In a capitalist economy everything is for sale. Love, for example. Possibly your very soul. So it is no surprise that trust is also for sale. We have to buy trust in order to perform beneficial economic transactions. Buyers and sellers, in any commerce beyond the lemonade stand, depend on “trusted” third parties to protect their interests. Banks, credit card companies, PayPal—you get the idea. Buying a house, for example, requires multiple layers of trust-protection: agents, escrow and title companies, lending institutions, inspectors, etc. Imagine what multi-billion dollar corporate-level transactions must require in terms of security and protection from fraud.
The problem with these third parties should be obvious to anyone who lived through 2008. Our most esteemed financial, banking, and accounting firms LIED to millions of investors about the value of their products and services. The result? A crash in wealth that hammered the bottom-dwellers in our social pyramid disproportionately. The “trust” so important in “trusted” third parties was eroded, perhaps for good. The problem of course is that there is no alternative. We have to have these institutions so that we can have commerce and we can pass our money around in transactions so that we can earn our livelihoods and pay our bills and buy our goods and services.
The other problem is one of centralization. A smaller and smaller number of entities increasingly have oversight over larger and larger concentrations of wealth. Any breach, via outside parties or (most likely) via internal corruption will impact everyone within that organization’s reach. That’s a lot of businesses, big and small, and a lot of people, rich and not-so-rich. We saw that happen in 2008.
So it pays to be mistrustful. But since we need trust to continue our commerce, what’s to be done? Technology, perhaps, is providing a solution path. Computer science has long been fascinated by problems such as “double-spending.” How do you make sure that a digital transaction (like a credit card payment) is done only once, or, that once done, can’t be un-done or re-done? The dishonest buyer would like to buy something but then defraud the seller by reversing or withholding payment. The dishonest seller would like to defraud the buyer by a double-charge for the good or service or withhold such things entirely yet still receive payment.
Enter the blockchain. In this model, trust emerges via cryptography and a peer-to-peer network. Mistrust is taken as the modus operandi. Since we all mistrust each other, the only way to generate trust is to have an entirely open transaction ledger. Everyone can see that transactions are occurring and everyone can verify that such transactions are legitimate.
The first leg of such an apparatus is the cryptography part. We can encrypt our transactions so that we have privacy. After all, we don’t want everyone to know what our transactions are, just that they occurred and were accepted in the ledger as valid. Think about stock tickers: they tell us that shares were bought and sold and for what prices but not who did the buying and selling. Also, the transactions get lumped together into blocks, which are then encrypted, as well as stamped with date and time tags. As blocks get created, they are linked into chains, which are validated by their length and chronology. The longest chain is the newest version of the ledger, and the honest users of the network default to that version.
The second leg is the peer-to-peer or distributed computer network. Instead of a central authority, there is a majority consensus of users. If more nodes on the network containing the blockchain are honest, and follow the protocols to add transactions to the blocks and blocks to the chain, the result will be an honest, up-to-date, distributed shared ledger. In order for the dishonest nodes to compromise the network there would have to be a majority of dishonest nodes. As the blockchain is built, and tagged with time and date stamps as well as the digital “signatures” validating the encrypted information, it gets harder and harder to defraud. Each encrypted block requires significant computing resources to “crack” the code, and once cracked puts a break in the chain. The entire blockchain would then have to be rebuilt from the beginning. Thus the nodes (i.e., users) on the network can “see” the invalid blocks and reject that copy of the blockchain. The crooks would constantly be playing catch-up as the distributed nature of the blockchain means that the newest, longest version will always be the accepted one.
I know my half-assed description will make the computer scientists howl, and perhaps make my readers skip ahead, but it’s the best I can do so far. I’m still trying to wrap my head around these concepts.
What I find intriguing is this “wisdom of the crowds” approach. Instead of relying on gatekeepers, which is what our financial institutions have become, we rely on our individual self-interest. We are motivated by self-protection as we want to be able to do commerce with strangers over the internet. So we participate in the distributed ledger by hosting it on our computers and interacting with it according to the established schemes for performing the transactions. Note that one does not have to have the entire blockchain (think of it like a database) in memory, just the “headers” of the blocks, or the identifying labels. It’s like knowing you have a legitimate copy of today’s paper by checking the date and skimming a few headlines (I’d be checking the baseball scores!). You don’t have to have the whole paper or scan the articles.
Bitcoin is the most famous application of the blockchain. Users are rewarded with a digital currency, the bitcoin, for performing what are chain maintenance tasks. They check the blocks using “proof-of-work” algorithms that verify that they are tagged properly and in the chain in the proper sequence. Perhaps to have nodes join the network there would have to be some kind of transaction fee to provide additional motivation so that users would stay involved and continue to host the information.
Like any technology, hype precedes the reality, and we don’t know what’s to become of blockchains. But it seems likely to me that such things will be used for everything from storing your medical records to facilitating the oil futures market. Groups of mutually mistrustful people will want to do commerce together without the need to purchase oversight from a third party. It’s a very libertarian notion. Maybe we don’t need to be more trustworthy, we just need to recognize our basic lack of trustworthiness, and use high-tech “peer pressure” to keep us more honest than usual. Not a very idealized view of social interaction, but maybe one closer to our nature.