by Ralph Tkatchuk

In ‘trustless’ payment systems, trust is still necessary

Mar 20, 2018
BlockchainE-commerce SoftwareFinancial Services Industry

Blockchain cannot eliminate trust from the equation, but it can reduce the burden that trust places on any system.

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Credit: Thinkstock

One of the easiest ways to explain blockchain to an amateur is simply to describe it as method of transferring assets in a trustless manner. However, this definition presupposes that the blockchain initiate in question understands exactly why trust is so necessary, and how it was enforced before blockchain came about. Basically, trust must be established to ensure that the correct party is making the transaction, and that their currency is real. In a person to person exchange—the sale of a vinyl record for cash, for example—the requirement of trust is inherently fulfilled because the identity of the buyer and his currency can be checked for authenticity using one’s eyes.

Clearly, this methodology isn’t scalable for larger business deals or more complicated financial transactions, which involve physically burdensome amounts of cash and multiple stakeholders. This is the primary reason why banks exist. Verifying and enforcing trust is the central job of any financial institution and is also why it used to take so long to transfer money between them. Despite these very institutions being more digitized than ever before, sending money to a bank account in another country is still slow and expensive.  Although banks are held to the same standards for enforcing trust, they still operate on disparate, unstandardized systems. To verify and record identities, push money through this stratified system, and get it to land in the right account takes effort. These labors cost money and time, which impact customers just as much as their respective banks.

These flaws were insurmountable until the internet helped accelerate banking processes, but few complained, because banks were relatively convenient and there were no alternatives. Credit cards, payment providers, and remittance firms serve the same purpose. Instead of acting as the single authority maintaining trust within its network, blockchain has recently illustrated that this responsibility can be democratically distributed to achieve better results. Therefore, the idea of ‘trustless’ transacting is a bit misleading. Blockchain cannot eliminate trust from the equation, but it can reduce the burden that trust places on any system.

Trustless? Or less trust?

Many believe the lack of a central authority in solutions like bitcoin also means that there is an absence of trust. In fact, one must exhibit more trust when transacting on blockchain than they would at a bank—this is the entire point. Instead of trusting a bank, users are placing their faith in an aggregated group of other bitcoin users, thanks to blockchain’s groundbreaking algorithm. They’re also trusting a bootstrapped community, including miners, bitcoin ‘whales’ and other actors who can conceivably stack the deck in their favor. Regardless, using cryptography and shared algorithmic consensus, blockchain asks users to trust that it will distribute processing power equally, that its miners will accurately verify the identity of the sender and recipient, and that the payment is in real bitcoin. In exchange for their faith, these cryptocurrency solutions can theoretically power cross-border transactions that are faster and less expensive than the alternatives.

Moreover, instead of bank records that enforce proper dispute arbitration, blockchain has a ledger where all verified transactions and their participants are listed. The result of this complicated mixture of technology is a system that takes authority from a single entity and distributes it to all a network’s participants, but that doesn’t mean trust is obsolete. For one, even with bitcoin as a currency, there’s no guarantee that the goods or service provider receiving it will make good on their end of the deal. Blockchain currencies are just that—currencies—and they enforce nothing other than the safe transfer of money between verified recipients. It’s up to secondary solutions or more advanced blockchains to encourage proper fulfillment of goods and services, and proper behavior within the ecosystem.

This can be accomplished in creative ways. Platforms like eBay, for example, might allow cryptocurrencies into their ecosystem but will implement a rating system to enforce good behavior. Another method would be to build a cryptocurrency solution as streamlined as the best of them, but with added smart contract functionality to compel exemplary conduct from its members, and punish those who disobey. The world is just starting to get a glimpse of what this might look like, with solutions such as COTI (the Currency of the Internet).

COTI is a cryptocurrency blockchain that supports fee-less, instant transacting, but also enlists a proprietary protocol named Trustchain. On COTI’s market for goods and services, participants include buyers and sellers, but also crowdsourced mediators, who are paid tokens for resolving disputes and verifying feedback on sellers who don’t deliver. Accordingly, the system uses its own generated value to improve itself, creating a better experience for other users.

Another trustless payment solution can be found in Ripple. Though Ripple is technically centralized, in that authority remains with the Ripple Foundation in terms of minting coins and sourcing the power required to run its network, there can be no doubt that transacting in Ripple requires less trust than with other solutions. The company has an impressive rolodex of partnering banks and financial institutions such as Mastercard, who are chomping at the bit to incorporate the Ripple protocol into their own system. Why? Because Ripple still uses the ledger, making the burden of trust significantly lighter, and allowing these entities to operate with increased agility.

TenX is a great example of trust-reducing financial prowess as well. Like how Ripple operates on a multinational scale, TenX uses traditional finance tools like their TenX credit card to impart trustless capabilities to merchants and blockchain-ignorant consumers. With streamlined systems that take and convert cryptocurrency on-site (at the register), and a digital backlog of how cryptocurrency has moved through the system, neither side of the transaction needs to deal with interoperability obstacles or the sluggishness of traditional infrastructure.

Fixing blockchain

Blockchain technology isn’t perfect, no matter how eloquent its enthusiasts are at explaining its benefits. It is indisputably successful at one thing, however: incentivizing shared responsibility. While this responsibility was once squarely in the court of banks, it’s now distributed among millions of people. Contributors in the young blockchain ecosystem can trust its delegation of financial power, but they should also remember that blockchain is not a jack of all trades. It must be endlessly customized, layered with auxiliary services, and fine-tuned before true trustless transactability can actually be achieved.

Fortunately, aggregate trust has worked astoundingly. Any flaws in blockchain’s distributed architecture are addressed and solved by the community in a democratic manner, which is why the last year has seen so many forks like Bitcoin Cash. This is crucial, because aggregated trust is nothing, if the decision to evolve cannot also be gathered collectively. Ultimately, this is the technology’ true power—the skirting of traditional systems without detriment. In blockchain we trust.