When you buy something, you rely on someone to authorize that you’ve paid for the product or service. In traditional exchanges, this someone is a third party who enjoys the trust of everyone involved in the transaction.
When you buy something, you rely on someone to authorize that you’ve paid for the product or service. In traditional exchanges, this someone is a third party who enjoys the trust of everyone involved in the transaction.
Trusted third parties are usually banks, reputable institutions, municipal and government bodies, international companies and the like. But though rigid laws and policies are imposed upon such institutions, they are far from infallible.
We rely on banks to hold our funds and carry out transactions, but banks can fail. We expect to receive wages for our work, but work providers can go bankrupt. We have confidence in officials to resolve any disputes and to uphold the law, but officials can be corrupt and the law can be exploited.
It would be nice to simply hope that trusted institutions will prove more reliable, but history suggests that this is not realistic. Many do not trust so-called “trusted institutions”. A more practical solution is to do away with our reliance on such institutions completely. A system that always does exactly what it’s supposed to without needing to rely on any third party institutions already exists. It’s called the blockchain.
Blockchain trustlessness essentials
- Traditional systems require a trusted third party to validate any action.
- Blockchains operate on a trustless basis.
- Blockchain transactions require no person or institution with authority for validation.
Traditional exchanges require trust
In a traditional exchange, faith in the correct behavior and operation of a third party is needed. Take, for example, buying a product from an online store. A purchase is made with a credit card and the product is shipped to the customer by post. That is how it is meant to work, provided that everything goes according to plan.
But there are several parties in this transaction that we need to trust will do their job. We have to trust that the online store is a legitimate business, that our bank will wire the funds, that the postal service will deliver the shipment, and so on. If anything goes wrong, you rely on officials to uphold the law and enable your money to be refunded, or perhaps even to penalize the online store, if it turns out to be a scam.
Since we’re usually dealing with reputable institutions, most of the time things work out just fine. But most of us have encountered a case in which something has gone wrong and one of the parties we trusted didn’t do their job properly.
Blockchain and trustlessness
Blockchain is a cryptographically secure technology that provides immutability, reliability and transparency. It was first developed to provide decentralized financial solutions, but it has since greatly expanded its uses, now assisting with things like smart contracts and decentralized applications.
What sets blockchain apart from traditional arrangements is its trustless nature. In order to make transactions, sign contracts, exchange digital assets or use any other blockchain feature, you don’t need to trust anyone you’re dealing with. The inherent properties of the blockchain, set in cryptographic stone, guarantee that everything proceeds exactly as intended.
When you send BTC to someone, you don’t need any particular person or institution to verify that the transaction has taken place. If you sign a smart contract that wires your monthly wage from your employer’s wallet to yours, you will receive the funds without fail. If you upload a decentralized application (DApp) that awards every 1,000,000th visitor to your website with 1 ETH, the award will be given. The uses are countless.
With that said, it is still not advisable to rely on blockchain completely and act mindlessly with your cryptocurrency. If the coder of the smart contract wiring your wage didn’t do a good job, it may have unexpected results (such as you not getting your wage). The blockchain doesn’t discriminate – it will execute the contract regardless of whether the intention was to give you your proper wage or not.
Though blockchain is trustless, it shouldn’t be called infallible. Yet, it has proven its reliability compared to the traditional model of putting faith in third party institutions. This is particularly true when using blockchain to trade in cryptocurrency. All you need to trade is an account at a crypto and fiat exchange, such as Bitstamp.
This webpage has been approved as a financial promotion by Bitstamp UK Limited which is registered with the UK’s Financial Conduct Authority. Please read the Risk Warning Statement before investing. Cryptoassets and cryptoasset services are not regulated by the Financial Conduct Authority. You are unlikely to be protected if something goes wrong. Your investment may go down as well as up. You may be liable to pay Capital Gains Tax on any profits you earn.