Truster Vs. Trustless (Part 1): The Role of Trust in the Means of Exchange Operation

Trustless has become a rallying cry for Bitcoin evangelists, focusing public attention on the fact that Bitcoin enables P2P transactions without the participation of a trusted third party acting as an intermediary.

Bitcoin makes it possible to conduct money transfers without intermediaries — intermediaries who could, otherwise, gain control over funds in a transaction, censor transactions, or act as points of failure. Does this give grounds to assert that Bitcoin and other cryptocurrencies are a form of money that does not require trust? Is it possible to completely eliminate trust from monetary relations, and is there even a need to? This article is devoted to the study of the role of trust in monetary transactions, including cryptocurrencies, and its main conclusion is that this role is hard to overestimate.

The series is divided into four parts. In this installment, we analyze the role of trust in monetary relations, including the role of trust in Bitcoin’s functioning and show that trust is necessary for any money.

The Role of Trust in the Functioning of Money

In the book Money Between Violence and Trust, Michel Aglietta and Andre Orlean formulated three forms of trust associated with the functioning of money [1].

Methodical trust. Money differs from ordinary goods by the characteristic of direct exchange. Individuals are willing to exchange their goods for money, only because they believe that the monetary form can then be exchanged for any other product on the market. That is why the functions of money can be manifested through such relatively useless things, such as scraps of paper or records in a database. A person doesn’t care what money is made of if they are sure that they can exchange it for a product or service.

This belief arises mainly from the previous experience of the successful exchange of goods for money by many individuals. The high frequency of such exchanges strengthens the payment community’s confidence, united by the use of money, that this unwritten rule of exchange will be observed in the future.

Will Bitcoin be able to perform the money functions if individuals do not believe that they can always exchange it for any product or service, or at least for other money? No. Before the appearance of market makers who began to buy and sell Bitcoins, thus strengthening the public's faith in its relatively stable exchangeability with money, Bitcoin was merely a plaything for a narrow circle of cypherpunks. If for some reason this belief is lost, Bitcoin will only retain the modest role of a digital collectible item.

Hierarchical trust. Methodical confidence in itself is quite fragile. In pursuit of profit, the rules of money exchange on which this form of trust is based could be violated. For example, bad actors could produce fake money, or suddenly refuse to accept money as a means of payment, demanding something else in return. So, an authority with the ability to enforce monetary rules must support the honest members of the payment community. Hierarchical trust is the belief of individuals in the ability of this authority to maintain established monetary rules, including possible punishments for violators.

As a rule, this function is performed by the state. For example, the state has the capacity to punish counterfeiters. The harm that counterfeiters bring to the economy is not limited to the losses of those who received fake money in exchange for their goods or in repayment of a loan. Counterfeiters undermine the methodical confidence of all members of the payment community: confidence in the rules of exchange as well as in counterparties. And confidence in the payment community itself, without which normal economic relations are impossible.

The state has legitimate instruments for coercing individuals to use money with the status of legal tender. A debtor can be sure that he/she will be able to pay off his debt with this money regardless of the whims or tricks of a creditor. A seller of goods can be sure that he/she will be able to use the money received for the goods for his or her future purchases. Thus, methodical trust is strengthened by the hierarchical trust.

One of the slogans of Bitcoin evangelists is the formula “code is a law.” In their opinion, government coercion to execute monetary rules is not necessary if these rules are hard-coded into Bitcoin. However, experience shows that the code regularly turns out to be imperfect and this can be used by intruders for the “illegal” emission of a cryptocurrency [2]. “What blockchain does is shift some of the trust in people and institutions to trust in technology.” [3]

If we ignore the possibility of abuse of all sorts of bugs, then there is, for example, a 51 percent attack that allows a bad actor to perform a double-spend of Bitcoins. Such an attack can also be compared to the counterfeiting of a fiat currency.

Bitcoin, unlike national currencies, does not have the status of a legal tender. Nobody is obligated to exchange goods or money for Bitcoins, nor to accept it as a mean of paying off debts.

Will the methodical trust of Bitcoin be strengthened if the state punishes anyone who attempts to profit by breaking the rules of this payment community? Will methodical trust in the Bitcoin be strengthened after one or more states declare it legal tender? You do not need to be a professional economist or sociologist to answer these questions.

Ethical trust. The state strengthens methodical confidence in money, but there is a third, more fundamental form of trust that limits political power over money. This is the trust of individuals in the social system offered by the government. If individuals lose faith in the project of the society proposed by the authorities, or the authorities violate the values of this society, then individuals can begin to introduce new rules of exchange, despite government efforts to save their existing monetary system.

The importance of the ethical form of trust is particularly pronounced during periods of social upheaval, especially during wars. Each of the belligerents can issue their own money, and individuals can accept money from one party or another based not only on coercion but also on the project of society they support. A less tragic example of the role of ethical confidence in money is the confrontation between supporters of gold and fiat money. If gold money is supported by free-market advocates, then fiat money is supported by those who believe that the government should interfere in the economy.

Bitcoin emerged as an alternative to the project of a society determined by state authorities. This alternative ideology, another project of the society that gave birth to Bitcoin, is called crypto-anarchism. In this system, there is (by definition) no central authority that can win or lose the trust of individuals. But this does not mean that Bitcoin is not vulnerable to potential crises of ethical trust.

Even in Bitcoin’s short history, there are examples of a kind of “civil war,” during which the payment community was split on the basis of ideology. The material result of such splits is forked. The most prominent "civil war" was a dispute over the size of the block. The party of crypto-anarchists was in favor of limiting the block size to protect the network from centralization, and the business-oriented party supported the increase of the block size for their commercial reasons. Crypto-anarchists who have lost faith in the privacy of the Bitcoin transactions, due to the development of services like Chainalysis [4], have switched to Bitcoin forks with increased privacy, or to alternative cryptocurrencies that use ring signatures, or zero-knowledge proof.

There is another example of an ethical trust’s role in the history of the Bitcoin [5]. In periods of economic and social crises, when state power and the money offered by it has lost the trust of individuals, Bitcoin has come to the rescue — precisely due to its stateless nature.

In the next part, we will justify the need for credit and credit money, which cannot exist without trust.

Sources

[1] M. Aglietta A. Orlean, La violence de la Monnaie

[2] Zcash Discloses Vulnerability That Could Have Allowed 'Infinite Counterfeit' Cryptocurrency // http://fortune.com/2019/02/05/zcash-vulnerability-cryptocurrency/

[3] Schneier B. There's No Good Reason To Trust Blockchain Technology // https://www.wired.com/story/theres-no-good-reason-to-trust-blockchain-technology/

[4] Chainalysis – Blockchain analysis // https://www.chainalysis.com/

[5] LocalBitcoins Volume (Venezuela) // https://coin.dance/volume/localbitcoins/VES/BTC