Cryptocurrencies operate in a way far removed from traditional notions of monetary exchange: protected from outside interference by blockchain technology and complex encryption, cryptocurrencies do not require the third party intermediaries which put the trust in fiat currency systems. Far from making cryptocurrency transactions insecure, such trustless transactions are highly secure from manipulation and misuse. But in order for cryptocurrencies to gain more widespread traction, consumers and businesses must be informed about the benefits and risks of this system – we must learn to trust in a trustless environment.
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If you were lucky enough to find a hoard of Roman coins in your garden, you would probably be disappointed to see that a large number of them would have small, rectangular gaps in them. While to modern antiquities dealers these nicks decrease the coin’s value, in ancient times such coins were favoured over the undamaged examples. Roman coinage derived its value from the purity of the metal from which it was made; nicking the edge of a coin proved beyond doubt that it was pure to the core, and not a forgery made from base metals thinly coated in silver or gold. More recently, coins and notes have acquired security features which enable consumers to dispense with such checks, transferring responsibility for value checks from the consumer to the issuer. But with digital money, with no physical security checks and given the anonymity of transactions, can consumers and businesses ever trust the money they are exchanging?
Trust has been integral to currency exchanges for as long as they have existed. Consumers must trust the money itself and the businesses they engage with, and trust the banks that hold their money in a conventional monetary system. One of the great innovations of cryptocurrencies, however, is the removal of this trust from the economic cycle. In a peer-to-peer exchange of digital money, neither party need know or trust one another, nor do they need to place their trust in a third party such as a government or central bank. Instead consumers place their trust in the currency itself, or rather, in the technology behind it.
The security of most cryptocurrencies lays in the introduction of blockchains and encryption. Blockchains – distributed ledgers recording publicly and permanently every exchange in that cryptocurrency’s history – reduce the need for intermediaries and trust. Every time digital money is exchanged, the transaction is checked against this record; unlike fiat currencies, it is possible to trace digital money throughout its life. Meanwhile, the encryption of cryptocurrencies protects transactions from outside interference.
The technology behind these blockchains and encryptions are Open Source and controlled (at least usually) by communities rather than individuals. They are slowly and incrementally improved by members of these communities in a broadly consensus-driven decision making framework. This democratizes control of the systems that protect businesses and consumers that use cryptocurrencies, and adds a further layer of protection from potentially nefarious external influences.
But the possibilities go further. Cryptocurrencies are essentially programmable, thus it is conceivable that conditions might be placed on the use of a particular cryptocoin. For example, a consumer might pay for a product from a business they do not necessarily trust on the condition that the business only receives access to the money on condition of the product arriving in working order. Alternatively, automatic wills, pensions or trust funds might be imagined: cryptocurrencies might be stored and automatically released to the holder once a certain condition has been met or time period elapsed.
But outside of cryptocurrencies, this technology might change the economic landscape further. Blockchains may be attached to other digital products – contracts, or digital deeds attached to physical assets – which might be guaranteed without the need for third parties. This may further democratize access to credit, ownership and the creation and securing of contractual agreements without the need for either party to physically be in the same place. This might enable businesses and individuals to contract agreements across national borders, wherever there is an internet connection.
As time goes by, trustless economic systems based on blockchain technology will undoubtedly become a part of everyday life for millions of people globally. But to fully capitalize on this development, businesses and consumers need to be informed of the potential opportunities and risks associated with these systems, and these systems must be overseen by at least a modicum of governmental oversight and regulation. In short, society must develop trust in trustless transactions.