Understanding the Trustless Currency-Ledger System
This is the first of four posts about how these sort of systems work, problems with the current model, and thoughts on potential ways to fix it. Of course, what explanation and potential solution is not complete without a cyberpunk vision of the future.
To really understand the trustless currency-ledger system, we need to break it down to its component concepts.
“Trustless”. What we really mean by “trustless” is that no single entity has control or unfair power in the system. Trustlessness is a result of the inbuilt market incentives that get individuals to participate in the network and adhere to the protocol. The incentive will always act like a currency, as it has to have value to pay for security. It is no different than a mechanical governor, or electrical feedback circuit. It is just a feedback system trying to reach its designed equilibrium.
However, this system is somewhat special in that it straddles both the physical world and the digital reality, ultimately giving us the “currency-ledger” dynamic.The Bitcoin universe (Bitcoin’s digital reality) is similar to all other digital space, except that the laws of the Bitcoin space are dictated by the algorithms and cryptographic framework set forth at the creation of the system. Some examples of these natural laws would be the block size, the block reward, or the difficulty. The blockchain/ledger resides within the framework of this constructed reality. The currency is the energy that allows movement of value around the blockchain. The proof of work algorithm is what binds the Bitcoin universe to the real world. This is how we can have a trustless system and a non-replicable digital token. Because the cost of securing the blockchain is ensuring the Bitcoin universe maintains continuity and consistency, it must be tied to something that we cannot cheat or fake, something that is not digital: namely, thermodynamics.
At the core of what gives Bitcoin its unique value and true revolutionary potential is the distributed consensus, the trustlessness, that proof of work allows. This never-before-created information machine is what we see currently functioning. However, with the proof of work becoming centralized, we are quickly undercutting the trustless nature of the system. Our feedback system is stuck, and pushing the system to the wrong type of equilibrium. This is a fundamental problem to any trustless distributed consensus system, and must be solved at the fundamental level: we have to distribute the network through incentives to build the right infrastructure.