Can a currency or business be truly decentralized, and thus trustless? Without the need for 3rd parties in transactions, blockchain technology is bringing us into new territory, where we no longer rely on outside sources to prove a transaction is trustworthy.
One of the first things you will learn about blockchain technology aside from its structure is that it is trying to achieve global adoption. Both it and decentralization, in general, are still in their infancy when it comes to development. Therefore, it is not wholly ready for the mass adoption it is aiming for. However, at the same time, it is still a distinct trend for the following decade.
Something else you will learn when dipping into the blockchain pool is the term ‘trustless’. Now, on the surface, it sounds like a huge drawback. This is especially true if you think about it in relation to a world that is seeking better security. Privacy is a hot topic nowadays, so why is a system that is ‘trustless’ so – for lack of a better word – trusting?
Admittedly, there are a great number of people who are guilty of describing blockchains as ‘trustless’ systems. However, as it turns out, the term is quite ambiguous, confusing, and to emphasize an earlier point, inaccurate.
Blockchains do not necessarily eliminate trust. In actuality, they minimize the mandatory amount of trust from any single actor participating in the system. They do this by way of circulating trust among different actors in the system. This is possible by utilizing an economic game that persuades actors to abide by the rules that the protocol defines.
Blockchain & Security
The blockchain is not the feature that builds security. Specifically, not when it comes to hacking and values in terms of currencies or decentralized data. It is, instead, only a buzzword. One that expresses a distributed database without the delete function. Moreover, its organization is in the form of transaction blocks.
The overall design of blockchain technology is specifically for storing pieces of information inside blocks. They are not as killer apps but instead act as a layer predominantly for empowering trustless features. These are features that really matter and also create values in this ecosystem. Take, for instance, networks like Bitcoin or Ethereum. Their trustless features create security and values and their blockchain is only the database structure for ledger organization.
The very concept of ‘trustless’ is what actively creates values in a Blockchain network. Moreover, it creates the idea to verify transactions and logic by an algorithm without any trusting entities.
What this system looks like
To better explain a truly trustless transactional system, we need to imagine a specific scenario. Imagine two individuals: Person A and Person B. Suppose that Person A gives a $20 bill to Person B. In other words, we have two people with an interest in transacting with each other changing hands directly. They are physically present, so they can easily verify the following things:
- Authenticity: The actual sender is handing the money over to the other person.
- No instance of double-spending: The money is not in any way fake and is an authentic $20 bill.
In theory, this system is flawless. However, if you take a closer look at this transactional system, you will find that it is indeed very limited. Take this into consideration: two individuals are able to trade with one another, but only when they are close in physical proximity. In order for economies to properly function at scale, a transactional system needs to do something important. That being they should allow transfers to occur with anyone in the world, regardless of the distance between them.
So, what we really want is Person A to give the $20 bill to a trusted party, who in turn gives it to Person B. The only way we can obtain this system is by having an intermediary. One who is able to simplify the transfer of value. Doing so will ensure that the actual sender is sending the money and that the money is the real deal.
In the end, we must ask the question “who acts as the wholly trustworthy intermediary?”
Centralization vs. Decentralization
Intermediaries, as we recognize them in modern transactional systems, can be an array of entities. These include banks, payment providers (ex. Paypal), remittance companies (ex. Western Union), and credit cards. In this centralized model, the bank authenticates you. What’s more, it ensures the recipient that they are receiving real money.
To put simply, unless there is a physical transfer of value, there needs to be some intermediary that we “trust”. In this sense, blockchains are quite similar.
Blockchains are indicative of a protocol that permits two individuals to transact with one another. The way in which they transact is in a peer-to-peer manner and it can be done over the Internet. By digitally transferring value from one account to another on the blockchain, you are placing your trust in the underlying blockchain system. You believe that it will enable that transfer and ensure both sender legitimacy and currency validity.
In a ‘centralized’ system, we place our trust in a single third party. We are of the belief that they will act as the intermediary, guaranteeing those two properties. Conversely, in a ‘decentralized’ system, our trust is put elsewhere. Specifically, in public-key cryptography and a ‘consensus mechanism’ that will allow us to figure out the truth.
Public key cryptography
A ‘public key’ is a cryptographic code and is what allows a user to receive cryptocurrencies into their account. Public key cryptography (alternatively asymmetrical cryptography) utilizes the following:
- A set of public keys that are visible to anyone
- A set of private keys that are only visible to the owner and no one else
The ‘private key’ is a fairly complex form of cryptography. When it comes down to it, this key is a type of “ticket” that allows users to spend their coins. It produces a ‘digital signature’ for each blockchain transaction that a user sends out. The signature is what guarantees authenticity, and it is able to by doing these two things:
- Provide confirmation that the transaction is coming directly from the user
- Offer protection against any alterations of the transaction as soon as it has been issued
It is important to keep in mind that changing the transaction message will result in a verification failure.
