Heart of Blockchain is Trust

How much should we pay to trust one another vs. middle-men?

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Photo by Markus Spiske

I can write realms of digital paper. Or I can move at a crisp pace and trust you to draw your conclusions. I chose the latter for this geeky topic.

The heart of the dilemma between our current currency vs. future money is trust.

Not trusting this or that currency, something deeper and fundamental.

Watch this illustrative video.

I found three subtexts in this video that warrant a deeper introspection.

Subtext 1) 26 secs into the video. “And it [bank] takes a little cut for its trouble”

Is there that much money in being a “trusted” bean counter?

My first eye pop-up happened when I watched the movie Office Space. The geeks in the movie created a computer virus to divert fractions of pennies into a bank account. They hoped that it would balloon slowly over time. What they realized was that the account exploded pretty fast. I got an idea of how fractions add up then. I did not feel it.

That feel happened a decade ago. My boss asked me to do a look back analysis of a trading strategy called “delta hedging.” The results looked promising. And aligned with the pricing principles of Nobel winning laurates Black and Merton (who worked with Scholes).

My boss smiled at my results and said, “Please add buying and selling transaction cost (bid-ask) in your model.”

Those fractions of the dollar changed everything.

Boom- all my paper profits vanished.

I smiled that day — for I graduated from being a book-worm to a street worm.

Yes, there is substantial money in being a trusted bean counter. Some call them market makers. Some call them middle men. Many call them bankers who participate on both sides of the transaction.

Does this space of trusted transactions warrant disruption?

Subtext 2) 50 secs into the clip. ”But I might trust everyone.”

The game of everyone vs. few boils down to: Should we decentralize or centralize trust?

History has great examples:

1) With advent of internet, we had a chance to decentralize information and news. We love the exponential spread of knowledge and live through the consequences of fake news.

2) With the advent of cloud, we had a chance to centralize information from local hard drives to central servers far away from our offices and homes. We love the convenience; we worry about the security of information.

3) With the rapid pace of solar, we have a chance to decentralize electricity. With all the tap dance and exponential decline in price of solar panels — Nikola Tesla’s central model of generation and efficient transportation through high voltage wires is still the economic way in most places.

Framed through these examples, you can draw your own conclusions on pros and cons of central vs. decentralized trust — based on your own, independent experiences.

I frame it as a debate between autonomy and efficiency.

Subtext 3) 2.08 minutes into the presentation: “they [bookkeepers] are not actually people, they are computers. Lots of computers.”

There is a hyberbole on blockchain and bitcon that I find amusing. Words like “trustless economy” get splattered in marketing materials. What blockchain will do is transform whom we trust — not eliminate trust.

Unspoken Subtext 4) If the world embraces the world of blockchain and crypto currencies with gusto — one thing is certain. We will subsume more energy. That is the paradox of technological enlightenment. Electricity business will boom with blockchain, Bitcoin and ensemble. And it does not [yet] come with strings attached for sustainable energy.

Connecting the Dots on all the subtexts

The central tenant of blockchain — the technology behind cryptocurrencies like Bitcoin — is trust. Blockchain symbolizes a transfer of trust — from middle-men to technology.

The bookends of this “spread of trust” are clear — today’s very few and tomorrow’s all.

Today’s ‘very few’ conjures up images -Shylock from Shakespeare’s Merchant of Venice, immaculately dressed up bankers zooming the streets of New York and a friendly neighborhood banker who knows you by your first name.

Tomorrow’s ‘all’ reminds me of famous lines from Kurt Vonnegert. “Write to please just one person. If you open a window and make love to the world, so to speak, your story will get pneumonia.”

The nascent vagaries of Bitcoin in recent past allude to these wise words.

The truth would end up somewhere between few ones and encompassing all.

Like how India did.

In 9th grade, I remember learning about Indian constitution in civics class. My social studies teacher shared, “India is a sovereign socialist secular democratic republic.”

I asked her what does it mean to include all ends of the spectrum. She said, “the nation imbibes the best strength of all and lives with the challenges of all. It takes time but the idea of India will eventually be a grand success.” Those were her words of prediction.

I do not have a crystal ball on where the world will land on trust and technology. As we stand, the best line for posterity from these early days of Blockchain, Bitcoin and all.

“Goldman Sachs calls blockchain the new technology of trust.”

The question that remains — Where is that sweetspot between the bookends? Will there even be a choice when it comes to trust?

Or will we roll with the punches — just like how the middle class has done through the ages?

Karthik Rajan

I enjoy writing at the intersection of analytics and human relationships. Trust you enjoyed the read at the intersection.

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