Bitcoin: Trustlessness & Backing
In this article, I will discuss two questions: what is “trustlessness” and why is it so important, and why is “backing" of a cryptocurrency a bad idea?
Trustlessness
We say about Bitcoin that it is trustless. What does that mean?
When you have money in a bank, you have to trust the bank to protect your money and information about it. You have no control though. They can do whatever they want with it, but you trust them.
When you send emails via – say – Gmail, you trust them to store and deliver as they are supposed to. But you have no saying in what they really do. It is completely based on trust, a trust that in Gmail's case has been shamelessly betrayed.
Likewise, if you leave a letter with the Postal Service, it is a system of trust. You trust them to deliver your letter.
When you have cash in your pocket, you are responsible for keeping it safe, or you will lose it. If you do, it is your own fault. You have not trusted anyone else. Cash in your pocket is trustless. No one can betray that trust, since there isn't anyone.
Trust-based services are susceptible to bribery, threat, or blackmailing. That means, you cannot entirely trust anyone with really important things. Traditionally trust-based services are held in check by law and the possibility of law enforcement; if a bank steals your money, you take it to court. Already at that stage, law is insufficient to protect against damage caused by breach of trust, since the representatives of state and law are those who protect it the least. But when it comes to the internet it becomes even worse. You cannot trust a website at the other end of the world to do what it says it will do! The only way to be sure that you and no one else controls important things such as your money or your privacy, is that these things can be handled trustlessly – that is, that no one else has even a remote possibility to breach any trust.
A trustless digital system must never have a central point; decentralisation of the system is a prerequisite – as is properly applied cryptography. Bitcoin is a breakthrough in trustlessness, since for the first time it offers a digital version of what in the physical world is cash. It is trustless. What you have and what you do with it is no one's business but your own, and no one can freeze your assets, confiscate or tax them beyond the level you allow, because there is no third party involved.
Most bitcoin users do indeed avail themselves to third party services, thereby eliminating the trustlessness in their own dealings. But so you can do with cash as well, when you, for instance, entrust it to a bank. The point is that the bitcoin system is trustless, you do not have to trust any third party unless you actively choose to do so.
Backing
There is recurrent criticism of that Bitcoin and other cryptocurrencies are lacking tangible backing. This is one way bankers and politicians try to discredit cryptocurrencies and scare people away. To some extent the general public believe this to be a weakness. Many say that a cryptocurrency should be backed by gold, then it would be trustworthy, and that's why stable coins turned up. They have a “backing”, and they miss the whole point. Any tangible backing would in practice be controlled by one or other government, which could simply confiscate it at any time; with it, Bitcoin would lose one of its most important features. The lack of physical backing is one of Bitcoin's major strengths, because there is nothing a government can steal.
For many people, it is still a fixed idea that digital "currencies" must be based on gold and that the question was only a matter of finding a safe place to store the gold. We don't know why it is so hard for most people to realise that no such place exists and that safe solutions must be based on a principle of "no jurisdiction". The reliance on the state is deeply rooted, it is taken for granted, questioned only by a few.
For the same reason, whatever is held digitally cannot be in a physical location. It would be dependent on the government of that location. That's where a distributed system comes in handy.
It is interesting to see critics of Bitcoin and other cryptocurrencies over and over again presenting perceived weaknesses that are, in fact, strengths. There are problems with Bitcoin which have to be solved, but that it lacks tangible backing is not one of them.
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Here you find all my writings about privacy & antibigbrotherism, including a few articles about crypto.
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Nice article. I would also argue that part of the backing behind Bitcoin is the Blockchain itself. Micheal Saylor often mentions how the Blockchain is stored economic activity (in the form of energy spent by miners). So many people have a vested interest in the integrity of the blockchain. So the backing is the "insane / never seen before in human history" cooperation of miners to maintain that blockchain and increase it's length.
So basically, we've already spent so much energy making this blockchain (which is increasingly important), that it serves as a backing.