Why does it matter to have computers that can make commitments?

The guardians of code

I've been thinking about the idea that blockchains are computers that can make commitment.

It's a simple and not a particularly original one, but one that reframes things in ways that I think are easier to understand for people outside of the industry.

The starting point to me is the idea of trust in code execution.

If I had a complex Excel file that determined the outcome of a bet whereby if you win, you get $1m - would you rather run it yourself on your computer, or would you let me run it on mine? Would you rather be in the room when I download it and open it, or would you trust me not to tamper with it? What if it's not me anymore but the person funding that bet - thus with a vested interest for you not to win?

Code can be tampered with, Excel files can be rigged. That's why casinos and slot machines are so heavily regulated. It would be very expensive to empirically prove that the owner of the machines changed the odds, so a trusted intermediary checks in to verify.

With that in mind, blockchains are often touted as a paradigm shift in computing because they are a technology that enables computers to make commitments.

A blockchain is a virtual computer comprised of a network of underlying physical computers that run a program that specify a) the state of the general computer and b) the rules to update that state (the consensus algorithm).

Each of the individual computer keeps a record of the state. Which means that in theory to tamper with the state you'd need to attack each single computer (the technical term is node) that participates the network (in reality you typically need some form of majority that lets you change the rules).

The consequence is that once the rules of the game are accepted by the participants (and they are because the network is opt-in), you can predict with how the system will behave:

  • Transactions are canon - Once someone makes a transaction, it is broadcasted to the entire network and becomes canon.

  • Code is law - a piece of code deployed on the blockchain will always behave the same, following a set of rules visible to all and - at least in theory - immutable.

There are therefore multiple commitments here: irrevocable access to the data written to the blockchain, immutability of the data and transactions written to the blockchain, permissionless access to writing to the public ledger.

There is no single entity that can reverse a transaction that was previously accepted as valid by the network, nor any gatekeeper to the network.

That's in stark contrast with most of the software we use daily - the execution and the data are in the hands of a few product managers and founders in California, with little to no transparency as to what the rules are, and how they are applied.

Implication 1 - blockchains are good to recreate applications where trust is a central component.

Take banking. One of consumer banks' main functions is to be the guardian of the code that custodies their customers' savings.That code comes down to a ledger that records the balance of each customer, and that executes the transactions broadcasted by the user (e.g. send $100 to my sister).

Well, that function can be very easily represented in a blockchain, but with fewer trust assumption in the bank and with a system that is open by default so that developers can come and create better experiences and interfaces than the banks can. The second point is important, and in the spirit of open banking which has been a driving force of innovation in the industry.

Implication 2 - An important second order consequence of computers that can make commitments is scarcity.

On a blockchain you can deploy a piece of code that creates something like a point system - or a token - as well as balances for each user. You can also specify that there are only ever going to be a capped number of these tokens. You now have a digital asset that may or may not have value, but that definitely exhibits the property of being scarce.

Some people would go as far as saying that absolute scarcity being the most important property of money, these tokens could in theory form a better monetary asset than national currencies that we know can't boast the same properties of a fixed cap.

The scarcity property of blockchains created the ground of experimenting with creating currencies that exhibit different properties than those of governments currencies. That's why the cryptography that underpins the industry is so often with the associated the cryptocurrencies that it has enabled.

That's the reason why in places where countries where governments are prone to print and devaluate their currency to finance their deficit, there is a lot of appeal to a store of value that you know can only decrease in circulating supply, and can maintain the value of people's savings.

So there we have it, an overview of why blockchains are so interesting, their neutrality in executing rules know to all participants.

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