Bitcoin’s Trustless Nature Adds Trust To The Internet

Bitcoin’s Trustless Nature Adds Trust To The Internet thumbnail

Stephen Thompson is a senior technical editor at LQwD Fintech Corp. He was a Bitcoin researcher at BIGG Digital Assets and an investigator, analyzing on-chain and offline information.

Trust is the lifeblood of all social interactions. People can trust their counterparts and make transactions in an environment that is high in trust. Low trust in a society can have devastating social consequences. Although trust is built into institutions and structures, they can also be detrimental to daily social life. A bank’s network can fail, leaving a transaction incomplete. A government that does not do what it says it will does. A website that claims to be free of discrimination starts to censor undesirable comments.

How The Internet Changed Trust

In our increasingly technologized world, society has come to see the use of electronic proxies for communication, commerce or even as a way of passing the time, as entirely normal. Networks have been created that allow people to establish trust without ever meeting each other. The internet is the largest network we have created. The World Wide Web, the internet’s most well-known app, was initially a platform that contained vast amounts of information. However, there was so little going on with these early web pages that a 56k modem on a phone line was sufficient to call them up. The internet started to become more powerful and much more interactive in the mid-2000s with the arrival of e-commerce, social media and networking. Internet enabled people to transfer money and personal information. This new internet capability required a new type of trust: trust that money and personal information were safe in the hands of a machine and not of another person. Information can be transferred between machines and sometimes across networks.

A study by the Pew Research Center in 2017, surveyed people’s attitude to the kind of trust people had for holding money and personal information on a digital platform. The respondents answered a range of questions but here are some of the types of answers they gave:

  • A combination of better technology with people allowing it to play a more prominent role in their lives will improve trust.
  • Government and industry regulation tailored to the nature of the internet will improve trust.
  • Trust itself will be fluid depending on the context.
  • Compliance replaces trust as part of a “new normal” if users still want the fruits of the internet’s functions.
  • Blockchain can improve elements of the internet but it will not be so disruptive by the time it becomes universally adopted.
  • Governments and corporations have no interest in improving trust over the internet and criminal networks will undermine trust.

I have focused on money and personal information because, in the digital world, those two attributes have merged into what has become known as “digital assets.” Information has just as much value as money. Nefarious actors have formed networks that are adept at attacking other networks. Such nefarious networks are just as likely to be seeking personally-identifiable information as they would be seeking money. The WannaCry virus of 2017 was one such example where the hackers were seeking digital information as well as funds.

Bitcoin As A New Trust Layer For The Internet

The internet currently has seven layers as expressed in this model below. This is the Open Systems Interconnections model (OSI).

The model describes seven layers (from bottom to top):

  • Physical layer for the transfer of raw data.
  • Data link layer which secures links between networked computers or nodes.
  • Network layer that controls the secure transfer of data packets from a node on one network to a node on another network (like what a VPN would do).
  • Transport layer which transfers data sequences of differing lengths from one application to another.
  • Session layer controls the setup of connections between computers which run logins, name lookup and logouts.
  • Presentation layer arranges the data into a format that the application layer can view.
  • Application layer is where the user manipulates software, such as Microsoft Office or web browsers, so that it communicates between the client and server to perform certain tasks.

It has been argued that this OSI model needs a trust layer that does not create a single point of failure — like downtime — at any stage of the user’s interaction with the internet.

This is where Bitcoin comes in. You can refer to Bitcoin as the network or as the asset. However, in both cases you can argue that Bitcoin combines information and money. The Bitcoin network is a trust protocol. We see it as the essential trust layer of the internet. The Bitcoin protocol is a set rules that govern and protect the network from attacks like double-spending, tampering with its blockchain, or spamming it. We consider Bitcoin as a much-needed trust layer for the internet because it is trustless. How is this possible? “Trustless” refers to the fact that users don’t have to trust any entities in order to obtain their information from one node and then confirm it onto the network. Bitcoin’s trust protocol is built on the transparency and decentralization of the network. The trust protocol for Bitcoin is based on two levels. At the transaction level, users sign transactions with their public keys and then swap them. This allows both parties to verify that the transaction was genuine. At the network level, thousands of nodes and miners verify that the transaction has not been spent twice and broadcast it to the blockchain.

Proof-Of-Work For Analytics

What would be the mechanism that can make Bitcoin a viable trust layer for the internet? In our book “Trust and the Rise of Bitcoin”, we propose “proof-of work for analytics” which is the computational effort required to audit the Bitcoin blockchain in real-time. This proofing can be applied by users, either individually or collectively, running a full-node that monitors internet data about the current blockchain state. There are currently thousands of full nodes that do exactly this. The proof-of-work approach to analytics helps to deter governments around the world and their corporate agencies from mass surveillance and abusive data mining. The more data points that are collected from the blockchain, the greater the number of full nodes that analyze it. The proof-of-work algorithm for analytics can be applied in areas of the internet where users’ private data is most vulnerable to mass surveillance such as social media. We propose that the Bitcoin protocol can provide an important layer of trust to the internet by using the proof-of work algorithm.