At this point, we now know that public-key cryptography assists in authenticating users within a peer-to-peer system. However, to ensure that there is no double-spending, we need to monitor who has what. This way, we are able to know whether the digital money someone is sending is real or fake. This is where the ‘consensus system’ – which is what allows us to preserve a digitally shared truth – comes into play.
Blockchains contain a shared ledger that provides us with the full truth concerning the overall state of the system. It employs the use of mathematics, economics, and game theory for incentivizing all parties in the system. By doing this, it will help them reach a consensus. In other words, it will help them come to an agreement on a single state of this ledger.
For example, the Bitcoin protocol has its own consensus mechanism. This is what is referred to as ‘proof-of-work’ and it holds the system together. This is a system that requires a feasible amount of effort to properly avert malicious uses of computing power. To settle a transaction between two consumers, the algorithm requires a set of nodes (‘miners’). These nodes compete with one another to verify transactions by solving a complex algorithmic problem. Basically, Bitcoin “economically incentivizes” miners to purchase and utilize computing power for the purpose of solving complex problems. These economic incentives often include:
- Miners will earn a transaction fee that users pay for conducting a transaction
- Miners will be able to earn new bitcoins for successfully being able to solve the puzzle
It is because of these economic incentives that miners are continuously watching the network. Doing so allows them to wholly gather a new assortment of transactions to fit into a new “block.” Next, they use their computing resources to figure out the complex algorithm in order to prove – in a way – that they did work.
The first miner that is able to solve the algorithm adds the proof and the new block to the blockchain. Moreover, they will broadcast it to the network. At that point, everyone else within the network will sync the latest blockchain. This is mainly because it is a “truth” that everyone believes in.
Obviously, even if the machine consensus is functioning perfectly, it is difficult to guarantee a 100% probability of achieving consensus. Specifically, on an array of other important aspects that are mandatory to sustain trust within the network.
For instance, suppose an underlying network needs an upgrade, enhancement, or repair. In this case, we need to trust that the network and all its constituents can manage the changes in an appropriate manner. At times like these, it is a coordination effort among constituents. Or perhaps – as Preethi Kasireddy of Medium puts it – a “social consensus.”
Let’s use a blockchain that requires an alteration (ex. better transaction logs) as an example. In this particular case, we need a governance mechanism that organizes the interests of all participating parties (users, developers, investors, etc.) for determining the ideal solution. Alternatively, let’s assume that there is a controversy on the best path forward, like a contentious fork. With this, a community will need to create a consensus on what comes next.
If there is a failure to reach an agreement, then the network will fork. Moreover, people will have no choice but to choose one side instead of everyone believing in a joint truth. Users will wind up losing faith in the system. This is primarily because they are unable to logically determine which chain was “valid.”
There are an array of unique models for blockchain governance. In addition, it continues to be an area of active research within the community. Blockchain governance, as a whole, is quite a tricky issue. Furthermore, finding a balance between control that is centralized and distributed will be imperative to system trust maintenance.
Trustless: 3 critical features
To successfully reach the trustless goal and develop state-of-the-art blockchain networks, there are three important (and mandatory) features. They are each imperative to the exclusion of entities and the eventual achievement of a trustless validation.
- Anonymous validators
- A decentralized authority
With these features, it is possible to create a trustless system in a blockchain network. Without even one of them, a network is nothing more than a hackable architecture. Overall, it is not worth much in value. This is especially true when you apply it to network costs, developer costs, and security.
1 – Anonymous validators
Validators are those who hold the computational power, maintain the distributed ledger, and validate the security of blocks. When it comes to a trustless network, validators are anonymous entities. The more validators that a network has, the more computational power is ultimately shared. What’s more, it makes the network better than it ever was.
Assuming that you create a network with specifically chosen validators or one validator, this is not exactly a trustless network. This is due to the fact that you place your trust in entities instead of an actual algorithm.
2 – Consensus
As you may recall, blockchains contain a ledger that utilizes various factors to help come to a consensus. The ‘proof’ is the algorithm that validators (or miners) use as a means to officially validate blocks. These particular algorithms have a design that guarantees as much as they can the decentralized power of validators. They do this so that they can make sure that a validator cannot manipulate the ledger or a single transaction.
3 – A decentralized authority
Some of the more valuable blockchain networks are decentralized. This element is especially prominent when it comes to decision-making, events, and updates of any kind. Generally speaking, this is an additional latent bonus towards contributing to reaching trustless validation.
In the field of technology, upgrades are a crucial component in functionality, not to mention evolution. This is especially true in a blockchain network. If a network is centralized in the way it is built how it upgrades, this could make other features useless. This is because, should an entity be able to decide how to update the network, they could rule the entire network. Now, if a decentralized application (DApp) runs into this kind of network, it is trusting the entity instead of a trustless validation.