Cryptocurrency, Blockchain & The Dawn of Decentralized Trust — Part One
Introducing Part One of an educational series on cryptocurrency, blockchain and other distributed ledgers. In an effort to add something unique to the adoption discussion, I’ll explore origins, key concepts, and use cases through the topics of Trust, Encryption, Decentralization, Distributed Ledgers, Smart Contracts, and Tokenomics.
Glossary
1. Trust.
In an exchange, the distance between us.
“Confidence in one’s expectations.” -Rachel Botsman
The gap between two risks.
An evaluation of outcomes, of how likely things will go right.
“Confidence that one will find what is desired from another, rather than what is feared.” -Morton Deutsch
Bitcoin’s biggest contribution is a new trust model, one where trust doesn’t have to be mediated by a centralized authority such as a bank or government, but rather where people who might not otherwise trust each other can agree to a shared truth or common record of events.
The Origins of Bitcoin: Trust in a New Era
To fully understand what’s going on with Bitcoin, blockchain, alt coins and distributed ledger technology, we must start with the evolution of trust. In fact, consider society as undergoing a trust revolution. Growing distrust of financial institutions, government officials — even of academics and experts in their fields — has created a paradigm shift that society has yet to fully comprehend or adjust to.
In late 2008, the world’s largest financial institutions began to collapse due to systemic greed and mismanagement, causing a worldwide recession. It was the closest the world has come to widespread financial collapse since the Great Depression in the 1930s. Banks had gotten drunk on profits from “exotic” trading instruments that most of society was oblivious to, and systemically issued fraudulent loans to large segments of the market that couldn’t pay them back.
The result was near collapse of the global financial system, followed by massive government bailouts of the very institutions that caused the problem to begin with. Homeowners and citizens impacted by the bank’s recklessness were the ones stuck with the bill, and millions lost their jobs and homes. One year later, banks came out of the recession with their biggest profits in history, while most citizens have yet to fully recover years later, many seeing their incomes decline.
An official review released in 2011 by the US Financial Crisis Inquiry Commission (FCIC) made clear the cause was human. The Commission concluded that this crisis was avoidable — the result of human actions, inactions, and misjudgments. Warnings were ignored. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”
And declining trust didn’t start or end with the banks. According to a 2017 Pew Research study, just 18% of Americans say they can trust the government in Washington to do what is right “just about always” (3%) or “most of the time” (15%).
For over 18 years Global communications firm Edelman has been creating a Trust Barometer that in 2017 proclaimed “trust in crisis.” From their timeline, erosions of trust have been escalating worldwide since 2001. The Brexit vote and Donald Trump’s presidency are acute symptoms, rather than causes of the biggest trust shift in recent history.
Public confidence in the responsiveness, accountability and effectiveness of elected institutions has been mired at historic lows for more than a decade. The role of evidence and facts in describing public events and shaping policy debates is persistently challenged. And as citizens become their own curators in a saturated and disaggregated information environment, the concept of a shared truth, upon which everyone can agree, appears increasingly elusive.
— Trust, Facts & Democracy, Pew Research April 2018.
Distrust now permeates government leadership, the media, charities, big business — even religious organizations. The Panama Papers revealed widespread offshore banking practices by the wealthy to hide money and avoid taxes. The Libor scandal showed manipulation of bank interest rates from the inside. Wells Fargo, Citigroup, Fannie May and Freddie Mac all saw banking scandals, paying record fines. Decades of sex abuse cover-ups rocked Penn State and the Catholic Church. No institution has gone unscathed.
Enter the Cypherpunks
In the wake of the bank bailouts, a person (or group of persons) using the pseudonym Satoshi Nakamoto proposed a new kind of digital cash, one that didn’t originate with any specific country or government. It was peer-to-peer, used encryption for security, and had a high degree of anonymity. With just 30,000 lines of code and an announcement online, Satoshi Nakamoto did something no one else had for almost 100 years — he (or they including Hal Finney, Tim May, Adam Back, Nick Szabo-maybe all of them) created a new kind of money.
