Blockchain and Trust

From the WSJ:

Blockchain overcomes the problem of lack of trust, thereby eliminating the need for middlemen. The concept relies on math and technology that are complex and often unintelligible to the uninitiated. Here, it is sufficient to appreciate only a few elements: A blockchain is effectively an interconnected, distributed ledger. New transactions are added to the chain and then, once cryptographically locked, cannot be altered. The result is a system of records that is secure and auditable but controlled by no central authority. When a bitcoin user wants to transfer funds, that transaction is added to the blockchain and becomes a permanent part of the shared record.

Blockchains can reduce wasteful byproducts of distrust. Rather than paying intermediaries, the technology allows users to do business with each other by trusting in a vast collective to verify transactions. That’s more important than ever, as people buy and sell online with unknowable strangers.

Consider the repercussions if blockchain technology becomes widely adopted: Financially disenfranchised people, those without access to banks or credit cards, will be able to buy and sell online. Information on deeds, titles, professional credentials and even simple identification will be easily obtainable, transparent, reliable and free from error. The costs associated with many transactions will fall as middleman are cut out and cumbersome government regulation is avoided.

The transaction cost economics of that is explained here.

My RMIT colleagues Chris Berg, Jason Potts and I explain why this is important here (emphasis original):

But the blockchain allows us to exchange differently. A better metaphor for the blockchain is the invention of mechanical time.  Mechanical time opened up entirely new categories of economic organisation that had until then been not just impossible, but unimaginable.

One of the criticisms of blockchain is the amount of electricity that is employed in the mining process. That, however, is simply a realisation of the cost of trust that is imposed on the economy in traditional transactions. I expect to see innovation in that space at some point.

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16 Responses to Blockchain and Trust

  1. Rusty of Qld

    Would a determined government agency with the resources available to it be able to get into the system, blockchain, currency etc and wreak havoc?

  2. Tel

    Yes and no.

    If you buy on VISA you get some opportunity to ring up and say the merchant failed to deliver therefore you want to claw back the transaction. Same with credit card fraud, you get paid back (and they rip the merchant). So that’s one sort of trust.

    Paypal have different arrangements but they do have a dispute and settlement process, I’m not going to stick my neck out and say whether it’s better or worse than VISA but as a “middleman” they do attempt to maintain the interests of both sides of the transaction.

    Bitcoin provides a guaranteed transfer of ownership, and there’s no claw back, no phone number to ring, and no arbitration. It transfers, end of story. That’s a different sort of trust. The problem has not at any stage been “overcome” it simply imposes an emphasis. Bitcoin is great for merchants, somewhat worse for consumer protection.

    I should point out that in concept a crypto-currency can offer option escrow features where the parties can select an arbitration service that suits their needs… but then you pay additional transaction costs (and with capital gain in Bitcoin the transaction costs are now pretty serious, but not all crypto-currency necessarily has that problem). Also, I don’t believe there are any successful examples of anyone getting this to work. They have been talking about it for a while.

  3. rebel with cause

    Stellar Lumens and Ripple are two examples of cryptocurrency that do not use mining. Sellar for example launched with 100 billion lumens and has fixed growth in money supply of 1% each year.

  4. JohnA

    Blockchain overcomes the problem of lack of trust, thereby eliminating the need for middlemen. The concept relies on math and technology that are complex and often unintelligible to the uninitiated.

    So the trust is now required to be placed in a different technology.

    There will still be middlemen to assess the reliability of the software, just as there were middlemen (horologists and engineers) who worked to ensure the reliability of timepieces.

  5. RobK

    One of the criticisms of blockchain is the amount of electricity that is employed in the mining process. That, however, is simply a realisation of the cost of trust that is imposed on the economy in traditional transactions. I expect to see innovation in that space at some point.

    I have reservations not so much about the electricity consumption but the data storage and transmission costs. Granted these are incrementally small but from what I gather there is an enormous amount of baggage transmitted with each transaction in a timely manner to many redundant sites in order to establish this verification according to house rule algorithms, so exponentially the data transmission and storage burden grows with increased usage.
    On the matter of security: I believe security is a time dependent function.
    The weakest link in any secure system is the human element. I do believe, from what I’ve read of this blockchain scheme that the system is likely to be able to be compromised in a manner that wouldn’t necessarily be detected (it would take a better trained mind than mine to do so). So to some extent at least, the trust is that the amount is transacted, not so much that there’s no chance of being fleeced.

  6. sdfc

    Bitcoin is pretty much a speculative asset rather than a currency.

  7. Tel

    Bitcoin is pretty much a speculative asset rather than a currency.

