TRUST ME BRO: Crypto transactions are never trustless

 

Trustless transactions are crypto’s unique selling point. As we lose faith in centralised institutions, banks, and governments, decentralised blockchains are seen as a safe haven where our transactions do not depend on the actions of other humans. But can we really eliminate trust when we exchange digital assets? Is it possible live the ideal of “Don’t trust, verify,” in the cryptocurrency space?

In this article, I argue that crypto transactions are never trustless. “Trust no-one” is something we say, not something we do. A narrow and idealised focus on permissionless blockchain technology has obscured our vision. In fact, trust is necessary at every stage of cryptocurrency investing.

First a few words on what I mean by trust. To trust is to make yourself vulnerable to someone or something. It is to hand over control and hope for a specific outcome that is meaningful or valuable to you, without being able to ensure that outcome. Trust is goal oriented. It is a way to achieve a particular objective more easily or efficiently than going it alone.

If I want to exchange fiat currency for ADA,  I have to trust a centralised third-party:  an exchange. For a brief moment, my money is in their hands. Handing over control to someone else in this way is a calculated trade-off. Trusting is not a moment of weakness or an undesirable personality trait. It is a choice, and a goal-oriented feature of some social relationships.

Buying Bitcoin in carparks was an extreme sport, but still preferable to being robbed by Sam Bankman-Fried

From buying Bitcoin in carparks to FTX

Crypto on-ramps demand that we trust them, or leave empty handed. To exchange fiat currency in for pure, promising digital assets, we must take one last leap of faith into the centralised. We choose to trust our KYC details and money to Sam Bankman-Fried or another person of dubious integrity. We send them our money and hope for the best.

This is nothing new. In earliest days of Bitcoin, buying crypto meant taking a deep breath and sending your money to a stranger. In 2011, you could choose between wiring money to someone you met on a forum, meeting up in a dingy car park, or sending your money off to Mt. Gox. We know how that ended.

Over a decade later, not much has changed. There are more exchanges, with bigger balance sheets and more sophisticated products. But they are still centralised, largely unregulated, and run by mysterious individuals, whose faces we see on the cover of glossy magazines.

The recent FTX meltdown shows the very real risk of trusting a centralised exchange, even briefly. But unless you mine or earn your crypto, you have little choice. The main portals into crypto still demand the same level of trust as a carpark encounter in 2011.

Enter your password and have a little faith

Obtaining your pristine crypto coins is not the end of your trust journey. To access NFTs and DeFi, you must once again place your money and faith in the hands of others.

The most common way to mint an NFT on Cardano is via a centralised vending machine. We trust the developers to do send us what we pay for, or refund us if not. We connect our wallets (which are not always open-source) to sites built by anonymous dev teams.

We sign transactions made up of strings of numbers, which most of us do not understand.  These are all acts of trust, based on the reputation of the coders, the website builders, and the wallet makers. Often the decision is made in a split second, almost unconsciously, in the rush to buy a coveted PNG. For the art, of course.

Could Increased Regulation Eliminate The Need To Trust In Crypto?

Minting NFTs is an extreme sport

Minting NFTs on Cardano in the distant past of 2021 required an even more reckless act of trust. Join a Discord server. Chat with an anonymous team for a few days. Then spam Ada transactions to an address posted on the announcements channel. Sometimes a rogue moderator would post the wrong address and steal the funds. Or the team would post the wrong address and make a random wallet owner accidentally rich. Mistakes were made.

Once the adrenaline wore off, the dread would creep in. The collective anxiety was palpable amongst the rocket emojis in the post-mint chat. Was our trust in the “devs” misplaced? Would we receive the coveted cartoon lottery ticket in time to flip it? Beyond that, would the team complete the road map, and bring the holy grail(s) of utility and number-go-up? The risk of rugpulls, of deleted  Discord and Twitter accounts and lost money, was ever present. It still is.

Trust is most visible when broken. Rugpulls highlight the nature of the trust trade-off

Rugpulls are luminol for trust

In DeFi, too, we put our hearts and money on the line. We buy tokens conjured out of thin air, and we trust. We hope project owners with huge initial allocations will act against their best interests. That they will not dump on us or drain our ADA from liquidity pools. Or that they will not go into “hibernation” due to adverse market conditions, poor planning, or greed.

The demise of Ardana this week shows that even projects with millions of dollars in VC funding from big names like Three Arrows Capital and cFund can dematerialise in an instant. This leaves unlucky investors in a state of confusion. When projects fail, our acts of trust are laid bare. We feel the betrayal, and can no longer pretend our investments are free of trust. It becomes clear that we had no control over the outcome or, the value we handed over in the hope of gains.

