The word “trustless”, defined by dictionaries as “not deserving of trust”, might sound concerning, but in the blockchain sphere, it is actually referring to something very useful. The trustless environment allows people to use blockchain networks to send money or make agreements with each other directly, peer-to-peer (P2P), without a bank or other intermediary.
The development of trustless blockchain platforms is a crucial shift from the way financial transactions used to work. Now it’s possible to do business in a far more open and decentralised way. Let’s learn more about this concept with Grapherex.
What Does Trustless in Crypto Mean?
When we say that a blockchain system is trustless, it means that users don’t have to rely on any person, organisation, or other authority to make sure everything works correctly. Instead, the blockchain uses a code, a set of predetermined rules, and special security techniques like asymmetric cryptography to ensure fairness and transparency.
Bitcoin, the first decentralised blockchain system, is open to anyone with an internet connection. Since all transactions are recorded on a public ledger, anyone can view and access the data. A trustless system is even more trustworthy than one that relies on a central authority – it’s harder to cheat an open and transparent system by falsifying data.
Trust is still an integral part of any financial relationship. In this case, the need for trust is minimised but not completely eliminated. The responsibility is distributed across participants of the system, the code and carefully designed economic incentives instead of being concentrated in one place.
How Does the Trustless System Work?
There are various ways the platform works without trust, depending on the type of network it is built on. Usually, the consensus algorithm determines how trust is distributed. This is just a fancy way of indicating how the network decides what’s true and what’s not.
The two most common consensus algorithms are Proof-of-Work (PoW) and Proof-of-Stake (PoS). The main difference between them is in the inputs they require for validation. There was a heated discussion about which of these systems was better when the Ethereum network switched from PoW to PoS.
Proof-of-Work: PoW chains use computing power to validate new transactions and secure the network. Miners add blocks to the chain by solving complex mathematical tasks, trying to uncover a certain number faster than other miners. If they are successful and a majority corroborate that the number found is correct, they receive the network’s native token as a reward. This ensures that only honest behaviour is rewarded. To attack a PoW chain, you would need to control over 50% of the computing power, which would make attacking blockchains like Bitcoin too expensive.
Proof-of-Stake: PoS is more energy-efficient because it doesn’t incentivise computing power accumulation. PoS systems require network participants to lock up assets to start validating. Validators are block producers who are randomly chosen from a pool, weighted by the number of assets they have at stake. Anyone can become a validator by locking up the protocol-native token. Validators are rewarded with the same cryptocurrency for validating transactions and penalised for malicious behaviour. The attack threshold varies but is usually about 33% of the stake. New blockchains use PoS for faster scaling without expensive hardware while maintaining security thanks to a stake-based consensus.
Trust vs Trustless in Crypto: How to Ensure Security
With traditional finance, you just trust that your bank and the government will ensure the security of your funds. Most people feel comfortable entrusting the storage of their savings to a third party. Similarly, while some worry about fluctuations in their stock portfolios, they usually don’t worry about their assets disappearing from their accounts. But why do you trust? Interestingly, there is no real reason to do so, as systems are centuries-old, closed, monitored by authorities, and strictly managed.
With blockchain, you can trust the processing of transactions without having to trust the entity that performs it. You can rely on new technology (blockchain, crypto payments, and smart contracts), where the concept of trustlessness is a core element. Here is a list of factors that ensure stability and safety for all participants:
1. Public-Key Cryptography
Public-key cryptography, also known as asymmetric cryptography, is an essential component of all cryptocurrencies. It relies on a public and private key pair, where the public key is visible to everyone, while the private key is kept secret. By using a private key, the sender generates a digital signature when sending a transaction, so the receiver can verify that the transaction was made by the right user.
Users share their wallet addresses (public keys) with others while keeping the private keys confidential. The digital signatures cannot be repudiated, which is great. However, the user is responsible for safeguarding the private key: if it is lost, access cannot be restored.
2.Machine Consensus & Crypto-Economic Protocols
Mathematics, economics, and game theory are used to incentivise the honest behaviour of the system’s participants and reach a consensus in blockchains. There is no human factor, fewer errors, and full automatisation, so it is a reliable strategy to use.
However, in some cases, machine consensus is not enough to maintain a blockchain. Blockchains often need updates to adapt to changes and improve decentralisation and scalability. These changes require social consensus and governance.
3.Social Consensus and Governance
Blockchain networks still rely on human involvement. Being open-source, they allow any individual to suggest updates on platforms like GitHub. Usually, the major forks are subject to a community vote for approval.
Depending on the upgrade, the blockchain may undergo a Soft Fork or a Hard Fork. While the Ethereum Merge was generally accepted, previous forks haven’t been as agreeable. For example, there was a split in the community caused by Bitcoin Cash being separated from the original Bitcoin chain.
Trustless Crypto Wallets
A trustless crypto wallet, known as a non-custodial crypto wallet, is a type of wallet in which users control the private keys of their crypto assets. In this case, you don’t need to trust a third party to manage funds.
In contrast, a custodial wallet requires users to trust a platform that holds their assets on their behalf. When you buy cryptocurrency on a centralised exchange like Huobi or Kraken, your purchases are stored in the exchange wallet, which is managed by the exchange itself. This is not considered trustless in the crypto sense. However, some users may feel more comfortable using a custodial wallet to store large sums of money because it is similar to using a bank.
Holding your own wallet and keys comes with its own set of challenges to ensure security. Ultimately, the choice of wallet type depends on your personal preferences and risk tolerance