My 2 cents on blockchain as I slowly understand the trust bit

Blockchain is not "just another database." Or even "a decentralized database." It is more, because it enables two people to trust each other without relying on a third party.

It took me a while to realize how important and revolutionary that is, so... here is my brief intro to the idea as it finally clicked:

When you make a $100 credit card transaction, there's you and the shopkeeper AND the credit card company.

Shopkeeper needs to be able to trust that the money you promise (via credit card swipe) really will be paid to him as promised. The credit card company does a quick balance check and says to the shopkeeper "You can trust this guy, or we'll pay his bill. For this service, we expect 2%." Trust is invested in a third party (which is always a centralized authority due to economies of scale). The credit card company makes similar assurances to you in case of fraud, etc.

This model is true not only with credit cards, but throughout the whole economy, because in 10,000 years of financial history, nobody figured out how to enable trust WITHOUT a third party being involved. Even dollar bills are "backed by a bank", so even cash transactions require a third party implicitly guaranteeing the value.

Blockchain solved this. It eliminates the need for the credit card company (which you pay, and then which pays the shopkeeper, meaning 3 ledgers are involved: yours, the credit card company's, and the shopkeeper's).

You and the shopkeeper simply add a single entry on the public ledger, transferring not a promise but actual value. Because blockchain entries cannot be edited*, the transaction is completed. Period. Done. Immutable. The credit card company, with its elaborate and expensive billing process paid for by that 2% is completely unnecessary.

As you can imagine, credit card companies and other such characters are not too happy with the advent of blockchain. There still is a place for their role in handling fraud, but that's a different model than handling promises. It is a much smaller issue, since a reasonably just legal system handles most of it.

*There will be an interesting hiccup to this process when the first quantum computers come online in a few years, because they will be so fast they'll enable "editing" blockchain entries -- but thankfully only recent entries. People will freak out for awhile until there are more quantum computers competing and then that hiccup will be done.

Posted in Everything on Feb 16, 2018