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Money, Blockchain and Trust

Money, Blockchain and Trust
July 03, 2018

Blockchain technology can be used to create trust between parties that have no reason to trust each other. It can add more trust between parties that already have some reason to trust each other. Before explaining how a blockchain creates trust, let’s discuss how money creates trust.

Consider this common scenario where two strangers meet and one wants to sell something to the other. The seller gives the buyer what that buyer wants in return for an amount of money.

Money

The seller is willing to make the exchange because he/she believes these things about money:

  • Others wants to possess money.
  • Within a kind of currency, such as dollars or euro, one unit of money is as desirable as another.
  • Everyone wants to receive money from others, because of its scarcity. People cannot just create money out of thin air.

Because of these beliefs about money, the seller is willing to exchange something for money. The seller trusts that possessing the buyer’s money will allow the seller to get something that the seller wants.

Ancient forms of money were considered to have value because they had some utility. Seashells were used as decorative items, whereas salt and rice have been used as money because people consume them.

As civilizations developed further, the rich and powerful needed something more valuable than salt or rice for their transactions. Here, gold and silver became their agreed upon money.

Around 600 BCE, the first coins in standardized weights appeared in Greece. Coins were very popular and its concept spread rapidly. This had the effect of changing the relationship between government and money, as coins came from government mints, not mines or farms.

Most commonly used forms of modern money are considered valuable because a government has decreed it to be worthy and people trust the issuing government to ensure that the money has the right level of scarcity. This type of money is called fiat money.

In 2009, a new kind of money appeared called cryptocurrency. The first cryptocurrency was Bitcoin. Bitcoin has the attributes needed for money and people want to possess them. All Bitcoins are equal in value. They use a combination of mathematics and blockchain technology to ensure the right level of scarcity without the involvement of any government or central authority.

The mathematics part of the scarcity governs the creation of Bitcoins. It ensures that there will be a limited supply of Bitcoins, no matter how many people are trying to create them at the same time.

To ensure its continuing scarcity, it must be impossible for someone to spend the same Bitcoin more than once. If people could spend the same Bitcoin more than once, it would lose its scarcity.

Blockchain technology was invented to ensure that someone cannot spend the same Bitcoin more than once. A blockchain is a shared ledger that can be used to record transactions like any other kind of ledger. What is different about a blockchain is that once a transaction is recorded in the blockchain, it cannot be deleted or modified. When someone transfers Bitcoin to someone else, the process is recorded in blockchain applications. Because transactions in a blockchain cannot be modified or deleted, it is not possible to transfer the same Bitcoin to more than one person.

A blockchain is a shared ledger that can be used to record transactions like any other kind of ledger

Blockchain

This brings us back to the original point on how blockchain applications create trust. A blockchain provides proof that someone or something can record a transaction. In the case of Bitcoin, recording a transfer from someone’s wallet to another’s is sufficient to make Bitcoin trustworthy.

There are other applications of blockchain that require capturing transactions from multiple parties to achieve trust. A few governments have established blockchain-based land registries. This requires transactions to be posted from both buyer and seller in order for a land transfer to be considered valid.

In some applications, the blockchain is considered to be one of the parties that must record a transaction. A variety of blockchain applications involve creating a marketplace for fungible financial instruments, such as stocks or futures contracts. In these applications, buyers and sellers post offers to buy or sell something.

Blockchain was invented to ensure that someone cannot spend the same Bitcoin more than once

A smart contract that is part of the blockchain application creates a match between buyers and sellers by posting transactions that initiate the transfer of the financial instrument. Once a transaction has been posted that matches the buyers and sellers, additional transactions are generally required to confirm the settlement of the trade.

A smart contract that is part of the blockchain application creates a match between buyers and sellers

One last point to understand about blockchain solution and trust is that the most widely accepted blockchain software is open source. It is considered important that everyone should be able to inspect the source for blockchain software so that if there is anything about the way the software is implemented that gives more advantage to one blockchain participant than another, it can be discovered.

I hope this has given a clearer understanding of how blockchain technology allows strangers to trust each other.