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We Need To Talk About Bitcoin’s Trust Issues

We need to talk about Bitcoin’s trust issues

I recently tackled Satoshi Nakamoto’s original Bitcoin text, which has mythical status amongst devotees of shared ledger technology.  It is a paragon of clarity on what Bitcoin is really all about.  According to its spiritual father, the purpose of Bitcoin is to remove trust from payments. Trust, it turns out, is a bad thing.

Until Bitcoin – for any payment form other than cash – each party needed a bank to prevent fraud and double spending. They are the trusted entities that assure a payee that the system will work, and that real money is coming their way.

Nakamoto says:

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Later theorists have identified other possible benefits for the technology Bitcoin is built on.

  • Libertarians see in digital currencies the possibility of salvation from fiat currency and fractional reserve banking, which they regard as the root of all economic evil.  I expect your attitude to this depends very much on your political views, but I think we can agree it is not a mainstream attitude.
  • Proponents suggest that a public shared ledger could increase the transparency of the financial system to improve relationships between a customer and their financial institution.
  • Shared ledger technology distributes the whole ledger with everyone. If a crisis occurs and a party loses their records, the rest of the network can assist with recovery.
  • Recent incarnations of shared ledgers seem to offer the exciting possibility of building complex legal obligations into executable code allowing greater flexibility & efficiency within transactions through the “smart contracts” concept.

But originally, it was all about avoiding trust.  This is worth delving into a little.  Is trust in payments really a bad thing?  Does it only exist to ensure process reliability?

My current speculation is that for at least some asset classes in some transactional networks, a shared ledger approach utilising smart contracts may well be more efficient, in some cases massively so.  But it’s hard to be definitive, and I don’t believe it’s a magic wand. A lot of money and effort is being poured into proving up the possibilities, so we will know soon enough.  I strongly suspect that it will come down to a question of the assets you want to record and trade, the community that wants to do that, and the frequency and complexity of the trading activity.

Can we really do without trust in payments and what might that look like?  I’d like to explore these issues some more in future blogs.

Coming Up:

Part 2: Why Shared Ledger Technology won’t free us from human fallibility. Does a shared ledger really remove trust from the equation?
Part 3: The ‘Snapshot Problem’. How does a shared ledger react to a changing environment?
Part 4: Conclusion: the irony of bitcoin and the future of shared ledger technology

 

Chris Hamilton

Chris Hamilton

Mr Chris Hamilton was the Chief Executive Officer of APCA from January 2006 to May 2016.

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