The Chain of Trust
What is the value of the internet?
It’s just a network of many computers. I can make my own network of computers at my home, but it will not have any value to anyone.
The internet relies on a concept called “Network Effects” to grow in size. Where the overall value of the network increases with each new member joining in.
One of the oldest application of the phenomenon of Network effects is the imagined reality we like to call Money.
Money was invented to replace the cumbersome barter system of transactions. But the idea of money only succeeded when it had all the people onboard.
Of course when billions of people are involved trust issues start to emerge, and that’s why central banks were set up. So that people could rely on money backed by central banks, which were supported by their governments.
A piece of paper only has value as long as the central bank issuing it says it has value. We have seen instances of such pieces of paper losing value within minutes on pronouncements of great political leaders.
We have also seen central banks go rogue and print more and more money to pay off their debts, essentially just offloading all the debt to the public in the form inflation. Some have even called such inflation as taxes on the poor.
So who do you trust when you can’t even trust your own government and the bank that funds it? You trust nobody, and you trust everybody.
In Code we trust
You effectively decentralise trust to every participant on a network, you use cryptographic hashing to ascertain the “skin in the game” of every participant. The more resources(CPU cycles and electricity) someone spends to solve a complex mathematical puzzle and to join the network, the more trustworthy she/he becomes.
The more people join such a cryptographically backed decentralised network, the more trust the overall network gains. As network effects kick in, the more participants join the network, the more suitable it becomes to function as a currency.
Now it can be used to make exchanges of value that we like to call transactions, as it becomes both a store of value and a medium of exchange.
Phew…
That was my humble attempt to understand Bitcoin, adding to the millions of others on the internet, including this paper from the founder of Bitcoin — Satoshi Nakamoto.
While Bitcoin in itself may not become a truly global currency we use on a daily basis like the Dollar or the Rupee. But the underlying technology used to run Bitcoin has massive impacts on the global financial system. I am of course talking about the Blockchain.
Blockchain attempts to effectively solve the ‘double-spending’ problem inherent to all financial systems. Basically if user A has 100 units of a currency, then he cannot give 100 each to user B and user C. He cannot spend more than what he has.
Yeah, I know that’s mundane problem to solve, but that is what central banks around the world are there to do. They keep a track of all the money in the system by being the single source of printing money.
They even put their seal of trust on legit money that we can use in transactions, so that monopoly-money can only be used to play board games.
In any financial system we need a trustworthy way to solve the double spending problem.
Blockchain solves this by keeping a permanent, un-modifiable record of every transaction ever made, verified by all the participants on the network, as everyone has a copy of the entire database of all the transactions every done.
The trust emerges from this immutability of history that a blockchain ensures. Something hard to do in centralised systems which are open to manipulation by hackers or sometimes, even by rogue internal players. (When The Fed prints more money to pay off past debts it’s essentially hacking the financial system and forwarding the debt to future generations, you can’t do that if your currency is backed by a blockchain, you can’t mint more Bitcoin out of thin air)
Blockchain can disrupt our financial systems if used wisely. Checkout this 2016 Ted Talk from Don Tapscott on its ramifications and applications. This is a good place to start if you are an absolute novice.
How the blockchain is changing money and business | Don Tapscott
(18 mins)
Another good place to understand blockchain is this podcast from Planet Money.
They take an innovative approach and talk about a made up distributed ledger system(blockchain) used to validate transactions in an American prison.
Its funny and interesting and makes you want to start your own private blockchain!
Episode 753: Blockchain Gang
(22 minutes)
Edward Snowden is an ex CIA operative, whistleblower, spy, computer scientist and a digital rights activist based out of Moscow.
Checkout this article where he explains Blockchain to his lawyer in an interview format. The casual conversational style makes the complex topic quite approachable. Check it out —
Edward Snowden Explains Blockchain to His Lawyer — and the Rest of Us
(18 minutes)
The more you read about Blockchain the more you realise that its an elementary technology that should have been part of our central systems since inception.
At least since computer code came along. Today the technology is where Machine Learning was perhaps 10 years ago, more hype than real implementations.
Once the hype dies down and the serious stakeholders get to work we should see it become a basic feature of all trust based tech systems around the world.
And Bitcoin? Well, for now, it lives to die another day!
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