In the very first article of this section on cryptocurrency basics we discovered that money was first used to facilitate trade. Facilitating the exchange of goods between two parties that didn’t know or trust each other.
As civilisation and commerce have expanded it has been accepted that the only solution to this trust issue at scale is to centralise power in the hands of an ultimate arbiter.
Monarchs, generals, governments or multinational institutions have the final say on, and control over, what’s fair (Law),who owns what assets, and what those assets are worth (Central Banking).
This arrangement has been more practical than optimal. Time and again, we have seen that trusting a central authority is a less than efficient way to do things – I’m looking at you, 2008 Financial Crisis. This is commonly known as the Principal-Agent Problem.
What is the Principal-Agent Problem?Agents (governments, large organisations and their machinery) make decisions that impact other people (Principals – citizens, customers) who’s interests they should be serving. Their powerful position and the absence of accountability mean their decisions that serve their own interests and adversely impact those they should be serving.
So how can a blockchain solve this age-old problem?
All this talk of governments and authority may be starting to sound a bit far fetched so let’s take a few steps back and focus on the central issue of how blockchains achieve trust without authority..
First, we’ll break down the unique characteristics of a blockchain – how data is structured – then describe the process for reaching agreement (consensus) on the validity of that data. The consensus mechanism really is the secret sauce of blockchain, as this is what enables the removal of a controlling authority.
Finally, we will assess blockchains’ limitations and evaluate if the technology is worth all this hype, which will lead nicely on to the final two articles in this section on crypto adoption and crypto frontiers.
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