External Factors That Impact On Trust

There are other factors that will influence the prospects of the Bitcoin protocol in improving trust in the internet. The trust layer that Bitcoin provides for the internet will be affected by the blockchain industry, financial regulators, and law enforcement agencies. Their interventions will help or hinder the trustworthiness of blockchain technology from the point of view of the public.

This is the point where we start to move away from the Bitcoin-centric notions of trust and towards a type of trust where new users will use Bitcoin because they trust the protocol to perform the functions promised. They also trust Bitcoin because they have interpreted the actions and words of regulators, law enforcement agencies, and blockchain companies as a way to assess their trust in Bitcoin. This layman’s view of trust is important because it makes the computational trust of Bitcoin protocol non-starter if there is no conventional trust in Bitcoin.

When we look at the blockchain industry, central exchanges have been the main point of sale for bitcoin. The public assumes that the Bitcoin blockchain has been hacked if an exchange goes down, whether it is a denial of service attack, funds theft, or something similar. The mainstream news loves personalities, so, individuals such as Gerald Cotten of QuadrigaCX, Alexander Vinnik of BTC-e and Ross Ulbricht of the Silk Road dark web marketplace, have all played their part in making bitcoin look like a currency that only renegades would use. Two reasons why the voice of the Bitcoin community isn’t heard is that the community’s information isn’t the public’s primary source of information and the emotive explanations from the mainstream media outweigh the technical explanations provided by the Bitcoiners. It is instead the mainstream media who, as we know, enjoy remarking on Bitcoin’s “Bitcoin falling to zero” or “Bitcoin being used by criminals”, or “Bitcoin using too much energy,” and where is the opportunity to introduce the concept of computational trust. Or that the energy consumed in Bitcoin mining — which is relatively low compared with other industrial practices — is the price one has to pay for the decentralization, transparency, and decentralization that Bitcoin offers.

The public can see the changing relationship between Bitcoin and regulators. Financial regulators have been closely monitoring Bitcoin, though at different times depending on where they are located. For instance, the Mt. Gox collapse in 2014 awakened the East Asian regulators to Bitcoin, but it took the revelations from the Panama Papers in 2016, to bring cryptocurrencies to the attention of European regulators. Around the globe, financial regulators believe that bitcoin must be subject to financial regulation before it can win trust and achieve mass adoption as promised by Bitcoiners.

The financial regulators have mainly targeted the centralized exchanges because they are the largest businesses that act as a bridge between fiat currency, and cryptocurrencies. Regulators faced a fundamental problem. Bitcoin is a global network that runs the same protocol no matter where the user may be located. Regulators are nation-state-level organizations whose existence predates Web 2.0 and, for some, the internet itself: The UK’s Financial Conduct Authority was established as the Financial Services Authority in 1997, the United States’ Commodity Futures Trading Commission (CFTC) — that has been recently assigned the regulation of bitcoin — was set up in 1974. These two organizations were created to regulate specific types of financial activity. It remains to be seen if their efforts to cover Bitcoin with their regulations (beyond central exchanges) will succeed.

Meanwhile, Bitcoin keeps evolving away from these attempts. Even more challenging is the inability of regulators to coordinate their policies to follow Bitcoin’s global protocols. In 2018, the Financial Action Task Force (FATF) offered regulators some hope when it published global guidelines that governments could apply to their own legislation and give their regulators a better degree of synergy when dealing with cryptocurrencies.

The FATF published its first set of recommendations applying to bitcoin in 2018. It required that any business that transfers any form of digital currency be designated as VASPs (virtual assets service providers). These new requirements were also applicable to centralized exchanges. The FATF wanted to apply the “travel rules” to bitcoin transactions, and this was most important for bitcoin. Those VASPs receiving bitcoin worth $10,000 or more were required to report the transaction amount, the payer’s real information and account number to their local law enforcement agencies and financial intelligence units as though the transaction was an act of money laundering or terrorism financing. The FATF believes that identifying bitcoin transactions with real information will increase trust in bitcoin.

The nature of their attempts at cryptocurrency regulation have focused on money laundering and terrorist financing, so a key focus of regulation has been to require the exchanges to complete know-your-customer (KYC) and anti-money-laundering (AML) checks on new users.

Conclusion

Bitcoin is an open-source monetary network that conceives of trust as computational effort in the form of proof-of-work. To achieve trust, regulators must break Bitcoin’s trust protocols. Pseudonymity is one example. In other words, regulators’ trust demands the destruction of Bitcoin’s trust. The blockchain industry is really caught in the middle. They are trying to convince the public to adopt this new type of money, while being under pressure to conform to regulators’ trust concept. During which they may be required to run public-relations damage limitation exercises whenever their platforms are attacked. We are looking forward to Bitcoin’s success, as it offers a way of computing trust that vouchsafes network security — something central bank-controlled fiat currencies cannot do.

This is a guest post by Stephen Thompson. These opinions are not necessarily those of BTC Inc. or Bitcoin Magazine HTML1.

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