How blockchain technology creates a clear and transparent layer of trust for all participants
This article is an introduction to the concepts and principles that underpin blockchain technology and is intended for those whom are still working out the basics of how the blockchain could be of benefit to themselves and to society, like my mom, and the guys helping me build my house! Regen.network is a platform and protocol that a team of us are working on to build a trusted system of Verified Ecological Outcomes. I reference the project and a specific use case throughout this series of articles.
Trust: The fundamental currency of commerce
This morning I had breakfast with a group of businessmen — good guys all around the table, doing well with their businesses, creating time for their families and trying to contribute to a better world. We chatted about what is going well for us and what challenges lie ahead for us and our businesses. When it got around to me, I mentioned that my company is in the midst of developing a network and protocol for verified ecological outcomes using blockchain technology. After comments about the “bitcoin bubble” and how so many people are going to lose a lot of money, one gentleman told me that the problem with my project and the whole space in general is that no one is ever going to trust it.
I love that he brought up trust, because it’s honestly at the core of what blockchain technology represents. Trust is the reason that regen.network chose to employ blockchain technology in the first place. It allows us to operate a system that is fundamentally built in a way that can be fully trusted.
What was his logic?
So what are the assumptions that formed the basis of what Peter (that’s a made up name) was saying, and why he’s not alone in making those assumptions?
- Trust is necessary. First off, he’s saying that if we are going to be building a system where people are transacting with each other, we’d better build trust. This is such an important point! In fact, in Richie Etwaru’s TEDx talk Blockchain: Massively Simplified, he says, “Trust is the fundamental currency of commerce.”
- We need someone to verify the trustworthiness. Without someone to trust, trust is impossible. In other words, if I don’t have someone to broker the deal, or someone to call when there is a problem, how can I ever trust that things are going to be done right?
What he’s saying here is quite logical. It forms the underpinnings of how we make transactions every day, but is it actually true? Let’s dive into that logic a little bit.
Let’s start with a super simple example.
You hired someone to help you with your website. They’ve done the work, and now you need to pay them the $500 that was agreed upon.
Let’s compare three different ways of doing that.
1) Person to Person — pay in cash!
2) Wire transfer through the current banking system.
3) Payment via cryptocurrency on the blockchain.
Person to Person Payment
Person to person transactions (of all kinds) are incredibly important. With trust in another person, a person-to-person payment system is best. But it does require a bit of trust, doesn’t it?
You meet the developer at a cafe, buy the woman a coffee, and thank her for her great work. You hand her the $500 in crisp new $100 bills. She says thanks so much and is on her way. Perfect, what could go wrong?
You need to trust that she won’t claim that you didn’t pay her. It’s a huge headache if she does and could cost you endless amounts of time and money to resolve it! So, ask for a receipt. But, even if she gives you a receipt, she could claim that this receipt is not real. And so, to solve this problem, you could pay her in the presence of someone who could notarize the transaction and witness it as being true. In this scenario, you need to trust that this person will perform his or her duties correctly and that the legal system will function properly if something goes wrong.
Wow. It takes a lot of trust to pay someone.
To be clear, this person-to-person trust is something worth building, and is far more valuable than technological fixes. From an 8 Forms of Capital perspective, a lot more is lost when a person acts out of integrity. What that other person loses when they say you haven’t paid them is any social capital they had built with you, which often proves to be more valuable than the $500 they could gain by claiming you didn’t pay. But that is a topic for another post!
Paying through the banking system
Let’s say this person doesn’t live in my town, but lives across the world. How do I pay her? In the current banking system, if I wanted to send $500 from my account in the US to someone in say, Singapore, I would walk into my local bank and ask to make a wire transfer. The bank would be happy to oblige, offering to perform this service for me for a low fee of $35 (plus there may be charges on the receiving end too), and the money will arrive in 5–7 days.
Layers of trust:
Trust in my bank
When I agree to this, the money (plus the fee) is withdrawn from my account immediately, and then, if all goes well, it arrives in my friend’s account in about a week. I trust that is will happen. Why? Well, because this is an upstanding bank. They have lots of paperwork. If something goes wrong, it may take a number of calls and a bit of an investigation, but I trust that eventually it will get worked out. If we didn’t have these banks to help make this transaction possible, how would we possibly get the money to someone in Singapore? Send them cash through the mail? No way! (We tend to not trust the postal service!)
Trust in the government
There is also another layer of regulation and government oversight that helps me to trust that this transaction will happen. Our elected officials have passed laws that are intended to protect the consumer (right?), and so even if the bank wanted to do something other than deliver my money, they would be in violation of the law. And so there is a trust in my government that this transaction will happen.
Trust in our legal system
And lastly, if all that goes wrong, my country has a legal system that is also intended to protect the little guy like me from being taken advantage of. I can take the bank to court as a last resort to get my money back.
(*And why would I ever have reason to not trust those institutions? That might be a topic for a different blog.)
Trust, Blockchain Style
Here’s how the blockchain handles such things.
The blockchain uses a decentralized, immutable, (fairly) immediate, and transparent ledger for all transactions.
What does that mean?
What’s a ledger?
