The "Trust Problem" - What Blockchain Exists to Solve

The “Trust Problem” and Skepticism Factors The foundations of blockchain were first splattered in digital ink onto a screen in 1977 by David L. Chaum in his P.H.D. dissertation paper “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.” A humble title which says a couple of critical things. First, the original value of blockchain is centered around trust between groups of individuals who have no way of trusting each other. In other words, blockchain exists to solve the problem of trust between mutually distrustful parties. The apps and businesses that are using blockchain are using the technology to solve the problem of trust — it is the conquering of the “Trust Problem” that makes blockchain valuable. Every use case (the way the technology is used) is built upon the following simple set of questions. What is not trusted? How does blockchain create trust in the situation that would not be possible without a blockchain?The original ideators built blockchain off of the understanding humanity lacked a system that was trustless, decentralized, and censorship resistant. These ideas are revolutionary, and the ideators that created the possibility of such a technology did it on the back of mathematics, game theory, and software fully well knowing their work could change society. As David Chaum noted in his introduction for the original piece of research literature that would lead to blockchain: “Manuel Blum was around a lot that summer, and he and I talked. He maintained that one should never try to predict the effects of ones actions on society. It was the rejection of this principle which lead to the present work.” Little did Chaum know just how much that paper would change the world. Talking to various investors, professors, and technology enthusiasts (many of are whom are hesitant about cryptocurrency and blockchain) have led me to many intriguing conversations. Spectator investors who have long been entrenched in traditional investments are consistently reluctant about cryptocurrency. I’ve been able to narrow down these “Skepticism Factors” (as I like to call them) to 3 problems: Volatility, Trust, and Tangibility. Investments that are built on products in flux — without a firm place in society — are volatile. Cars are a stable part of society; we will always need to get from point A to point B in some capacity. A car’s valuation typically doesn’t change from $100,000 to $5,000 in a couple of days. How valuable any given car is relatively mapped out. Housing and shelter will always play a part in human existence. Probably McDonalds too. Because lets be honest, cheap quick food isn’t disappearing anytime soon. These examples are all mapped out “stable” investments — the revenue streams are fairly easy for investors to track. Blockchain technology (which enables cryptocurrency) is not so. We are in the stage of unknown unknowns when it comes to adoption and integration. The cryptocurrency market also lacks liquidity. This makes cryptocurrency as an investment speculative, risky, and volatile. But just because an emerging technology and asset class justifiably contains volatility within price discovery does not detract from the legitimacy of the innovation in progress. It merely adjusts the expected return of the investment. The irony of the 2nd problem (trust) is that blockchain exists to solve this exact problem. For as long as humanity has been around, third parties have existed to facilitate transactions and the execution of contracts. Real estate escrows, debt collection agencies, attorneys, landscaping companies, marketing agencies. All of these require trust. Often, this trust is quietly misplaced and exploited. What if there was an alternative to trusting people? A perfectly neutral party that could always be trusted? That is what blockchain enables — mathematics running monetary policies, programs executing transactions, and contracts enforced digitally. All without needing to trust a human party. Trustless trust. Thus, I was left to grapple with “tangibility” as the indescribable problem many high caliber investors — potentially including you the reader — have with cryptocurrency. When I asked a retired Finance professor why he was so pessimistic about the future of cryptocurrency as an asset class and product he immediately looked uneasy. Perhaps there was even a trace of disgust in their voice: “You can’t touch it. There seems to be a lot of hand-waving. This whole cryptocurrency thing… and blockchain is just not tangible.”Lack of tangibility came up interview after interview until it could be ignored no longer. Some of these people were modern individuals, children of the digital era — how could they be so obtuse about wanting the product to be tangible?In the middle of the summer of 2018 I set out for a 10 mile run, and I had set my mind to this question. Running often produces a meditative state where everything seems to quiet down. Its my favorite past time and problem solving tool (a painful one at that). As I passed by a small pond, I spotted a swan standing perfectly still. I kept running — I’m not one to slow down for anything. An oncoming car drove by me and grabbed my attention for a couple of seconds. I glanced back at the pond. The swan was gone. It felt magical. I knew that swan was real. It had to have been. I trusted my eyes. I trusted what I saw. Trust. Trust is what made that mysterious swan feel tangible. In many ways, I would argue trust itself is an attribute of tangibility. If we see something