Most of what we knew as money was already digital, mainly via electronic accounting systems of which assets are owned by whom. Institutional control of money means holders never really possess currency, they possess credits.
But what Bitcoin proposed wasn’t merely a ledger of account — it was a new way of securely transferring digital assets, giving owners control, and a way of transferring government-backed currencies for one that was not. It was less of a replacement for world currencies than it was something entirely new. With a piece of software, you and only you could now control ownership of an original digital asset.
To be clear, it took years for wider adoption of the concept of Bitcoin. Slowly, computer engineers began to participate in the network. It wasn’t until 2011 it had its first broad market application, the Silk Road.
I encountered the Silk Road in 2013 while in graduate school, working on a thesis for a PhD in Professional and Technical Writing at the University of Memphis. It was there I discovered Bitcoin and, by connection, the dark web. I wasn’t in the computer science department, I was in the humanities. The university felt my research was illegal — especially when the Silk Road was seized by the FBI —
but that’s a story for another day.
The Silk Road website ran from 2011 to 2013 selling drugs (among other nefarious things) peer-to-peer over the internet. In this highly illegal and shady realm, Sellers and Buyers alike needed a way to trust each other and exchange drugs for bitcoin. When buyers purchased items, their bitcoin was held in escrow until the product arrived (or after a certain number of days if left unattended). This is the same payment model later adopted by Chinese-Wal-Mart Alibaba. The Silk Road test case is the reason bitcoin still retains an image of criminality.
Could there be any environment more risky, more susceptible to fraud than illegal drugs — online? Trustworthiness was a hallmark of the exchange. It made sellers rich and created repeat customers. Trustworthiness was lost when someone didn’t follow the rules or didn’t do what they said they would do. There were penalties for bad behavior (unlike bad behavior at institutions like banks).
In the end it wasn’t sellers running off with funds (usually) or disgruntled customers deciding it wasn’t worth the risk (getting high far more important) that did the Silk Road in; it was law enforcement (through shady, civil rights-busting antics and Bitcoin-embezzling agents that brought it down. Ross Ulbricht, the convicted “mastermind” was the only one prosecuted and was unfairly sentenced. See freeross.org).
Trust, But Verify (Code)
You’d think the escalating white collar crime and erosions of confidence in institutions would have propelled us towards an era of trustlessness — that society would be paralyzed and characterized by mistrust. Instead, something moved in to fill the void: distributed trust through computer code.
In distributed trust, systems are created to spread risk, not eliminate it. With Bitcoin, users are actually trusting several parties: the miners to secure the network and validate transactions; the developers to write, maintain and improve the code; and other participants to use the platform and participate in the economy. In the best cases, all of these participating parties are decentralized and unknown to each other.
Consider Uber and AirBnB: two examples of this new distributed trust. It’s a sign our distrust in institutions has been replaced by more trust in individuals (as long as their is software working to level the playing field). Owners of assets (cars and houses) are able to trust exchanges (a ride to the airport or a weekend in Miami) with strangers through software and a well defined set of unbreakable rules. If the rules are broken on either side, they are penalized.
Perhaps from one perspective we’ve broken up trust into shards of acceptable risk. Instead of giving trust to traditional institutions, those with an oversized influence on the outcome of a transaction — banks which can charge fees and reject withdrawals or a Federal Reserve that has a monopoly on money— we’ve distributed trust to each other.
The software that makes Bitcoin possible is what made this new trust model possible.
And that’s what all the hype is about. Well, that and potentially so much more.
Trust is the lifeblood of interpersonal transaction, just as money is to an economy. Until very recently money creation was concentrated in the hands of a chosen few intermediaries. What we’re seeing now puts control back in the hands of individuals, a paradigm shift that will disrupt traditional intermediaries of trust: lawyers, bankers, investment firms, real estate agents, government agencies — those third parties that collect rents for the privilege of holding your record of assets.
If you think relinquishing trust to a set of code and code users is a recipe for disaster, have no fear. This is where encryption comes in. See my next article for why these new uses of encryption techniques may save us from ourselves.
Next up, Part II: How Encryption Will Save Us From Ourselves
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