Most blockchains employ a trustless mechanism wherein no parties know or trust one another. This trustless system was first introduced in 2010 when Bitcoin came into existence. Since then, it has become the foundation of the cryptocurrency industry.
When you make a transaction using a fiat currency, say INR, a third party is responsible for verifying and recording the details of that transaction. This third party could be a bank or other transaction facilitator such as Visa, and Mastercard, among others. We know and trust these entities to store our money and maintain records of our transactions.
The entire finance industry is based on trust. You invest in the stock market, trusting your money will not disappear overnight. If you were not to trust the system, you could never invest anything in the market. Also, in this system, we have some idea of the person or entity managing our finances.
That, however, is not the case with blockchain. This is because most blockchains employ a trustless mechanism wherein no parties need to trust one another. This trustless system was first introduced in 2010 when Bitcoin came into existence. Since then, it has become the foundation of the cryptocurrency industry.
But what does trustless mean?
In general parlance, we all know that trustless means someone or something that is not worthy of trust or is unreliable. However, in blockchain terminology, trustless refers to a system wherein we do not have to depend on one stranger, institution, or third party for a network or payment system to function.
Instead, every transaction is verified by thousands of other users on the network. These users are not known to each other. They are spread out worldwide and tasked with verifying and maintaining transaction records. They arrive at a mutual consensus regarding the authenticity of a transaction before passing it along to be stored on the blockchain. In exchange for doing this, they are awarded newly minted coins. Once a transaction is verified, it is added to a distributed ledger that every network user can access and store a copy of.
This distributed ledger ensures that once a transaction is verified and added, it cannot be tampered with. Also, since no single entity is responsible for transaction verification, the blockchain becomes decentralised.
Is it genuinely trustless?
Well, not really. Blockchains do not work without trust. Instead, they reduce the amount of trust placed with one entity, such as a bank or a fund house. This is done by distributing the trust among several network participants. Further, complex coding, advanced algorithms and self-governing protocols ensure that the blockchain functions without a central authority.
Power and trust are distributed among the network’s stakeholders rather than concentrated in a single individual or entity. Having said that, the term ‘trustless’ is a bit misleading. Instead of referring to blockchains as trustless, we could describe them as built on the basis of distributed trust.
Are trustless systems more secure?
Centralised systems such as banks are most susceptible to hacks and attacks. This is because traditional financial services have one single authority to verify data and make decisions. This creates a single point of failure that bad actors can exploit to carry out thefts and hacks. There is also the possibility of data being altered or manipulated.
This is not to say that cryptocurrencies cannot be hacked. Anyone following blockchain updates will know that hacks and attacks are pretty common in the crypto space. However, the decentralised nature of cryptocurrencies and the ability to not have to place trust under a central body is touted as one of the biggest strengths of crypto assets.
First Published: IST