    It is now… in much the same way as a Model-T Ford is more of a collector’s item than a car, but long ago it was seen only as a car.

    Point is that we all saw Bitcoin as proof of concept, so nothing can go back to being exactly like it was before. I’m not recommending buying Bitcoin, I think it’s a stupid bubble, but I do suggest that this concept will go a long way, very likely in unexpected directions.

  8. sdfc

    I don’t know anything about the technology but bitcoin is useless as a currency. I don’t know what to make of it. I just wish I’d bought some in 2011 when it was about USD1.

  9. RobK

    …”but I do suggest that this concept will go a long way, very likely in unexpected directions.


    I agree with that. There will be many uses and developments.

  10. ACTOldFart

    Is Warren Buffett investing in any of this stuff? I very much take his point that if you can’t understand what they are selling, or how they make their money, don’t go there.

  11. Roger W

    “The concept relies on math and technology that are complex and often unintelligible to the uninitiated.”

    So now we have to trust the sorts of people (not necessarily the same people, but who knows?) who run organisations like Google, Facebook, Apple and Microsoft.
    The sorts of people who have totally corrupted science in relation to Global Warming and who knows what else.
    I’d rather trust the Big Banks!

  12. max

    I have a close relative working with a couple of partners in a business unrelated to bitcoin.

    One of the partners is Chinese, and an astute hard head.

    He described how an acqaintance – a young guy – set up a couple of computers in his spare room a few months back and began bitcoin mining. He struck it lucky, and in the course of three months made $12 million.

    He has just bought a house in Toorak for his mother.

    You can see how this becomes a mania. Fear of missing out.

  13. Kneel

    “I’d rather trust the Big Banks!”

    This sounds very much like any number of technophobe arguments against the “new” – eg, electronic fuel injection on cars. The banks are HR Holdens – they do what has to be done, but by todays standards, they are unsafe, inefficient, slow, uncomfotable etc. Bitcoin is a new Commodore: much safer, more efficient, faster and more comfortable, all at the same time. It may not last as long, it may not be as comfortingly known from years of use, but at the end of the day, it also does what you need, only better. Power steering, climate controlled air conditioning, power windows, power brakes, electric seats, good sound system, 15,000 km service interval – none of these are required to get you where you are going, but most consider them worth their marginal cost and most would be appalled to find a new car didn’t have these things.
    It (crypto-currencies in general and Bitcoin in particular) will settle out as more people realise it can be trusted and find the limitations, caveats etc. Banks will live on, but as this tech spreads, they will find it harder and harder to skim their profits from the punters – they’ll morph into finance companies. You’ll know it is done when you can get your centrelink payment via a crypto-currency transaction.

  14. old bloke

    Blockchain overcomes the problem of lack of trust, thereby eliminating the need for middlemen.

    Blockchain does require trust, trust in the infrastructure that supports the distributed ledger, i.e., trust in the Internet.

    The infrastructure that supports the Internet, the undersea cables, the distributed data centres, the various telco’s switching gear etc., haven’t been tested in a global war. In the event of a major global war we can expect that diverse nations will shut down all overseas telecommunication gateways for security reasons, and that hostile nations will target the large data centres in their enemy’s territory to inflict the maximum damage to their enemy’s commerce.

    In such an event, the Internet will be just a memory. No Internet, no distributed ledger, no blockchain.

  15. Colin Suttie

    “a young guy – set up a couple of computers in his spare room a few months back and began bitcoin mining. He struck it lucky, and in the course of three months made $12 million.”

    This doesn’t pass the sniff test. An Antminer S9 working 24/7 produces about US$1000/month of bitcoin at today’s prices, more like US$300/month before the current run-up. It draws ~1300W, which is a significant load, and not cheap if you’re paying for power in Australia (hence many of them are located in places such as Iceland, with cheap / almost-free power). Currently you can make about US$800/month per machine in Australia. These machines are rare, cost about AUD$6000 at the moment if you can get one, and can do nothing else except mine bitcoin. There’s really nothing else that will mine bitcoin in any profitable way in Australia.

    Your acquaintance’s acquaintance may well have made $12m from bitcoin in 3 months, but it would have been from trading with insane leverage – hardly any of it would have been made from mining with a couple of ASICs in a back room in Australia.

  16. Isnt there a logical inconsistency here: “Financially disenfranchised people, those without access to banks or credit cards, will be able to buy and sell online.”

    I can’t imagine someone who doesn’t have access to banks or a credit card having a computer and having the financial savvy to participate in a sophisticated model such as bitcoin

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