Trust Is the Heart of the Blockchain

What was the original intention for the blockchain and Bitcoin?

What does Bitcoin founder Satoshi Nakomoto’s original white paper tell us about it?

The core idea that jumps out at you in Satoshi’s white paper is about trust. How do you create trust between people who want to send each other payments?

The solution, Satoshi writes, is “cryptographic proof” rather than trust. Cryptography is simply the art and science of creating a code, a code that can’t be hacked or changed by someone else.

Satoshi’s insight was that the way to create trust between two people who want to send/receive payments is you don’t rely on trust between them. Instead, rely on cryptography. That’s why some people say the blockchain is a “trustless” system, but what they really mean is it’s “trustful,” completely trustworthy.

Satoshi writes in the white paper:

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.

In the absence of something novel to create trust like cryptography, you need to rely on a “trusted third party.” Why is that an issue? Costs.

There is the obvious cost of fees charged by the third party, especially when they’re not being fair or trustworthy (looking at you Wells Fargo and your $35 fees). But it’s deeper than that. It’s what the fees incent and don’t incent in the system.

Fees and minimum transaction amounts hinder what Satoshi calls “small casual transactions” between people. Think of all the value that’s not creating markets and transactions because of this loss.

And not as obviously, it causes people to be somewhat suspicious of each other around the edges of the third party payment system because in that system (which isn’t using cryptography) some payments are reversed. Fraud takes place in today’s payment system and so people are naturally suspicious at some level of anyone they transact with.

What Satoshi proposed, then, is a system that automatically and every time creates an irreversible transaction. It eliminates the possibility of both blatant fraud and what he called the “double-spending problem,” which is fraudulently spending digital currency more than once.

His proposal, simply put, was a network that would essentially run itself (i.e., no third party) by generating cryptographic proof of every Bitcoin payment (using time stamps and digital signatures from individuals), then, with the help of an entity called “miners,” who are incented to extend and secure the blockchain, group these payments together in a “block,” followed by another block, then another, to create an irreversible, irrefutable “blockchain.”

What’s also striking is that even though you need so called miners to create blocks of transactions that all the other miners will agree is the next block in the chain (accomplished through a type of game they play), miners can fall in an out of the system at will. No particular miner is necessary for the system to function. Either, they believe the incentive to do their job is sufficient or they don’t. It’s brilliant.

“The network,” as Satoshi writes in the conclusion, “is robust in its unstructured simplicity.”

Read his white paper if you have a minute. It’s only eight pages and holds the basic blueprint for the next Internet and financial system that’s happening right now.

(Photo source)

Defining Ethereum

How’s this for a simple definition of Ethereum in today’s New York Times:

“Ethereum is a global computing network operating according to rules defined by Ethereum software.”

Maybe that’s a little too simple.

But the article follows that up with a description giving you a better feel for it, which is “a global smartphone that can be programmed to operate according to the apps built on top of it.”

If you want to jump into the deep end of the genesis of Ethereum, I highly recommend this Wired piece titled “The Uncanny Mind that Built Ethereum,” profiling its founder Vitalk Buterin.

It has a really straightforward description of the blockchain and Bitcoin, which was to remove third parties from both the creation and transfer of currency. This was accomplished by recording payments (Bitcoin) on a new type of open ledger (blockchain).

The success of the Bitcoin blockchain made it obvious to Vitalik Buterin, and others, that you could use the blockchain to facilitate transactions and complex agreegments for anything (e.g., deeds to houses).

He realized the right type of blockchain network “could deliver every imaginable digital service, right out of the box,” and this idea eventually became Ethereum.

Vitalik recently spoke at Disrupt SF 2017 and this is how he described Ethereum:

Where Ethereum comes from is basically you take the idea of crypto economics and the kinds of economic incentives that keeps things like bitcoin going to create decentralized networks with memory for a whole bunch of applications.

In other words, Ethereum uses incentives in a decentralized network with shared memory to run diverse applications. Pretty simple.

(Photo: source)