Blockchain Gap: Trust and Efficiency

I’ve taken a few weeks break from the blog, considering what to do next about financial systems. Today’s video though makes clear the major gap I see in blockchain.

Trust is at the core of the efficiency of today’s financial and business systems.  But blockchain, as developed by Bitcoin, is premised on a “trustless” system.

Systems of Trust are Highly Efficient

One of the significant promises of blockchain is greater efficiency.  And one can see how that can be possible through a shared ledger.

A Shared Ledger can significantly reduce expensive record keeping resources

The problem is, that a trustless system adds such a burden to the shared ledger, that it becomes too costly; much more costly than today’s inefficient ledgers built on trusted transactions.

A Trustless Ledger is as inefficient as recording transactions in granite with a jackhammer

In a highly trusted relationship, such as in a family, pencil and paper have adequate security to record transactions in a ledger. In a slightly less trusted environment, such as a partnership, one might chose to use pen and ink, making things a bit harder to change.

Blockchain–the actual file format designed by Bitcoin developers–is like using a slab of granite and a jackhammer. Only in that way will I have confidence that when I have to fall asleep for eight hours each night, the counterparty won’t be able to sandblast the slab clean and re-chisel it with a fictitious set of transactions. But at the cost of using huge amounts of compute capacity recording each transaction all day long!

Fundamentally honest people–the “trustworthy”–have a significant competitive advantage over criminals. Blockchain in Bitcoin is effective for transactions with criminals, but will never replace the efficiency of today’s trusted systems of records.

A trust-based, shared ledger system will ultimately make today’s trusted systems of record even more efficient.

This is Episode 146 of Conversation with Kip, the best Financial Systems Vlog there is. Watch all the Blockchain Gap Videos with this link. Literally learn more–about ledgers and financial systems–at Financial Systems Education.

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