Trustless environment

Trustless environment is a set of external system processes that does not require a trusted party because the rules of interaction between the process participants constitute Nash equilibrium, that leads to a collective choice of the outcome needed by the principal.

One of the technologies for creating a trustless environment is Blockchain. Blockchain supports the trustless environment as long as conditions of Nash equilibrium are fulfilled. For instance, if bitcoin miners create a Union, which allows them to communicate and coordinate their actions, the Nash equilibrium[1] could be violated. In this case, bitcoin network participants would be able to jointly conduct a double-spending attack, and thus bitcoin network participants will be bound to trust major miners again. 

Distributing trust

The distributed nature of blockchain plays a very important role in fostering a trustless environment. In traditional financial models, a central authority acts as the regulator of the flow of money by ensuring there is no double spending, verifying and clearing all transactions within a nation’s financial system or extrapolated to worldwide financial systems. In this system, banks act as this authority and people implicitly trust banks to ensure that the banks themselves and other institutions that hold money do not alter or manipulate it.

With a distributed ledger system over a peer to peer network, the trust shifts to focus on whether or not one can trust the distributed ledger across a vast network of nodes. In order for them to be able to trust the system, the blockchain needs to be provably valid, immutable, and consistent across all the nodes.

While the distributed nature of blockchain removes the trust needed in centralized institutions, it does not guarantee consistency and validity across the nodes for people to be able to trust the system. Rather, a mechanism is needed that can prove the validity of the blockchain and assure users it is not compromised. This mechanism is called consensus.

Public-Key Cryptography

Public key cryptography (or asymmetrical cryptography) uses:
  • a set of public keys visible to anyone, and
  • a set of private keys visible only to the owner
The private key generates a “digital signature” for each blockchain transaction that a user sends out. The signature ensures authenticity by:
  • confirming that the transaction is coming from the user, and
  • preventing the transaction from being altered by anyone once it has been issued

Changing the transaction message in any way will cause verification to fail.

Consensus

Consensus within a distributed digital ledger can be defined as the majority of honest nodes in the network coming to agreement on the valid state of the ledger, and that state being provably valid. A solution is needed where transactions are publicly announced, a single history is agreed upon, and participants can agree on the order in which the transactions were received.

There are several types of consensus

Proof-of-Work (PoW)

It solves the problem with validity and consistency by adding computational difficulty to the distributed ledgers. Basically, the valid blockchain is the longest chain since it is the state of the blockchain that was hardest to generate. Miners verify blocks by finding a nonce value through computational power and the result is a value that is very difficult to find, but trivial to verify its validity. The nonce value discovered by a miner is broadcast to the network who accept or reject it depending on whether or not all transactions within that block are valid. This ensures consistency of the ledger across the network as each block contains a unique digital signature and each block is linked to the previous blocks through a cryptographic hash, also ensuring

Importantly, the blockchain is immutable because a malicious entity would need to have the requisite computing power to compete with the entire network. To alter a past block, the entity would need to redo the Proof-of-Work for that block and all following blocks at a faster rate than blocks being generated by the honest nodes in order to catch up and surpass that chain as the longest chain. immutability.

Proof-of-Stake (PoS)

Unlike PoW where new transaction blocks are created based on computational work done by solving a complex cryptographic puzzle, PoS allows a forger (instead of a miner) to stake any amount of cryptocurrency she has, to be probabilistically assigned a chance to be the one validating the block — the probability based on the amount of cryptocurrency staked.

Additionally, for most PoS systems, instead of receiving a cryptocurrency reward (in the above case, the Bitcoin miners receives some Bitcoins for solving a PoW), the forgers instead takes the transaction fees as rewards.

The idea of putting coins to be ‘staked’ prevents bad actors from making fraudulent validations — upon false validation of transactions, the amount staked will be forfeited. Hence, this incentivises forgers to validate legitimately.

Delegated Proof-of-Stake (DPoS)

DPoS is similar to PoS in regard to staking but has a different and a more democratic system that is said to be fair. Like PoS, token holders stake their tokens in this consensus protocol.

Instead of the probabilistic algorithm in PoS, token holders within a DPoS network are able to cast votes proportional to their stake to appoint delegates to serve on a panel of witnesses — these witnesses secure the blockchain network. In DPoS, delegates do not need to have a large stake, but they must compete to gain the most votes from users.

Proof-of-Authority (PoA)

PoA is known to bear many similarities to PoS and DPoS, where only a group of pre-selected authorities (called validators) secure the blockchain and are able to produce new blocks. New blocks on the blockchain are created only when a super majority is reached by the validators.

The identities of all validators are public and verifiable by any third party — resulting in the validator’s public identity performing the role of proof of stake. As these validators identity are at stake, the threat of their identity being ruined incentivises them to act in the best interest of the network.

Due to the fact that PoA’s trust system is predetermined, concerns has been raised that there might be a centralised element with this consensus algorithm. However, it can be argued that semi-centralisation could actually be appropriate within private/consortium blockchains — in exchange for better scalability.

Trustless Wealth Management

Individual investment management implies that a client trusts the competence and integrity of an advisor, a broker, a depository and a registrar, as well as the ability of the judiciary to protect assets. However, both сrypto- and traditional asset management markets face issues due to having a trusted party involved in the processes.
Smart contracts allows to store assets, calculate the optimal investment portfolio and exchange assets within the network. Being essentially conventional programs, they do this absolutely responsibly, autonomously, automatically, securely and confidentially. Although each smart contract is supported by thousands of nodes, no one can get access to the assets without a private key. The private key is known only to the owner of the assets and reliably protects them. The process of hacking a private key consumes energy, and this is a quadrillion times more expensive than the potential benefit.

Although the blockchain allows such processes as reconciliation of a portfolio, asset storage and asset exchange to be made trustless, it fails to execute all processes efficiently. Firstly, the blockchain is a very expensive technology on which to perform the calculation of an optimal portfolio or to store large amounts of data. Secondly, the investment process cannot be considered trustless without solving the problem of avoiding the need to trust the party that inputs the data which an advisor or a robo-advisor uses to make decisions.

To find a solution to these issues, the developer community has already initiated a number of projects. The Wealthman Platfrom is one of them. It is focused mostly on implementing trustless wealth management, whereas others provide technologies on quite narrow tasks. The Wealthman team is engaged in the development and integration of a stack of protocols and micro-services facilitating the building of trustless wealth management services.

References

[1] Theodore L. Turocy (October 8, 2001). Game Theory. CDAM Research Report. p.12–16.

Futher reading

1.  The way to trustless wealth management. Accessed 06 October 2018.


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