Part 3: Blockchain’s Trustless Guarantees
In traditional financial systems, every transaction is built on trust. Blockchain removes the need for trust, replacing it with a system built on guarantees.
This article is Part 3 in a series. Read the rest here:
- Part 1: The Case for Market Decentralisation
- Part 2: How Trust Makes Traditional Financial Systems Inefficient
Blockchain network technology makes it possible to build a transparent, immutable and robust accounting system, without any single entity, that needs to be trusted to operate it in good faith, controlling it. How a system can function without a central entity in control can be difficult to grasp, but the important bits can be understood without getting too deep into the technical details.
A blockchain system (or network) can be seen as a big database that holds a record of accounts, of the assets that they hold, and all of the transactions that have ever been performed on them. The network is made up of multiple computers (known as nodes), and each of these nodes keeps an identical copy of all the accounting information in the network. Nodes are typically spread all over the world and communicate with each other over the internet in such a way that each time a transaction is submitted to the network, they all need to come to consensus that the transaction is valid before the database can be updated on all the nodes simultaneously.
Blockchain networks are typically completely public and permissionless. This means that anyone can add a computer (node) to the network without any restriction.
Blockchain networks are typically completely public and permissionless. This means that anyone can add a computer (node) to the network without any restriction.
Each network keeps track of a built-in asset known as the native token or coin (e.g. Bitcoin), which is used to pay for performing transactions on the network. Since it typically has a controlled supply, the native token gains value as people try to buy the token, with fiat currency like US Dollars for example, to be able to pay to use the network. Since the token has a real-world monetary value, it can be used to provide an economic incentive to node operators to keep their nodes running well and to behave honestly. This can be done through an initial distribution plan at the launch of the network, or through direct payments during transaction processing.
KEEPING DISHONEST OPERATORS OUT
The consensus communication (aka. consensus mechanism) is designed in such a way that dishonest node operators are excluded from processing transactions on the network, which means that none of them can corrupt the accounting data that it contains. Often node operators are either early adopters that hold a large amount of the native token, or business builders that have a product built on top of the network. This means that node operators have an economic incentive to keep the network running effectively.
In short, the fortune of node operators becomes tied to the fortunes of the network. It is unlikely that they would attempt an attack as it is typically more economically attractive to keep the network healthy and efficient than to try and to bring it down.
Public permissionless blockchain networks are thus completely decentralised as no participating entity can make decisions about how the network should function and it continues to exist even if participants go down. This impartiality of the network to the desires of any one participant and the built-in exclusion of bad actors means that the network is “trustless”.
In other words, the network functions correctly even though none of the node operators can be inherently trusted.
This is somewhat comparable to imagining that you could say, with confidence, that you trust that your bank balance is correct and that your funds are safe even though you don’t trust your bank. This statement makes no sense in the traditional financial world as it is built on trust, but it’s standard in the blockchain world… which is built on trustlessness.
The existence of such independent, trustless accounting systems allows for the construction of a radically different kind of financial market. A financial market with a single trustless source of truth where the layer in which assets of value are stored and traded is independent of the companies building on top of that accounting layer and providing financial services to clients.
In this world, clients don’t need to implicitly trust the company that they interact with as the single source of truth, as they themselves have the ability to examine the transparent layer in which their assets are stored to confirm whether transactions have or have not been carried out.
Read more articles in this series:
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For more press information, please contact:
Connie Bloem, Product owner of Mesh:
hello@meshtrade.co / +1 604 671 4515