Over the last weeks, 3 out of the 6 considerations on this Substack had the word trust in their title - well before the world was shocked how trust can be broken.
It is important to understand the relevance of trustless technology.
Trustless is actually trust(the majority of)verymany
Instead of trusting one counterparty, or a counterparty overseen by a regulator and guaranteed by tax payer money (bank deposits), the trustless nature of bitcoin means trust in a very high number of counterparties - open source developers coding with an ambition to maintain the network safe and trustless and scrutinising the code of developers, miners making more than 250 million TH/s (25x10^19 hashes calculations per second, requiring more than 8.3 GW electricity capacity) and more than 14,000 nodes. So, trust is based on very many counterparties and intermediaries keeping each other in check - moreover the trust does not depend on all of these counterparties or intermediaries to be trust worthy, in most cases, only the majority of the large number of counterparties or intermediaries needs to be trust worthy.
Sometime people talk about disintermediation - actually bitcoin increases intermediation - to a very many intermediaries. It is not p2p - without trusted intermediary - on the contrary, there are very many intermediaries. The level 2 lightning network changes this - and actually enables transacting value without counterparty - the very many intermediaries only validate the setting up and closing of a channel between two parties.
Trusted versus trustless
Recent events raise the importance of the difference between trusted and trustless (or trustverymany if you wish). There are various levels of trust:
Trust counterparties
Many counterparties in the blockchain / crypto space depend on trust. They are barely regulated or externally audited (or even internally audited). Centralised exchanges (MT Gox, FTX) , credit & yield platforms (Celsius, Holdnaut, Blockfi) and many ICOs are included in this category.
Significant issues have emerged - a call for regulation seems appropriate.
State guarantee - trust regulation and the tax payer
Most banks are more extensively regulated. Deposits are sometimes guaranteed by tax payer money. Such regulation helps reducing the occurrence of (criminal) bankruptcies - although cases such as Lehman Brothers, Kaupting, Dexia, Fortis and many more indicate that even such regulation is no guarantee for the avoidance of calamities.
Trustless - trust a large aligned group of coders
Trustless permissionless technology is actually trust very many technology. Users of such technology depend on a large aligned group of coders that work to keep the technology safe. The Lindy Effect would imply that the likelihood for a technology that has already existed since January 2009 has a relatively higher chance to continue existing successfully.
Trustless technology is not completely free from calamities - on November 1, 2022 for example, a hacker by the name Burak caused that a bitcoin node implementation, the most adopted lightning network implementation and many other related network elements stopped working. In the initial minutes after the hack, it was uncertain if funds were at risk. While the bug was resolved within about 3 hours after the incident, the hack remains a debated topic in the developer community. For the p2p finance system, the hack was probably a more concerning incident than the FTX bankruptcy, even though it was much less debated in the press. No funds were lost due to the hack, but it created uncertainty and rightly pointed all network users to the risk that even in a trustless technology remains.
The above indicates indeed that trustless is not flawless. This being said, one can wonder if regulation is the more appropriate approach to tackle risks in p2p finance. One could consider that taking away regulation and adoption hurdles and enabling a broader adoption is the better way to help reducing risk for trustless technology. Indeed, as more (professional / institutional) actors get involved in the ecosystem, with significant means and development teams, more development capacity can be deployed to ensuring flawless, bug free software and a lower risk eco system.
Trustless technology enables more of a level playing field for participants. Trust based or regulated activity has high barriers to entry. In a trustless world, a participant does not need to build a trust - therefore any individual or small company can participate to the network as easily as a regulated institution.
Role of banks in trustless technology
Banks may perceive trustless finance as a competition - the opposite is true. While trustless finance will drive several evolutions in the finance space, banks are uniquely positioned to support less tech savvy customers in the use of trustless finance - through the setup of custodial wallets (actually signing devices), … Therefore banks have an interest in embracing trustless finance asap - as already covered in a previous consideration, game theory is at play here - if certain banks are slow in embracing trustless finance (through their own will or due to inappropriate regulation), they will be eclipsed by other banks who are faster at adopting trustless finance.
In the United States, Cash App has made Lightning Network transactions available to its 47 million users. In Europe, Revolut has enabled investment in trustless finance and even started enabling making payments with trustless finance - also competitor N26 is will enable trading of trustless finance . Several German banks offer the ability to invest in Bitcoin directly from their platform - some have partnered with Börse Stuttgart for that purpose.
Any bank, not willing or constraint by regulation, that is not offering trustless finance can observe: not offering clients access to trustless finance will become a competitive disadvantage, as other organisations are doing it.