Bitcoin and blockchain | The Trust Machine

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The problem of trust

Trust is in the root of human relations. It’s the cement that allows individuals to collaborate and, together, accomplish goals that would be individually unfathomable. Grossly oversimplifying, trust can be seen as one of the pillars of a complex system of transactions that has enabled our species to, from scattered nomadic groups, become a global, interconnected, space-faring civilisation.

While societies were nothing more than a few dozen people linked mostly by family ties, trusting the other party in a transaction wasn’t a big deal. But after the agricultural revolution, the appearance of the first cities and commercial civilisations, relationships surpassed the tribal sphere and thus began the issues with trust.

Should I trust this guy? I mean, his hand was kind of wet, so...

Commerce has opened a cornucopia of possibilities and unlocked previously unreachable value, giving rise to markets. However, one of the biggest obstacles to the growth of these societies (and a recurring headache that only increased with gains in scale) is how to organise a group of people that don’t know each other – and therefore have no reason to trust one another.

How to make sure that each part will honour an agreement? How to prove that the other party is who he claims to be? How to guarantee that, say, a plot of land that is yours today won’t be appropriated by someone tomorrow? Such risks bring friction into relations and discourage not only economic development, but all kinds of social collaboration.

Defining Technology 

Luckily, we’re creative and versatile apes, adept to the creation and use of technology to solve our problems.

To understand the relationship between technology and trust, one should analyse the concept of technology in a much broader sense, beyond gadgets and electronic devices, but as “a collection of tools, techniques, methods, skills and processes used (...) in the accomplishment of objectives”, and realise that the use of such tools are indissociable from human experience.

That is to say: it’s not only about refrigerators, rockets or iPhones, but also processual and social innovations such as language, accounting, institutions in general (governments, legal systems, notaries, banks, etc), each and every creation that ultimately increases the reach of the human civilisation and makes previously inaccessible goals possible.

Queue to the DMV
Although it pains us to call this a technology

Technological cycles

Every technology in existence is iterated, combined and optimised to exhaustion while new technologies are constantly being developed. The motion of innovation tends to feed back into itself and to accelerate exponentially.

Once a mature technology reaches its productive limit, a whole family of new ones takes its place and productivity growth resumes. Those that offer competitive advantages are adopted, while the least efficient are discarded in a mechanism analogous to natural selection.

Steam engines gave way to internal combustion, that today seem to be losing steam in the race against renewable energy. VHS was succeeded by DVD, who lost its hegemony to internet streaming and SSD storage. City-states were absorbed by empires; feudal monarchies were replaced by representative democracies – in every sphere, mankind applies new technology to achieve common goals and expand its horizons. And in rare moments, a group of new technologies brings about such a wide-reaching disruption of the current way of life that it tears through the social fabric itself.

None of these transitions is quick or painless; economic and cultural shockwaves reverberate for long periods while new ideas replace the old ones. Established systems have very little incentive to abandon old practices, and the friction in the transition sometimes may cause a lot more than a mere dissatisfaction.

The centralisation of trust

But let’s go back to trust.

For a good part of History, the solution to lower uncertainty in a transaction between two parties necessarily involved a third one, whose only role was to endorse the participants and ensure each one would keep their promise. A State that issues identity cards, a court that enforces contracts or a bank that guarantees that the funds required to a transaction actually exist – all of them are gears in a “trust machine” to whom parties choose to delegate risks (sometimes compulsorily) and receive, in exchange, a varying degree of certainty.

For a long time these institutions – these technologies – have carried out their duties and served as a foundation upon which progressively bigger and more ambitious endeavours could accelerate the development of societies throughout the planet. Even with some measure of friction, inefficiency and a significant cost, when compared to the alternative – the lack of trust –, intermediation is undoubtedly much more desirable.

