Trust & the Blockchain
LoLDEX is a decentralized trading protocol for smart contracts that aims to accelerate the formation and distribution of decentralized crypto-token exchanges, which are increasingly coming into play alongside the major centralized exchanges.
Trust —perhaps a vulgarity in the blockchain space — is something centralized crypto-exchanges seek to build and sustain in relation to their brand. However, exactly why are blockchains described as “trustless” systems? What is trust within the context of the blockchain and the barriers to its adoption as blockchain technology matures and redefines trust?
Because of their decentralized nature as distributed ledgers that record transactions chronologically and publicly, melding mathematical algorithms and cryptography, the technology significantly reduces the ‘cost of trust’ that often comes with centralization, as well as shortening the lifecycle of a transaction.
Blockchains are a distributed ledger (DLT) recording transactions, which can be movements of money, goods or secure data. It can support peer-to-peer (P2P) payments services, supply chain tracking, and other applications.
According to Deloitte, distributed consensus ledgers are becoming smart contracts facilitators. This creates efficiencies by removing the legal and financial intermediary in a contractual agreement, with the blockchain is assuming the role of trusted gatekeeper and purveyor of transparency.
In the case of banks, who grapple with the challenge of getting incompatible financial databases to communicate, the use of blockchain technologies can reduce the lifecycle of trades significantly. Santander Innoventures, a fintech investment fund, estimates that such ledger technologies could save banks $15 — $20 billion per year by 2022.
“Trustless” can be a confusing and inaccurate term, and in fact may be an inappropriate label for the technology altogether. Blockchains minimize the trust required between nodes in a system. It stores information in a manner that renders it virtually impossible to add, remove or alter data without it detected by other users. A consensus in a network has is achieved for transactions to be verified.
Being decentralized — is much like the file-sharing BitTorrent protocol, blockchains distribute trust via an economic game. Termed token economics, which differs for various crypto-tokens, each has a set of rules that aims to incentivize members of the network to cooperate, with rules as defined by the protocol. With cryptocurrencies, this is as ‘mining.’
Preethi Kasireddy writes in her Medium article — ELI5: What do we mean by “blockchains are trustless”? — that blockchains “define a protocol that allows two individuals to transact with one another in a peer-to-peer (P2P) manner over the Internet”.
The digital transfer of value from one account to another on the distributed ledger system of the blockchain means there is trust in the underlying blockchain system to facilitate the transfer, validate the currency and assure verification — the authenticity of identity.
The focus of the blockchain on distributed consensus enables automation of trust. Data in a blockchain is replicated and stored across nodes in a network — comparable to how BitTorrent operates — but in a blockchain network, updating data requires approval from a majority of the participants, who verify the requested change as permissible and valid, according to the programmed rules of the blockchain.
Participants within each blockchain implementation function as users and controllers of data, removing the need for intermediaries to arbitrate transactions. This significantly reduces the operational friction required to validate ownership, identity and contractual terms; participants can directly interact directly without intermediaries providing verification.
Centralized crypto-exchanges like Binance, which are prone to regulatory problems, have high costs of listing tokens and offer a centralized point of attack. While centralized exchanges offer ease-of-use and simplicity, they also represent a security risk for funds held there. There are those who claim to possess better security measures, but as we have recently witnessed, hacks are not an uncommon occurrence.
Meanwhile, decentralized exchanges suffer from low trading volumes, as well as a small selection of crypto-tokens to trade. Decentralized exchanges do not rely on third-party services to hold funds but facilitate trades through automated processes that see proxy tokens or assets created, or multi-signature escrow systems are facilitating trades. They also permit users to control funds, with higher resistance to hacks or server downtime, unlike centralized crypto-exchanges.
LoLDEX seeks to resolve these problems by melding the benefits of both, enabling heightened security and liquidity for crypto-tokens. It’s a decentralized exchange smart protocol that grants smart controls a protocol to seek out and match each other, facilitating liquidity and matching supply and demand.
Note: For more information about LoLDEX, contact Dina Abdullah Enriquez (dina[at]loldex.io)
