Tustless systems and cryptocurrencies

Are Trustless Systems Like Cryptocurrencies The Future?

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Currently, trustless systems like cryptocurrencies are growing rapidly in popularity. This article will deep dive into these systems and the possible impact it has on the future.

Trust is a word that is integrated into human nature since the beginning of times. For centuries we(the humans) have been working together on the base of trust. Moreover, to get a job done or set up a deal one has to gain ‘the trust’ first. This ‘game of trust’ takes place daily and brought society where it is today. However, the world is evolving and especially the digital world is changing or even disrupting traditional institutions. This article will explain the impact trustless systems like cryptocurrencies will have on the design of IT systems and why it could change the future.

What is the definition of a trustless system

A trustless system like Bitcoin and many other cryptocurrencies have one very important thing in common which is called their trustless nature. Also, these cryptocurrencies are connected in a decentralized environment using a peer to peer format. As a result, these systems are called trustless, because there comes no central authorithy in play to guard the data in the network.

In other words, in a trustless system anybody can operate the system without the need to rely on a third party. Moreover, this blockchain technology completely removes the ‘trust factor’ out of their environment. But, if there is no central party ‘to trust’ which controls and rules, how is it possible to make the right decisions?

Decision making and consensus mechanisms

To fully remove the central authority out of a trustless system and make sure that data within such a system is still reliable blockchain technology uses consensus mechanisms. In addition, the Proof-of-Work(PoW) consensus mechanism used by Bitcoin and many other cryptocurrencies is a very good example. The Bitcoin network uses miners to calculate and uses lots of electricity to add data(blocks) to the blockchain.

By doing this, they make sure that it is impossible to double spend Bitcoins and also that transactions are stored in a correct way. As a result, no central party is needed to validate and control the transactions, because the PoW consensus mechanism makes sure that data is validated in a trustless way. In fact, a trustless system could be very disruptive and could have a major impact on the structure of organizations, companies and financial models.

decentralized trustless system
A distributed and decentralized network

What impact does the remove of trust have on a system?

Transactions being done in traditional system always relies on a certain party which makes sure the transaction is handled and stored succesfully. Meaning, trust is always present and is paramount on how a transaction is executed. To remove the need for trust out of a system, could make a transaction less complicated and even cheaper. Moreover, current decentralized Blockchain networks are able to handle transactions at almost zero fees. On the other hand, we have centralized third party systems like Visa which are charging 1% or 2% for every single transaction made. Not only trustless system could handle transactions cheaper, but also they reduce fraud, corruption and misplaced trust.

Trust is such an integral element of human nature that it will be very difficult for some people to understand the concept of a “trustless” system. Also, they could feel a little bit uncomfortable by transacting value over a medium based on such a concept. Potentially, this hurdle may be one of the biggest in facing mainstream adoption of cryptocurrencies. Provided that you cannot simply view the trustless nature of the systems, you need to have an understanding of how they work to really appreciate it. By all means, at first glance both trustless and thrustworthy systems seem to operate identically, but underneath there is a paradigm shifting concept.

How secure are trustless systems

Next, in the explanation of trustless system comes the way security is handled. Bitcoin for example, uses private keys to give users the right to transfer Bitcoin(digital money) over the distributed network. In fact, these private keys are the real treasures every hacker should be hunting for to acquire new Bitcoin.To secure these private keys the network uses cryptography which is called SHA256 hashing to protect it. How does this work?

SHA-256 encryption for cryptocurrencies

All Cryptocurrencies are secured with encryption

SHA256 hashing uses asymmetric cryptography to encrypt data(private key) on the Bitcoin blockchain network. Also, asymmetric cryptography uses a public and private key that are arithmetically paired but not identical. The public key can be shared with everyone but the private key should be kept secret. These keys are used to lock and unlock the data which is sent over the network. On top of that, the private key is calculated once and cannot be traced back to the original recovery seed string.

For more information about the SHA256 and crypto security read our article we wrote about the Bitcoin seed phrase and how to recover it.

In summary, trustless systems are using cryptography to protect their data which are stored in private keys. By the use of their SHA256 hashing algorithm, it’s impossible to track back to the original seed phrase.

Distributed decentralized networks

Besides the cryptography being used which is also quantum-resistant, there is another factor that improves security. Trustless systems like cryptocurrencies are part of a global decentralized network of nodes. These nodes are considered equal and have an entire copy of the Blockchain database stored locally on their hard drive. Moreover, by storing the exact same copy of the blockchain locally on millions of nodes it’s impossible to bring the network down. Also, traditional IT systems like banks are often suffering from DDoS attacks which takes their systems offline. Using a decentralized system instead could save a lot of network administrators a proper headache.

Why are banks not using trustless systems?

