Blockchains and Trust
The novel thing that blockchains bring to the world is the ability to transfer value between two parties without the need for an intermediate actor serving as a trusted third party that handles the actual transfer (eg. a Bank). Given the assumption that the majority of the network participants are honest, we can transfer money directly between each other and be sure it will end up where we want it to. And it can be done much faster than wire transfers. Magic.
There is however another kind of trust that is rarely mentioned, and this one is per blockchain. When a new blockchain pops up, it comes with some social rules that we all agree on. One such rule would be that a value transfer can only happen with a signed transaction, meaning that only the owner of the wallet can move the money out of it. Another one would be that we don’t undo transactions when people lose money if the network itself was functioning normally. These kind of rules are mostly agreed on implicitly so we often don’t even talk about them as they act as some kind of axioms from which we start.
The sad news is that nothing guarantees that these rules will be followed. In the end, a blockchain is just a piece of software that can be changed, so it might not follow the social rules tomorrow, it could decide to skip them or might even decide to change them. The key to long term success is following these social rules consistently. Since there is no mathematical formula that would guarantee us the rules are being followed, how can we know whether a blockchain will actually follow them? Unfortunately we can’t. While this may sound like a lost case, there is a way to gain trust and we do this on a daily basis when interacting with others.
Try to remember the last time you saw a conversation going something like this:
Bob: Hi, my name is Bob.
Alice: Hi Bob, I’m Alice, nice to meet you.
Bob: You want to hear my secrets?
Unless you’re hanging around with people that don’t value privacy, you’ve probably never seen such conversation. As humans, when we invest time in each other we also test and validate our trust for the other person. If the feedback is consistent and aligned enough with our beliefs we start to build up trust. Trust builds up progressively and this is the reason we can’t trust a person fully the first time we meet them. In case we get betrayed, the trust drops significantly. One crucial thing to note is that if we do get betrayed by someone we really trusted, there is no way we will be able to reach the trust levels we could have had we not been betrayed. There will always be a what if that will cross our mind because of the bad experience in the past. Read more about progressive trust.
Trust towards Blockchains is no different. When they are launched, we can’t really tell if they are trustworthy. Only over time when certain events and stressful situations happen, where they show they can follow the rules consistently can we build up our trust towards them. Until then, they are just promises in a similar way that ICOs are — with the difference that ICOs promise a product while blockchains promise following the social rules everyone agreed to.
Why Bitcoin deserves to be at the top
Bitcoin has been consistent in following the rules since its birth in 2009, so it has a much longer history than most of the other cryptocurrencies. It wasn’t a smooth sailing though, plenty of things wen’t wrong which made the price drop for years, but the chain stayed true to its original philosophy and never broke the rules.
Some might jump now and say “hey, but it had an incident with an overflow bug which allowed people to create billions of bitcoins and they reverted it!”. This obviously had to be fixed. Note however that this doesn’t break our trust towards the chain because the social rules everyone agreed to were never broken, it was merely a mistake in the implementation of the rules — this is very different from breaking the rules.
In order to achieve the level of trust it has today, Bitcoin had to survive some serious hacks which resulted in millions of dollars being lost. However, it is these hacks that made Bitcoin the resilient beast it is today. Let’s take a look at the history of major hacks in the cryptocurrency space and draw the trust progression based on whether the chain followed the social rules.
Blockchain Trust Progression history
Blockchains should be open and equal for everyone and more than anything else, they should follow the social rules. It’s a metric that is more important than market capitalization or daily volume in the long run. It is not the rise in price that made Bitcoin successful. It is its consistency to following the rules over all the years… the rise in price was merely a side effect of this.
Note: It is much more difficult to break certain kinds of rules for some privacy-focused coins for instance you can’t really revert transactions because you don’t have sufficient information available about them. This makes them more resistant to potential mutability/interference.