Blockchain and Trust

The elusive creator of blockchain technology, Satoshi Nakamoto, opens his[1] landmark whitepaper about Bitcoin with these words:

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.” (Nakamoto 2008)

The impetus of his revolutionary new technology was his fundamental distrust in the “system.” He finds fault with the prevailing model, desiring to free man from the risks inherent to trust by replacing the “trust-based” system with a new, trustless, one. The whitepaper concludes with the ambitious claim that he has achieved his objective:

“We have proposed a system for electronic transactions without relying on trust.” (Nakamoto 2008)

His distrust in people and desire to circumvent trust in business transactions is understandable. A brief survey of the last few centuries of business dealings tells one tale of fraud after another, bringing humanity to a point where we are practically begging for a trustless system that actually works.

At the root of the problem is the unfortunate reality that humanity itself is difficult to trust. Dale Carnegie understood this, perceptively observing that, “When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.” (Carnegie 1936)

Financial services professionals must inevitably “[deal] with people,” undoubtedly know their track record of moral failures, and likely cannot help but empathize with Nakamoto’s aim to eradicate the need to trust when transacting with “this kind of creature.” In full view of the risks of fraud and loss plaguing financial systems, Nakamoto promises respite in a new world of logic and objective mathematics, free from the prejudicial and fickle behaviors of man that Carnegie identified.

But is it really possible to eradicate trust from the system? The very whitepaper that claims to have solved the problem of trust in financial services defends its distributed ledger solution with “honest nodes” creating an “honest chain” with “honest” incentives. In fact, the term “honest” appears 16 times in the Satoshi’s 9-page paper. Has he really escaped the necessity of trust in doing business?

And what can financial services professionals take away from this?

If we are quick to herald blockchain as a savior that can somehow insulate us from our own broken behaviors to facilitate better business absent trust, we must reckon with the fact that Bitcoin, the first real-world application of blockchain technology expressly designed to replace a trust-based financial system, crashed. In large part, the crash was because people didn’t trust it.

Blockchain has its limits.

To be clear, I am not down on blockchain. As a technology, it is a formidable tool that promises revolution in any industry that leverages its immutable recordkeeping power. Blockchain is still in an embryonic stage; as yet we cannot fathom the potential that lies untapped and undiscovered within it. We who work in financial services today might not even recognize the financial world of the next generation thanks to the changes blockchain will carve into its DNA. But it is worth noting that blockchain has failed its creator’s original stated purpose: to free man from the boundaries of operating in a trust-based system. Satoshi sought to replace trust with cryptographic proofs, but only succeeded in shifting the object of trust from man to machine.

This, I contend, is because trust is a function of relationship, and mankind thrives in relationship as a fish thrives in water. Broken and risky as that may be, mankind cannot escape the relational context from which he came or for which he was designed.

We would be wise to regard blockchain within its limits. It can be leveraged by humanity as a tool to be used, but it cannot fundamentally change who we are. We will always need to operate within the context of trust and relationship. Not even the inventive (or invented) Satoshi Nakamoto can escape the inescapable.

 

 

References

Carnegie, Dale. 1936. How to Win Friends and Influence People. New York: Gallery Books.

Nakamoto, Satoshi. 2008. "Bitcoin: A Peer-to-Peer Electronic Cash System." bitcoin.org. October 31. Accessed December 14, 2018. bitcoin.org/bitcoin.pdf.

 

[1] It is not known if Nakamoto is a natural person or group of persons. For ease of communicating, Nakamoto will be referred to as “his” or “he” for the balance of this article.