The main reason why banks aren’t using trustless systems is the way banks are organized by nature. A bank is using the word trust or trustworthy as a business model, meaning that it is trying to attract customers with it. Also, the banks are using marketing campaigns building their reputation by being trustworthy. As a result, they have built large centralized IT systems that are charging fees if you want to use their networks. Additionally, building and maintaining these networks require a lot of investments and these costs are charged back to customers. This is the way the world worked before decentralized blockchain networks appeared and customers are totally ok with that. As explained above, removing the trust out of the system requires a paradigm shift in their business model while the actual service(transfer of value) remains the same.

What are the disadvantages of trustless systems?

Blockchain technology used by trustless systems are considered revolutionary and disruptive, however, there is a downside. One of the main cons is that the Proof-of-Work consensus mechanism is wasting electricity. Bitcoin, for example, uses a lot of miners which validate and create new blocks on the Blockchain. As a result, these miners have to consume a lot of electricity to calculate hash rate which increases over time.

Another disadvantage of trustless systems lies in the way they are designed which makes them quite inefficient and slow. Meaning, the decentralized nature with no central server makes it hard to scale and it takes a lot of time before transactions are confirmed. For example, the Visa network is able to manage about 1700 transactions per second while Bitcoin is able to handle only 7 per second. Could this be a problem? In my opinion it depends, for using a trustless system for small payments in stores it could be a problem. On the other hand, if you want to use a safe and borderless system for just sending any amount of value it shouldn’t be a problem at all.

trustless systems with banks vs Bitcoin
Bitcoin vs Bank

How are cryptocurrencies and blockchain technology trustless?

Bitcoin and cryptocurrencies have been mentioned earlier in this article and are stated to be trustless. Additionally, what is exactly what makes them trustless and how are these systems working on it? Blockchain technology uses a distributed ledger which is a shared database across the entire network. In contrary to a centralized system this database is shared and stored on thousands or even millions of nodes locally. Also, all these locally stored ‘blockchain databases’ are exact copies and are constantly being updated with the latest block data. In contrary to a centralized system which has only 1 centrally administrated version(to make it simple) of a database. Moreover, cryptocurrencies being trustless systems means that this decentralized network will handle your transactions in a trustless way. The system which runs with a central server can be considered ‘trustworthy’ while the systems running cryptocurrencies are considered trustless.

Finally, to make things more clear regarding a trustless system, the following phrase has been shared a lot among crypto enthusiasts: “Don’t trust,verify” which is the main motto of a trustless system.

What problem does a trustless system solve?

In general, all IT systems whether it’s centralized or decentralized have one thing in common which is the way data is stored and shared among its users. A trustworthy system like Facebook asks their users for their data and in return they say that they will keep this data secure. Moreover, if we want to use their system we have no choice than to trust them with our data. In reality, this data uses Facebook to sell to third parties which lacks privacy policy of the users of the platform. Most users don’t have a problem with this, because they can use the platform for free. However, Facebook has grown immensely and has become part of the lifes of billions of people nowadays. As a result, many peope lost control over their private data and also it could make them an easy victim to fraud or identity hacks.

Then there is Bitcoin an example of a trustless system that gives users the control back of their private data. A very famous phrase many Bitcoiners uses is ‘Be your own bank’ which means that the user is in full control of their digital money. In a trustless system like Bitcoin, external authorities like governments can’t lock your funds or throw you out of the system. This is a very strong use case that will change the future of finance online.

Transfer of value across borders

Another problem most financial IT systems are facing today is the transfer of value across borders. Currently, mostly in the western world, it’s possible to transfer money from one country of the world to another country. However, it only works for the bigger bank systems but it’s costly and it could take time(days) before the amount of money is available especially if you sent the money Friday night. In a trustless system, which is running 24 hours a day and 7 days a week weekends or bank holidays don’t exist. Also, it’s very easy to send value(money) across borders in almost an instant way without paying high fees.

Conclusion

The near future will give us more insight the way IT systems are going to evolve. Moreover, trustless systems like cryptocurrencies have found it’s way into the mainstream and will become a bigger part of our future. The question is if they are going to change our daily lifes like social media platforms Facebook or Twitter did more then 10 years ago. In general, the ideal picture would be a trustworthy system designed in a trustless manner where private data can be managed and verified by its own users.

Disclosure: This post contains affiliate links. This means I may make a small commission if you make a purchase. This doesn’t cost you any more but it does help me to continue publishing cool and actual content about Bitcoin & Crypto – Thank you for your support!

Jelmer Steenhuis
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Jelmer Steenhuis

Online entrepreneur at uDigitize
Crypto believer and 'Hodler' of Bitcoin since the early days. Spreading the word about this exciting new technology..
Jelmer Steenhuis
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