One of the foundational concepts of any exchange of value is trust between parties, something vital to complete a transaction successfully. Trust refers to the ability of each party to believe that the other will uphold their end of the bargain, something that is not always guaranteed.
To resolve this trust barrier, societies have created layers of intermediation that guarantee both parties’ intentions at multiple points. From banks that verify they hold their clients’ accounts to lawyers who verify that contracts are legally binding and valid, these middlemen perform their function of adding trust, but at a high cost.
Maintaining these intermediary networks, which have at this point become massive and entrenched, costs users both financially and in terms of transaction times. Each node in the value chain extracts fees for their services and can significantly slow down even the simplest transactions. However, these intermediaries are not as necessary as they seem.
Blockchain’s distributed ledger technology has already been touted for the transparency it provides in record keeping. However, this increased transparency also has the effect of removing the need for trust, and with it, opens a new potential paradigm of transacting that could make intermediary networks obsolete.
Improving Trust Comes With A Price
The current financial model is based on a complex network of institutions and nodes that verify transactions, parties, and the movement of dollars to create trust for any value exchange. The system has become increasingly entrenched, with banks, lawyers, accounting firms, and other middle men positioning themselves as de facto gatekeepers of vital transactional services.
These roadblocks are considered necessary evils to ensure that the financial system operates smoothly and can make money by collecting value when transactions pass through their nodes. Even so, the current model is functional if not optimal. Individuals can safely keep their money in banks, though they are charged for the privilege of holding their funds. Lawyers draft contracts which allow for legal recourse and guarantees, for a sometimes-sizable fee. Payment processors verify transactions via credit cards and other payments, extracting a percentage from sellers for the right to use their network.
The result works, but it imposes inefficiencies in the system—time, costs, and most importantly, an enforced trust that is not always transparent. Unfortunately, while there is some guarantee transactions will be completed, trust is not derived from the transaction itself or even the exchange, but rather the institutions and gatekeepers doing their job. This method is not optimal, as it forces users to accept a high-cost solution to a seemingly simple problem.
No Trust? No Problem
To resolve the trust problem, there must be a model that can guarantee a transaction on both sides without the need for intermediaries. Blockchain, which was built to support the anonymous-yet-secure cryptocurrency model, offers many benefits that can do just that.
The biggest way blockchain achieves this is because of its architecture as a distributed ledger system. This means that all transactional data is stored on every single node of its decentralized network. When new transactions are made, each user’s ledger is automatically updated, and must then be verified by the network using a consensus method such as proof-of-work or proof-of-stake. This verification is crucial, as it means that even as information is distributed to potentially millions of points simultaneously, transactions are verified quickly enough to avoid double-spending and data manipulation.
Additionally, most cryptocurrencies and blockchain systems have means to verify users and confirm they are who they claim, that do not require any intermediary. Wallet verification systems like Know-Your-Customer and other cryptography-based methods are more precise than traditional tools, and offer users both anonymity and a safe way to verify their identity for transactions.
Because blockchains are decentralized, there is no need for a central authority to maintain or control the network and flow of data. This decentralization also distributes the verification and transaction recording needs across the network and creates a peer-to-peer paradigm of transacting.
Most importantly, however, all these separate factors work individually to remove intermediaries and add trust while simultaneously increasing security. Distributed ledgers are fully public, as anyone on the network has a version with immutable transaction records. This reduces the need for lawyers, accountants, and even banks to record transactions, value exchanges, and what each party is holding in assets.
Consensus verification methods reduce the need for banks and payment processors to confirm that transactions are valid and funded. When users have a clear record of what each party has transacted and their existing assets in an unalterable format, fraud becomes a significantly smaller concern.
Moreover, combining these three factors means that blockchain could theoretically replace traditional payment systems by reducing costs, friction, and the likelihood of fraud. Trust is only necessary when there is no way to verify each party’s particulars before an exchange occurs. Blockchain can do so without requiring users to place their trust in systems built by people with their own agendas, and without requiring any mediation aside from a one-to-one agreement.
Removing Trust to Build Better Transactions
Blockchain is set to spark a fire in the technology and financial worlds. By creating a system that removes the need for many entrenched stakeholders and intermediaries, blockchain’s biggest advantage lies in its disruptive power. By creating a value-exchange model that is completely peer-to-peer, the technology can build better transactions, enhance transparency, and reduce the high costs that often get passed along to consumers for the privilege of processing their transactions.