Liquid trust
Trust is a peculiar thing. It’s different from truth. Something can be true yet not trusted. Conversely, what’s trusted may not be true. Machines running code are unemotional about reconciling – and trusting – what’s true. The equation is different for human beings. Truth is a necessary but not sufficient condition to achieve a long-term-stable equilibrium of human trust at scale. The core premise of crypto is solving coordination problems in low-trust and high transaction cost environments. This technology transforms truth into trust at a global scale. Crypto makes trust liquid.
Computing, abstracted by software, enables powerful coordinating mechanisms. Sequential waves of computing have demonstrated the many ways in which human behavior can be coordinated to solve a problem. Uber was only possible at scale because mobile emerged as a new computing platform (pocket-sized form factor, connectivity). One of its key accomplishments was to create trust between two constituencies via software, solving a two-sided coordination problem which dramatically lowered transaction costs. Imagine jumping into a complete stranger’s car at night circa 2000? The trust that was infused through the Uber app lowered the friction to consummate a transaction, unlocking economic value for consumers and suppliers.
Closed-end loops of trust can be powerful. Note that the direct consumer-supplier trust relationship in Uber’s private network exists within a greater web of trust, with Uber as the ultimate arbiter of truth. The nexus of trust is a corporate intermediary; there’s a central administrator serving as a referee. This works relatively well for short-distance travel. But does it work for a monetary system?
Some systems are different. The corporate structure of shareholders, a board of directors, a management team, and employees can be highly effective. Yet, a corporation can’t run a supranational monetary system, because the trust requirements are fundamentally different.
Crypto is a new computing paradigm. Blockchains – such as Bitcoin, Ethereum, and Solana – are permissionless systems that can agree on what’s true without any central administrator, intermediary serving as referee of the system itself. This could be called a self-verified global consensus machine; it’s a network of compute, in effect channeled into a single computer, running software that can’t be corrupted. You could also think about it as a type of emergence: the whole, as a network, is vastly different from the sum of the parts in isolation. (10,000 unconnected computers is quite different from 10,000 computers synchronized with software as connective tissue.)
Truth is transformed into trust. Crypto offers five properties that enable this metamorphosis, resulting in the potential to coordinate human activity at a scale that transcends any nation state or existing transnational organizations: neutrality, immutability, permanence, openness, and verifiability. There is some subtlety here so let me be clear. A neutral system treats all equal things the same, lacking the ability to discriminate for arbitrary reasons. An immutable system ensures that the state of the world can’t be altered retroactively. A permanent system provides strong assurances about its future existence. An open system is accessible, transparent, or available to the public. A verifiable system can be proven to be accurate or true. All five are important ingredients for truth to blossom into trust in our world.
Bootstrapping truth requires incentive. Large amounts of computing resources are needed to enable a system like Bitcoin or Ethereum to maintain its own truth in adversarial circumstances and as a result nurture human trust. Crypto makes incentive native to the system. It’s a permissionless meritocracy underpinned by open source software and financial incentives to (computational) work. The beauty of this design is that the production function becomes endogenous to the network; it’s not possible to game the rewards mechanism, because inputs to and outputs of the production function are mathematically verifiable. All contributors can trust the fairness of the network.
It’s an era of distributed trust. The main benefit of crypto is that users, including application developers and end-users of a product, can have confidence in transactions without directly trusting the integrity of any intermediaries such as individuals, companies, or governments1. Yes, this means that immutable and verifiable code, secured by distributed trust, supplants traditional trusted third-parties. All players in the system can fundamentally distrust everyone else, and the integrity of the system is still intact. Truth and trust are built into the system by its design. It’s a trust architecture through which transactions can run, or property rights enshrined in software.
May permissionless innovation flourish.
Crypto reduces coordination and transaction costs. It’s a technology that helps the human species increase its rate of innovation and achieve long-term-stable equilibriums of human trust at scale. Trust has become liquid.
- This is an excellent paper from which I’ve drawn inspiration for this piece https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2844409 ↩︎