When you make a transaction using fiat currency, for example INR, a third party is responsible for verifying and registering the details of that transaction. This third party may be a bank or other transaction facilitator, such as Visa and Mastercard, among others. We know and trust that these devices store our money and keep records of our transactions.
The entire financial industry is based on trust. You invest in the stock market, convinced that your money will not disappear from one day to the next. If you did not trust the system, you could never invest anything in the market. Also in this system we have an idea of the person or entity that controls our finances.
However, this is not the case with blockchain. This is because most blockchains use a trust-free mechanism where no parties know or trust each other. This untrustworthy system was first introduced in 2010 when Bitcoin emerged. Since then, it has become the foundation of the cryptocurrency industry.
But what does without trust mean?
In general, we all know that without trust means someone or something that is not credible or unreliable. But in blockchain terminology, trustless refers to a system where we do not have to rely on any stranger, institution or third party for a network or payment system to work. .
Instead, each transaction is verified by thousands of other users on the network. These users do not know each other. They are spread all over the globe and have the task of verifying and maintaining transaction records. They reach a mutual consensus on the authenticity of a transaction before transmitting it for storage on the blockchain. In return for this, they receive freshly struck coins. Once a transaction is verified, it is added to a distributed ledger, which any network user can access and save a copy of.
This distributed ledger ensures that once a transaction is verified and added, it cannot be changed. Additionally, since no single entity is responsible for verifying transactions, the blockchain becomes decentralized.
Is it really distrustful?
Well not really. Blockchains do not work without trust. Instead, they reduce the amount of trust given to an entity, such as a bank or a fund house. This is done by distributing trust among several network participants. In addition, complex coding, advanced algorithms and autonomous protocols ensure that the blockchain operates without a central authority.
Power and trust are distributed among network stakeholders rather than concentrated in a single person or entity. That said, the term “distrustful” is a bit misleading. Instead of branding blockchains as untrustworthy, we could describe them as built on the basis of distributed trust.
Are trustless systems more secure?
Centralized systems such as banks are the most susceptible to hacks and attacks. This is because traditional financial services have a single authority to verify data and make decisions. This creates a single point of error that malicious actors can exploit to commit thefts and hacks. It is also possible that data has been altered or manipulated.
This does not mean that cryptocurrencies cannot be hacked. Anyone who follows blockchain updates knows that hacks and attacks are quite common in the crypto area. The decentralized nature of cryptocurrencies and the ability not to trust a central body is proclaimed as one of the greatest strengths of cryptocurrencies.