Developing blockchain solutions since before it was cool and I'm in Auckland, NZ
Crypto technologies are often referred to as “trustless.” While often cited as one of their defining features, the label can actually be quite confusing. How can something that’s “trustless” be used for activities that typically require trust?
Blockchain is already starting to change the way we transact and do business by opening up the exciting new possibility of a trustless economy where blockchain apps and services are widely used to facilitate transactions.
For crypto to have a real chance of being accepted in the mainstream, it’s important for users to understand the technology’s nuances, starting with the idea of trust.
The way the word “trust” is used in blockchain is similar to the way it’s used in the world of finance. Financially, to trust means to place confidence in a third party to manage assets or properties on one’s behalf.
Take the case of trust funds. If you’re setting up a trust fund for your children, you can “trust” a bank to manage assets on your behalf in case anything untoward happens to you until your beneficiaries come of age.
As for blockchain, it is often called “trustless” because it takes away the need for third parties to be involved in transactions. For example, Bitcoin payments can be directly sent from one user’s wallet to another. The tokens will be credited to the receiver’s account without being routed through an external system or intermediary.
Bitcoin is also a decentralized system so the transfer of funds is handled entirely by transparent computer code that runs on a peer-to-peer network. This is unlike other digital payments where transacting parties have to trust the payments company to manage the transfer of money through its system.
So, if we don’t have to put trust in third parties anymore because of blockchain, does this mean that we can now readily enter agreements and transactions?
It is important to keep in mind that, in reality, there will always be the human element to consider. We may be able to rely on blockchain to securely facilitate transactions but this doesn’t mean that we can readily trust the people that we transact with. Fraud continues to be a concern for digital systems just like all other systems, and it’s always important to be cautious.
Bitcoin users can be confident that the network would be able to process sending and receiving tokens without any issues. However, in an actual use case of, say, an online retail transaction, the system can’t actually ensure that the product would be delivered to the buyer.
Crypto’s pseudonymity also makes it challenging to identify parties beyond their wallet addresses. For users to be more confident in using such systems, there should be added mechanisms that would keep other users in check. Payment network and crypto development platform COTI for example, does this by using its Trustchain protocol which keeps the network safe from potential manipulation and fraud.
COTI CTO Dr. Nir Haloani explains the protocol further:
“We’ve developed double spend prevention (DSP) nodes that are tasked with identifying double spending attempts to keep the COTI network fraud-resistant. Only participants with high trust scores can create a DSP node, and, if a node is ever found to be acting maliciously by others, it will lose all trust, be blocked and the owner’s deposit will be seized.”
The database takes into account users’ identities and transaction histories to assign trust scores. Those with high trust scores could use the system for free. Those with lower scores have to pay transaction fees. This rewards-and-punishment mechanism built into the platform’s rules encourages users to behave properly. COTI also features an arbitration system that offers an added layer of protection for users so that disputes can be resolved fairly.
These kinds of mechanisms are now even more critical since blockchain is gaining traction in areas beyond finance. Fortunately, various blockchain-based services are designed to promote fairness on their respective platforms.
For example, blockchain-based jobs platform Ethlance seeks to provide freelancers and employers better means by which to do business. The platform uses blockchain to provide an immutable and transparent record of feedback given to parties. Users will be drawn to work with freelancers who have positive reviews. Freelancers can also check the employers’ wallets to see if these have enough to funds to compensate them for their work.
Decentralized marketplaces seek to provide less restrictive ways for people to buy and sell online. OpenBazaar, a decentralized ecommerce platform, enables users to freely create their own stores and sell both physical and digital goods. The platform doesn’t charge any listing or service fee. Payments are settled through cryptocurrencies so no other intermediaries have to be involved in transactions.
Personal auctions platform Listia also recently integrated the Ink Protocol to promote good faith in transactions. The blockchain protocol allows user reputation scores to be transferable across various marketplaces. This way, buyers and sellers could easily prove their reputation to parties they transact with online.
The wider availability and adoption of these kinds of platforms could help establish a truly trustless economy.
Blockchain does seem capable of providing secure mechanisms for people to transact. Various blockchain projects should be able to use these functionalities to build platforms that inspire trust and confidence in their users.
Still, trust can be tricky to navigate since the human element will always have to be considered. Besides, these platforms are built by people so it’s only natural for errors and lapses to exist.
If you’re keen on participating in this emerging trustless economy, you should do your due diligence first. Always check if the platform you plan to use features the following:
· Transparency — Discloses all rules and allows auditing of transaction records
· Decentralization — Uses a public blockchain platform to store data and run its smart contracts
· Identity — Checks the legitimacy of participants through identity platform integrations or know-your-customer (KYC)
· Incentives — Provides fair incentives to all participants using transparent algorithms
· Active Support — Has an active development team or community that improves on the platform and performs fixes and updates
Despite some concerns, developments in the space look promising with many of issues in the space seemingly temporary ones, the technology will be able to address them as it matures.