in front of our eyes, we move through space trusting that the information we receive is true. Anyone who has used VR before can relate to the confusion of this fact suddenly not being true. The verification of reality no longer matching the information from your own eyes is chaotic and disorienting. Thus it would seem that trust is the step between tangibility and verification. If you’ve ever made an online order before, when you put your “card” number in and commit a transaction, you trust the product will eventually end up on your doorstep. I would imagine the first time individuals made online orders they didn’t trust the product would arrive. Thus, the original people who made online orders took a risk, and were eventually rewarded by a product arriving (verification). The more a user purchases online, the more we take the transaction itself as something tangible. If you make an amazon order, and you click on the “add to cart” and “purchase” a 21st century user would say the entire exchange feels “tangible”. Perhaps this is because there are a series of mouse clicks — regardless, the outcome builds trust which eventually converts into a feeling of tangibility. Digital banking is not tangible. You cannot touch a transaction because a transaction is a verb. Yet, we take leaps of faith everyday when we swipe our card here and there. The result of the swipe is tangible and therefore the transaction is tangible. The 21st century economy of transactions will be invisible and pervasive. If you don’t deny digital banking as being tangible, then don’t be contradictory and claim decentralized ledger technology (blockchain) and cryptocurrency are “not tangible”. You simply trust one and not the other.Thus, anyone who felt cryptocurrency is not tangible (such as our retired Finance professor mentioned earlier) I posed the following question: “Have you transacted on any blockchain before using cryptocurrency?” The inevitable answer was “No.” As someone who has transacted over 500 times on a variety of blockchains, one of my goals for this book is to get you to experiment and use cryptocurrency — it is one of the quickest ways to understand the breadth, magic, and possibility this emerging technology is capable of achieving. Centralization vs Decentralization What are the systems you trust today in the world? At this very moment, how much does the world know about you? Do you trust the companies and apps you use? How much say do you get in your control over your own assets and data? If the bank decided today your bank account has $0 in it, what would you do? If facebook decided to sell all of your profile information and location data to the government, or if your phone company traded your every day conversations to a 3rd party, what could you possibly do to stop this? What control do you truly have? You are not at the top of the hierarchy. You are merely a participant. As I began to investigate the original research papers on bitcoin, blockchain, and privacy, it became clear to me centralization of power is a lurking beast we as a society have decided to trust. And rightfully so — centralization was created out of a time where there was no effective alternative problem solving solution. Since then, centralization has shape-shifted to meet the many demands of society.“Centralization itself is not evil — it cannot be. It does not exist in opposition to anything. It’s just a concept, a point on a line, always in relation to something else. Over-centralization is the enemy — cycles of re-concentrating power amongst fewer individuals until systems collapse under their own weight.” -Tor Bair of Enigma MPC (Blockchain)Centralized systems on the surface are not inefficient from an economic standpoint. The problem with centralization is not efficiency, but the characteristics that are born out of an over-centralized system. Because of the relationship between centralized systems and the user, often times the user has no effective alternative that does not contain the negative externalizations. For the longest of time, the negative externalizations of over-centralization posed a trinary choice — participate, choose a lesser evil, or sit out completely. Centralized systems are often imposed on individuals as a result of historical events they are wholly unaware of. Terms and conditions apply. The US monetary system is centralized. Internet Service Providers are centralized. Your entertainment is centralized (Disney and Fox combined own 35% of the movie market). The servers holding your information for snapchat, facebook, and instagram are centralized. Even farming in the 21st century is centralized! Centralized systems are a natural human reaction to any sort of chaos that involves a large number of parties needing to come to consensus on how to make an action efficiently (in many cases to “serve the customer”). It’s no wonder the majority of businesses are authoritarian in structure.Yet, just because something is natural does not mean it is fair. And just because something is efficient for some does not mean it is efficient for all. Decentralized systems such as blockchain are an alternative solution to centralization, a solution created by human tendencies designed to solve the problems of the first millennium. Enter the 21st century where we face problems inconceivable to past generations — the stakes are higher and the need for a trusted alternative to centralization is desperately needed.“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.“ -Satoshi Nakamato (anonymous creator of bitcoin)