Blockchain, Banks and Trust Issues

How do you know that the transfer that you are sending through your bank will reach your destination? The answer is simple: you don’t know. But you trust that it will.

In Blockchain We Trust

The popularity of Blockchain and cryptocurrencies is strictly related to what people believe in. There’s a vast number of people that are not convinced about storing the money or transferring it through banks. Blockchain and cryptocurrencies offer them an alternative with transparent rules and mechanism.

The real value of Blockchain is the fact that it can remove the expensive intermediaries it the transfer process. But it does not really remove them – it usually simply replaces them with the miners, that cannot fake the process or stole the money (with a few particular exceptions). However, the transactions are not trustless – they require the same amount of trust, but located in the technology itself, rather than in the institution of bank.

The difference is that with the bank, the institution supposes to take care of you and your money. The Blockchain is simply safe by definition.

It means a trust shift. Instead of people and institutions, we trust the technology itself. In many cases, that might be a good choice, but it is connected with particular issues and problems.

Trust in Smart Contracts

The idea of Smart Contracts works if both sides understand its code. The blockchain becomes arbiter and executes the contract to the letter.

Now, let’s imagine that you get a Smart Contract proposition from a contractor, and you consider signing it.

Take a look at the Solidity code. Even if you are a developer, are you 100% sure that it can’t be exploited to drain your wallet? Are you sure that you know all the limits of this technology? Are you sure that there’s no hole in this contract, that can act against you?

Because after you sign it, it does not matter if you were aware of all the consequences. You simply signed the contract, and the Blockchain will execute it.

DAO example

DAO, a large and popular project based on Blockchain was heavily audited and sure about their code, too. But it didn’t stop a hacker from draining a huge part of their resources.

The most important lesson from this is to understand that the hacker did not break the rules. Everybody that signed the Smart Contract had access to all the code. They simply failed to understand, that it can be used against their will in a specific way.

Now, getting back to the Smart Contract you are about to sign – of course, if you are not an experienced Solidity developer, you can use third parties’ help to assure that this Smart Contract is safe, reliable and will do what you want it to do. They will audit it and certify it.

But that simply moves your trust from the technology itself back to people and organizations that take care of you… and it does not differ much from the banks and financial institutions as the intermediaries, does it?

In the end, trust is always an essential part of agreements and business. The blockchain technology does not make the transaction trustless – it rather makes us trust the technology itself and its rules written in stone. The key to unlocking its potential is making sure, that we understand those rules well enough.