Cryptocurrencies are often touted as being trustless. However, the very concept of money is entangled in a web of trust and memory. The shackles of money are always going to be attached to some anchors. One mainstream view is that money has to be backed by the nation state, which anchors all of society’s faith in a money supply. Others argue that people self-organise and create alternative spheres of value that are independent of the state.
Bitcoin has managed to bootstrap a community of millions of people worldwide who believe in the value of its currency, the technology that underpins it and the network of users. At the base of this trust pyramid is its consensus algorithm: Proof of Work.
Proof of work was designed as a sure way to not have the problem of selecting whom to trust in the network. It provides a mathematical way of proving which history of transactions has the most computational power behind it over a period of time. Then the network can agree that this is history is the correct history of all transactions. This is the greatest innovation of Bitcoin. It provided a system of economic incentives to build trust in a network of computers and ultimately people.
Unlike computers, people require visual cues to build trust. The fact that we put the faces of important people on our notes is testament to this fact. In Bitcoin, we have had a number of these institutions that developed. We needed a way to make sure that the guarantees of proof of work were holding up.
Banknotes are symbols of faith in modern society
One of the fundamental assumptions of Bitcoin is that a single party does not control more than 50% of the mining power. This would allow the miner to be able to convince other nodes on their own version of Bitcoin history, reject alternative histories and make it impossible for the rest of the network to self-organise around an alternative history without a hardfork of their consensus algorithm.
The 50% number itself is a red herring. Profitable attacks by malicious actors have been shown to stem from much lower concentration levels. However, this highlights our reliance on some anchors for our trust. At every meetup that I go to there is a display of the mining pie chart of the cryptocurrency in question, whether it is Bitcoin or Ethereum.
Phew, a sigh of relief. No pool is over 50% of either network. But wait, what went into that calculation. These charts are based on pools voluntarily signing the coinbase transaction with a unique identifier. In other words self reported. Trust is assumed and not derived through monitoring.
In Bitcoin’s history there have been incidents of detecting connections between different mining pools due to the transparency of the blockchain. This was clearly the case when Bitfury pulled their hashing power from Ghash.io in 2014. In other cryptocurrencies where there is less transparency, what confidence can the users have on the concentration of mining, which as we know is of critical importance.
The block explorer has almost arguably been a larger trust anchor. These are sites where you can browse all the Bitcoin transactions. The website with most traffic in the industry is blockchain.info and much of this traffic is related to simply checking transactions or the balance of addresses. While it may not be clear the exact mechanism, people gain confidence in being able to look at their transactions in and amongst everyone else’s. So much so that their site is often confused with the Blockchain.
The transparency of Bitcoin transactions and its distributed nature has led to the more accurate measurement of real activity on the network. Hobby projects and companies have been built on producing metrics and charts on what is the “real” transaction volume on the Bitcoin network. Am I sending $10 in and amongst 100,000 daily transactions with $100m of economic value at risk or $10 in and amongst $100 of economic value at risk. In a truly anonymous setting this would be an impossible measure.
Bitcoin teaches us a lot about how trust is produced in disparate economic networks forming on the internet. There have been missile crises and imperfect monitoring tools to help the community continue to build trust. There might indeed be a tradeoff between privacy and trust. Arguably, for Bitcoin, the balance was chosen by technological constraints but in the future it will be a strategic decision.