Sell cryptocurrencies, buy dreams

Even investing in a respectable blockchain like Cardano requires a level of trust in the founders. Many of us purchased our first ADA after watching Charles Hoskinson’s famous “whiteboard video”. We placed our trust in the tech, but also in the vision and abilities of 3 founding entities – their integrity, their benevolence, and their ability to deliver a secure decentralised blockchain.

And so, we trust, keep our ADA staked (and hopefully self-custodied) and hope that Cardano will live up to the narratives of banking the unbanked, decentralised governance, and slow, steady, research-based security.

By now it should be clear that the mantra of “Don’t trust, verify,” lacks nuance. Trust is the necessary lubricant for exchanges of value in the “trustless” crypto space.

Making friends and evaluating people

In the wake of the 2008 financial market crash – with bailouts, abuse of surveillance technology, and disinformation – our desire for disintermediated financial transactions has increased. In the blockchain space, technology, human alliances, and online identities form an enclave of ‘just us’ – a gated community of people who share an ideology of avoiding third party mediators and the unrelenting gaze of the nation state.

In this enclave, our financial transactions become more personalised and socially framed. In the bear market, the Cardano community feels like a small village. We share intimate interactions on social media and at live events. Reputations are formed in every encounter, for better or worse. We know each other’s (online) faces.

We have entered an age of relational finance, where traditional narratives of convenience, speed, and security in transactions merge with tales of trust and distrust, social relations, community, and dissent.

On a quest for meaningful experiences (and a Lambo) we consume cryptocurrency as a social experience – rather than consuming with money, as was the case in the (fiat) past. Our crypto experience is social, mediated by technology and social media. And in this social space, we transact, exchange value, and trust each other.

Discord degens are expert risk managers

How, then, do we safely navigate this social-financial space? Obsessed with privacy and fiercely guarding our real-world identities, we sacrifice essential social cues such as gesture or eye contact. We produce new virtual identities, and renegotiate our roles daily in communities on Twitter and in dozens of Discord servers.

Online, we create, curate, and negotiate the data we need to evaluate our next inevitable trust trade-off. Does a NFT project have any red flags, does an individual show integrity, is a community open to criticism, are the devs professional, present, and decent?

The pictures are complex, constantly evolving, and always incomplete. Behind cartoon profile pictures, we create taxonomies of identities and past behaviour for our fellow human-internet chimeras. We use loosely arranged reputational data to weigh up the risk of choosing to trust.

How important Are Discord & Twitter To You When Buying NFTs & Investing In DeFi Projects?

Blockchains may be trustless, people are not

Pure, trustless blockchain code is merged with social relations in cryptocurrency transactions. We consume our money as an experience and constantly (re)produce our own identities and those of others. We gather data to assess the risks of our trust relationships. The ideological basis for crypto as a technology of dissent has become entangled with the urge to personalise the experience of transacting, and to form relationships.

The social aspects of financial transactions are also present in fiat exchanges of value, but they seem to have mutated within the crypto space, taking on a life their own. Here, we need to trust in order to be part of the game. And we want to interact and create relationships, because existing in and consuming the social spaces of crypto is essential to protecting the economic value we invest. We need to know who is who, and what is going on. If we do not stay in touch, and aware, we are NGMI. Crypto projects and trends move at a frantic pace. Set it and forget it does not work here.

So, then, trust cannot be eliminated from our crypto games. Our only line of defence is to be aware of when and whom we are trusting. Make it a conscious choice. And, well, DYOR.

Inspiration:

Martin Tremčinský, Bitcoin and its spheres of consumption: Transactional orders of consuming money in the Czech and Slovak Bitcoin community, Economic Anthropology (2022) 9: 35–46

Primavera De Filippi, Morshed Mannan, Wessel Reijers, Blockchain as a confidence machine: The problem of trust & challenges of governance. Technology in Society, 62 (2020) 101284, https://www.sciencedirect.com/science/article/pii/S0160791X20303067

Rebecca M. Bratspies, Cryptocurrency and the Myth of the Trustless Transaction, 25 Mich. Telecomm. & Tech. L. Rev. 1 (2018). https://repository.law.umich.edu/mttlr/vol25/iss1/2/

Sebastián Manrique, Blockchain: A proof of trust, Masters thesis. (2018) https://repository.tudelft.nl/islandora/object/uuid:c1996e12-1462-4683-8716-72110c665d4c/datastream/OBJ/download

Yura Yokoyama, From money to culture: The practical indeterminacy of Bitcoin’s values and temporalities, Economic Anthropology (2022).

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