But no system is static, and today this trust machine begins to show signs of wear and tear. The first generations of digital technologies have exponentially accelerated the flow of transactions, but, despite commendable efforts, did not manage to offer a trustworthy alternative to the bottleneck of centralised intermediaries. The resulting extreme concentration of power has potentiated the effects of corruption and inefficiency, perverting the incentives system that kept the parties’ interests aligned and, most ironically, spread distrust amidst – and ultimately alienation of – the system’s users.

Some institutions, such as banks, have reached unfathomable dimensions and become “too big to fail” without updating their services to the new wants and needs of users. Others, like governments, simply couldn’t keep up with the rhythm of changes, resulting in a bureaucratic bloat that’s incapable of dealing with its new and growing demands. Justifying their own existence seems to have become, in some cases, their only objective. It’s not by mere chance that banks and governments are among the least trusted institutions to the public opinion, and that this trust has, on average, declined in the last decades.

Some symptoms of this wear and tear are quite perceptible, like the global financial crisis of 2008 and the continuous, worldwide erosion of trust in governments. Almost two decades into the new millennium, some institutions are simply incapable of delivering satisfactory solutions to society’s real problems. In the words of the social scientist Pia Mancini, “we are 21st century citizens doing our best to interact with institutions developed in the 19th century, that are based on information technology of the 14th century.” The math clearly doesn’t seem to add up.

Blockchain and decentralisation

The question is, to whom should we delegate our trust? Until a short while ago, there was no viable alternative. However, in late 2008, an obscure paper describing an electronic currency that could be securely traded without a central intermediary has changed that.

And thus Bitcoin was born, a revolutionary combination of technologies that, for the first time, allowed two parties to digitally exchange value among themselves without the need for a trusted-third – instead of a bank, an algorithm ensured the existence of funds and the validity of the transaction, duly verified and registered simultaneously by all participants in the network.

One of the biggest innovations of Bitcoin is the architecture of its bookkeeping and validation layer, called Blockchain: a kind of ledger that is simultaneously maintained by all its users and freely auditable, where all the transactions are registered in an ever-growing chain of blocks. Despite this transparency, cryptography confers relative anonymity to the parties, at the same time mathematically guaranteeing the security and immutability of records.

Fundamentally, however, Blockchain’s biggest promise is perhaps the decentralisation of trust and the potential this has: optimisation and reduction of friction with more direct, P2P transactions; the security of a robust network; the empowerment of individuals with the opportunity of owning and controlling their own data - and that’s just scratching the surface.

A comprehensive list of all its possible applications is beyond the scope of this article, but it’s worth noticing that Blockchain is only the first in a series of technologies that may allow at the same time the decentralisation and the automation of processes that until now belonged exclusively to the realm of intermediaries (not always known to be transparent or honest) - and that even if it never gets to be fully implemented, its pioneering potential should considerably impact the way trust is organised from here on.

2008 financial crisis graph
2008 subprime lending: yeah right, Bitcoin was THE bubble. 

The future of decentralisation

This doesn’t mean that Blockchain is a silver bullet to all of the world’s problems or that we should immediately decentralise everything. Throughout history, there seems to be an alternation in the balance between centralisation and decentralisation. Some processes work better in a centralised way, while others could gain a lot by being decentralised. There are no definite formulas – everything depends on social context, incentives systems, and available technological platforms.

If people today feel alienated from social processes and antagonised by the very institutions that should serve them, so maybe it’s the right time to review the latter’s role in society. No institution should be too big to fail and nothing justifies the maintenance of inefficient systems that suck more value than they offer back to their users.

Technologies are essentially agnostic, and may be used as instruments for empowerment and freedom as much as devices for coercion and control. Like any infant innovation, Blockchain has as great a potential as it has practical challenges and associated risks. Despite all this, Blockchain’s promise alone is enough to bring the industry of trust one step closer to the 21st century – even if, like all promises, this one will also depend on the choices of its users so that this trust can be justified.

Check out these articles to learn more about the history behind Bitcoin, and Cloudbet's investigation of what challenges lie ahead for the currency.

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Cloudbet Blog

Cloudbet Blog

Cloudbet blog

Posted on 2018-10-17

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