Whereas Trust is delegated to 3rd parties in our legacy systems, Distributed Ledger Technology (DLT) systems are Trustless. This means Trust is embedded within computer code, and so the network participants do not need to Trust each other for the system to function. This is important because, in legacy systems, 3rd parties extract value due to Moral Hazard.
A Transaction is an event. Therefore, Distributed Ledger Technology (DLT) is a breakthrough in our collective ability to verify events. In Traditional Finance, this is a simple accounting of balances on a centralized ledger, and it is reliant upon 3rd parties for verification.
The two-sided accounting of debits and credits is known as Double-Entry Accounting. This method of book-keeping necessitates auditing (verification) by 3rd parties to assure nobody is “cooking their books” (See: Enron, 2008 Global Financial Crisis, and more recently FTX, Celsius, Voyager, 3AC, Terra-LUNA).
Trustlessness of Bitcoin
In 2008, The Bitcoin Network pioneered the innovation of Trustless Value Exchange by employing Triple-Entry Accounting.
Triple-Entry Accounting combines the two-sided accounting of debits and credits - the subtracting of numbers on one ledger, and the subsequent addition of those numbers in another ledger - with nearly instantaneous auditing and verification of the event, facilitated by cryptography and distributed computing.
As evidenced by the title Bitcoin: A Peer-to-Peer Electronic Cash System, Trustless Value Exchange was the intended purpose, and it is an important advancement for humanity.
Trustlessness of Ethereum
The Ethereum Network builds upon this breakthrough: it couples Trustless Value Exchange with the Trustless Execution of Contracts. In web3, such contracts are known as Smart Contracts 🤝.
In the pre-web3 world, Contracts were facilitated, audited, and enforced by third parties (E.g., the legal code in a jurisdiction). In web3, Smart Contracts are facilitated, audited, and enforced in a peer-to-peer manner without 3rd parties.
Smart Contracts 🤝 are executed within the Ethereum Virtual Machine (EVM).
By eliminating middlemen and value extraction mechanisms…
…end users can obtain better interest rates on their U.S. dollars in Decentralized Finance (DeFi). Decentralized applications (dApps) like Compound and Aave are exclusively peer-to-peer.
This means your coins are custodied - held - by Smart Contracts and your Digital Wallet only. No humans are involved. Self-Custody.
In contrast, custodians like Gemini, Coinbase, and Nexo are NOT exclusively peer-to-peer. They are centralized entities. Human operated.
Once you give them custody of your coins, they are free to do with them as they please. Moral Hazard compels.
These entities have been known to take customer funds and gamble with them (margin leverage is what they like to call it), enabling them to offer deceptively high yields. But as recent events have shown, most of them are essentially pyramid schemes driven by Greed.
If it is a black box, it is centralized. dApps like Compound and Aave exercising the judicious application of Smart Contracts are permission-less and transparent, allowing complete scrutiny of transactions (auditing) on block explorers like Etherscan.
E.g., depositing USDC into Aave will send an interest-bearing “a” token to your digital wallet. Below, a user deposited $1 USDC into Aave on Ethereum’s Layer 2 Arbitrum Network, and received an interest-bearing Aave token denoted as “aArbUSDC.”
Similarly, your digital wallet will receive a “UNI-V2” token for providing liquidity to an AMM (Automated Market Maker) DEX (Decentralized Exchange) like Uniswap. And so forth.
This exemplifies Triple-Entry Accounting, and unlocks Double-Token Debt. Aave is an imperfect analogy because the creditor’s claim is not “callable” by the Smart Contract, hence the one-sided arrow.
Learn more at button.foundation.
Trustlessness of Medicine
There is none.
But it’s easy to change this. Our identities are basically NFTs (Non-Fungible Tokens) sitting in the healthcare system’s centralized ledger. We upload our identities to a Distributed Ledger, so that we can self-custody our NFTs.
Physicians are invited to HPEC.
And then we build a new healthcare system, modeled upon DeFi’s Hierarchy of Needs:
