his initial announcement of Bitcoin, a fiat currency can never be a trustless money system as a central authority has sole influence and power over the issuance of its currency:
The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
Thus, a trustless money system is a system that does not have a central authority, nor does it require third-party intermediaries to facilitate transactions, yet still serves all three functions of money:
A good illustration of this would be gold.