I. Assets and Computation

The purpose of central authority is to establish exclusive control within a common space.

Centralization

The world contains a limited number of resources. When the demand for a resource exceeds its supply the resource becomes valuable. Some resources, like food, become so valuable — so essential — that people perform desperate acts to acquire them.

In order to protect resources communities developed central vaults. Vaults stored resources. Vaults were physically guarded to restrict access to the resources inside.

The permission of the vault owner was required to open an account. Account holders paid fees to store their resources with the vault. Vault owners pooled fees to develop stronger defenses.

Specific vaults began to distinguish themselves. Some became known as the best place to keep resources. Eventually, a handful of successful vaults owned the marketplace. They had become so good at securing resources that no competition existed.

Powerful vaults turned into central authorities. People living in small towns with only a single vault, or “bank,” were obligated to store their resources there. The bank’s management began to feel the pressure.

Protecting an entire community’s resources is a stressful task. New defenses have to be established. Bank fees must be raised to pay for stronger guards, more vaults, better security.

Vulnerability

A bank teller chats with a pal after work. He is overworked, he says. What used to be a cushy job has become too much to handle. His hours are longer but his pay seems the same. He cannot go on like this. After all, he will be thirty years old soon with nothing to show for it.

Something, he says, must change. The bank teller’s tired mind remembers something. A slip in banking protocol. An opportunity in his favor. A fresh start.

The bank teller wakes early on Sunday morning. He arrives to the bank. Closed for the holiday, it says on the front door.

Everyone in town knows the bank’s centrally scheduled hours. The bank is closed every Sunday. No one is at the bank — it opens Monday, 8am sharp.

No one witnesses the trusted bank teller open the vault. No one sees him calmly move resources out of other’s accounts and into his own pocket. Thankfully, the bank teller does not need to ask anyone for a light. He brought his own.

He takes a deep breath and sets his manager’s only copy of the central ledger on fire. On his way out he ignites the lobby and seals the front door. The last we see of our bank teller is a slow-motion cameo of him riding toward his new life on horseback, the bank — and all of its records of ownership — bursting into flame behind him.

What went wrong?

Central authorities are vulnerable. Malicious actors know that investing their time to find weak spots in a central authority is worth it. The payoff is huge. A dense concentration of valuable assets — money, information, alphonso mangoes — all in one place is a thieve’s paradise.

Central authorities cannot protect against all threats. Even a secure bank requires staff. Overtime, someone with bad intentions can gain trust at a central authority and abuse their position.

A central authority can abuse its own position as well. Without competition central authorities have little incentive to act ethically. Central authorities can establish arbitrary fees and regulations that affect their captive community.

Consider a local government office with sole authority to grant driver’s licenses. The new administration issues a regulation stipulating that no right-handed people are allowed to drive. Government police officers enforce the regulation. Anyone caught driving right-handed is out of luck until the central authority decides to change protocol.

Central authorities create system-wide vulnerability because entire systems depend on them to provide a crucial function. When a central authority is damaged, destroyed, or goes crazy, every one else — every other node in the system — is affected. Central authorities benefit from monopoly status because it grants them influence over their dependents. Dependents only benefit from a central authority if it can be trusted to perform with integrity.

Integrity and Trust

A system that performs with integrity gains the trust of its users. Integrity stipulates that a system must function predictably, correctly, and cannot be cheated. Users learn to trust a system after many positive interactions.

Constructing a system with integrity requires three components—

  • Information Integrity: 
    A system’s input information is complete, correct, and free of contradictions.
  • Behavioral Integrity:
    The system performs commands correctly and consistently.
  • Security:
    Only a system’s authorities can modify system information and behavior.

Achieving these guidelines results in a predictable system. Users know that a system will output a trustworthy result if the system is built with integrity. Trust is established between a system and its users when it performs truthfully, consistently.

Central coordination has historically enabled integrity. Consistent outputs require that a consistent process is followed. Establishing central locations to enforce integrity from input to output has been required to ensure trustworthy results.

Consider the production of automobiles. Our central authority, a car company, sets up a beautiful manufactory. They control the integrity of inputs by sourcing only the best raw materials. They establish best-practice manufacturing processes. Car parts are created and inspected to remove defects. Highly-trained workers assemble cars under tight managerial oversight. Every car is tested to guarantee it will behave correctly. No one can access the manufactory off-hours. No part of the production system can be tampered with. Enforcing this exact process results in cars with trustworthy performance.

The factory’s managers hold the inputs, behavior, and security to high standards. These managers conduct ongoing true-or-false tests to determine whether standards ensuring integrity are maintained throughout production. Regardless, the factory remains centralized which creates vulnerability for both the car company and its customers.

Computation and Disintermediation

The conditions that central authorities check to verify integrity can be recreated with boolean logic. In boolean logic there are two states: a condition is either true or it is false. Computers can be programmed with boolean logic to perform state tests.

Computation paired with boolean logic enables objectivity. A human inspector’s judgment can be affect by hunger or personal bias. Computers only see true or false. Given correct input and correctly defined behavior we can trust a computer’s output to be unbiased and objective.

Achieving true objectivity with computers allows us to decentralize the tasks historically restricted to central authorities. Prior to computation, dependents had to trust that central authorities were behaving with integrity. Computation allows us to form systems that prove their integrity and provide cheaper, more resilient alternatives to centralized storage.

Transitioning centralized systems to decentralized systems is called “disintermediation.” Centralized systems are characterized by the presence of authoritative nodes. Decentralized systems lack any central authority.

In a decentralized system nodes, or peers, join and leave at will. No central authority exists to coordinate the behavior of nodes. Independent node behavior creates diverse, overlapping connections that give the network resilience.

Decentralized systems must remain open and secure in order achieve the benefit of central authority but avoid its vulnerability. This requires computation to consistently follow a network protocol that has integrity built-in. Enforcing integrity in the design of decentralized systems removes the need for a central authority to enforce correct behavior.

Blockchain systems are network protocols that achieve disintermediated integrity to manage valuable assets. Blockchain systems are resilient. They lack central points of control while providing identical functionality — and better security — than the centralized systems they replace.

Next… 
II. Verify Ownership