First of all, what’s a ledger? It is like a spreadsheet of all transactions, with the newest ones getting entered after the previous ones and all accounts being updated accordingly. If Account A has 2 bitcoins and Account B has 1, and then a transaction occurs where account A sends 1.5 bitcoins to Account B, the ledger would record the transactions and update the balances. Account A now has 0.5 bitcoin and Account B now has 2.5. The ledger does this with every transaction. (To be technical, it actually retabulates with every block, which represents a bunch of transactions. All the blocks put together create a chain of blocks or blockchain!)
What is a decentralized ledger?
This ledger system is somewhat like what a bank does to keep track of the bank accounts, except that a bank does it in a way that is centralized, changeable, and unseen by the users, which is us. There is a proprietary process that each bank uses to keep track of its accounts. We don’t know how they do it or if they could change the records if they wanted to without anyone knowing. We just trust that they do it right. Every once in a while they get hacked or the system has an error, but we trust that they will get it figured out.
With a decentralized ledger, there is no one entity that keeps track. There are thousands of computers around the world keeping track of all the transactions. At each block they communicate with each other to make sure that they all have recorded the same transactions and made the same conclusions. If a single computer tried to manipulate the data for their own gain, the other “nodes” in the system would invalidate their data. This ensures that no single entity can manipulate the system. This is revolutionary.
What is immutable, and how does that work?
Immutable means unchangeable. There is no way to go back later and change a transaction, whether for malicious or for honest reasons. Once a transaction is registered by the blockchain, it is locked in. There is something called a cryptographic hash created for each block that is based on the data in that block and the hash of the previous block. If someone tries to change the data in one of the previous blocks, it would be immediately obvious to the entire system, because the cryptographic hash wouldn’t match the records and would be rejected. In this way, the blockchain records every transaction in a way that can never be changed. If you run a full node on the bitcoin blockchain, you have a record of every single transaction that was ever made on that blockchain. In this way, you can have absolute trust that those transactions actually took place. No ambiguity, no human error, no possibility that someone altered the records. This is revolutionary.
What is transparency, and how does that work?
In our bank example, you can look at your own account and see what transactions have taken place, but you cannot look at any other transactions. When your wire transfer had a fee, you have no idea who that fee went to.
On the blockchain, every account (or wallet) is transparent to the world. Every single transaction that has ever been made from any wallet is visible for everyone to look at if they like. So, if someone claims to have sent money to someone else, not only do those two parties know if that is true — anyone can check. It’s revolutionary. (Now, you can choose to associate your name with your account or not, but in either case, the wallet is transparent.) This is revolutionary.
Sending money via the blockchain
So, coming back to the example of sending $500 to Singapore. I can connect to my wallet on my personal computer and send a transaction to my friend in Singapore without any intermediaries to help it happen other than the decentralized, immutable, transparent blockchain. If I did this transaction on the Bitcoin blockchain it would cost about $20 and arrive in my friends account in about 6 hours. If I sent my transaction on the Ethereum blockchain it would cost under a dollar and be there in less than 10 seconds. (The settlement time and transaction costs for each of these chains are variable, but these are current estimates.)
The transaction has been made transparent to the world on the immutable blockchain, so this person could never claim that I did not send the payment to them as the record is made public immediately.
So the transaction took way less time, cost way less, my trust in fulfillment was higher, the transaction is verified to have taken place and there were no intermediary parties that might have interests competing with my own.
The blockchain is a trustworthy, immutable, transparent ledger of my transaction, and often quicker and cheaper than the bank!
Drawbacks of the Blockchain:
To be honest with you, there are still issues to be figured out with blockchain technology, and a long way to go before we reach mass adoption.
This first bit challenge is your own! You need to manage your own private keys (which are like passwords) in such a way that they don’t get compromised. It is quite common for someone to lose them, for a computer that stores the keys to become inoperable, or for them to be stolen. These are serious risks that certainly can be managed, but need a reasonable amount of effort on your part.
Another serious problem is the gross use of resources (electricity) that it requires for crypto-economics to function at this time. Particularly Bitcoin uses a disgusting amount of power for every block confirmation. There are blockchains that already run on Proof of Stake, which is a different system that has largely addressed this problem. Ethereum plans to shift proof of stake sometime this year. Regen.network will likely be built on the Tendermint platform which employs proof of stake with a fixed number of validator nodes and at regen.network we are considering the possibility of requiring verification of green energy for those nodes. I’m inspired by the Living Product / Building Challenge requirement that buildings produce more power than they consume, which is something that the blockchain technology should aspire to.
And the last big challenge that blockchain technology faces is one that every radical new technology faces, which is the up hill battle of mass adoption.
In a way, blockchain technology does not really create a trusted system, but rather a trustless one (one where it is not necessary to trust anyone, just to trust the system). And this trust in the actual system takes time. We’re currently in the innovators/early adopters phase, and after some time will likely see the early majority join in. As more people join, the system will be more trusted. Right now, the young technology is very volatile in price, and looks new, complicated, and difficult to understand for even the early majority. That creates the barrier to entry/feeling that it is not trustworthy. Over time, as the volatility dies down and people have been exposed to the concept multiple times, we’ll start to see the trust in the system grow and eventual adoption by the majority.
In Part 2 of this post, I will look at another example that is a bit more complicated: Who do we need to trust when we choose to buy organic food, and how might that be made more like the decentralized, immutable blockchain ledger example from above. It’s a bit more complex as we will be discussing real-world things — not just the movement of money — but that’s where it gets interesting.