There’s No Good Reason to Trust Blockchain Technology

Advocates of bitcoin and the blockchain system that underlies it have hailed the system as superior to other payment systems because, they say, it doesn’t rely on trust. Public blockchains have three distinct features: 1) A public ledger records transactions that every member can review but no one can alter retroactively; 2) a sophisticated consensus algorithm ensures that all decentralized transactions follow the same rules and get recorded in the public ledger; and 3) the system maintains a common currency or digital token, to which members assign value and trade.

“Society can’t function without trust, and the fact that we mostly don’t even think about it is a measure of how well trust works.”

Trust is the foundation of all constructive human relationships. Modern societies have developed several overlapping systems of trust that underlie human interaction. Morals and reputation work well in smaller communities, while rules-based institutions and enforceable laws ensure norms in larger society. Finally, security systems – including locks, alarms and audit systems – provide additional reassurance against potential violators of the laws and norms.

“What blockchain does is shift some of the trust in people and institutions to trust in technology.”

Blockchain enthusiasts celebrate the fact that their system does away with the need to rely on other people, intermediaries or institutions to ensure orderly, rules-based transactions. But blockchain couldn’t function if bitcoin miners didn’t trust in the system of protocols that governs their transactions, as well as the underlying technology that enables them. In fact, trust in the technology must be absolute as bitcoin traders have no outside recourse to recoup their losses if something goes wrong. Bitcoin traders are only one hacking operation, computer code bug or forgotten password away from losing their savings.

“A false trust in blockchain can itself be a security risk.”

Even the most sophisticated system can’t do away with people stepping in from time to time to provide outside governance or adjust the system’s internal rules to changing circumstances. Moreover, bitcoin users shouldn’t base their trust in the system on its decentralized nature. In fact, a single company currently produces most of the mining hardware, and most bitcoin traders continue to rely heavily on a handful of exchanges to make their transactions. A “false trust” in the system can pose a security risk in and of itself. Hence, people are well-advised to stay away from cryptocurrencies.