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In Mining, We Trust.

Op-ed - In mining

In mining, we trust.

On the side of the US $1 bill it says “In God, we trust”. Because money is all about trust. Trust that it’s real, trust that it will remain at a similar value for the duration of the transaction at least, trust that the products are represented honestly. In the past trust that the paper was redeemable in gold, and more recently trust that our dollar will be backed by the “full faith and credit of the US Government”.

And when that trust is lacking society shuts down. To some extent, the crisis of 2008, in the same manner as the one in 1929 was about the lack of trust. They called it “counter party risk”, but it basically means: “Do I trust that the other side of the contract will be honored when the time comes?” When there is not trust, markets freeze.

And let’s be honest, our trust in government, in markets, in society in general has been shaken over the last few years.

It is precisely TRUST that makes Bitcoin, and specifically mining in Bitcoin, so world changing. Remember, Bitcoin is not just a virtual currency. It is a “public, trusted, distributed transaction ledger”.

Public because we can all see the transactions. The block chain is open for anyone to inspect. Every transaction is recorded and available for public view. We ALL know what was sold and for how much, even if not necessarily to whom.

Trusted because it is mathematically very difficult, almost impossible, to fake the data. That is very, very important because it means the ledger can be relied on. We can trust it.

Distributed, because no one single entity can modify the ledger data. No-one can cheat. Again, trust.

That means that the data in the ledger can’t be faked. It is in other words “TRUSTED”. Mathematically TRUSTED. Cryptographically TRUSTED. And so, socially trusted.

And remember, it’s a “ledger”. A “TRUSTED ledger”. A ledger we, as a society, can all agree on.

Now think about how MANY ledgers are out there. You run into them every day, many times a day. The checkout counter for your coffee? A ledger. Taxes you will pay later in the year? Ledger. Election results? Ledger. Company balance sheet? Ledger. Stock market? Big ledger… And so on…

Right now we don’t really trust these ledgers. That’s why we have audits, and spot checks, and back office settlement. How much money does the NYSE spend on “back room clearing”, the matching process that allocates buyers and sellers to each transaction at the end of the day? Billions. And at the end not really “TRUSTED”. How much do we all spend every year on tax filings? And our taxes are often wrong and take a lot of work to figure out.

Bitcoin, and alts, solve this problem. By creating and maintaining these “public transaction ledgers”, we can increase trust in government and in our society, and drastically reduce transaction costs. More importantly we can, for the first time, have total transparency of our institutions and REALLY know what they’re doing.

Imagine: the 2000 election result battle? Solved. Just tally up the electronic register. It’s TRUSTED. MERS, the Mortgage Electronic Registry System, the culprit behind so many bad foreclosures? Follow the transactions. TRUSTED. NYSE back office settlement? Yep, that too. How about annual company audits? How about tax filing? Yep. A TRUSTED register allows for all of these issues to be resolved. But the trick is TRUSTED.

So how do we know that it’s “TRUSTED”. I mean, can we REALLY know?

Well, that actually is the reason that Bitcoin works. Because we can. While the details of the process are a bit too technical for this article, the details are available. Bitcoin is after all an “open source” protocol.

And as you dig into those details, as I, and many others, have, you find that we can really TRUST the ledger. The ledger allows for the kind of verification that Ronald Reagan talked about when he said “we trust, but verify”. (As a side note, it’s interesting that Ronald Reagan got that from a Russian Proverb.)

It is mining that provides that trust. Mining, as an activity allows for many different miners and mining machines to cryptographically coordinate, verify and agree upon the transaction ledger. This, under most conditions, protects the ledger from external modification.

“Under most conditions”. Pretty good legalese, huh? The process fails when any one entity (or combination of entities) can control 51 of the hashing power. This is called the 51 attack. If you control most of the hashing power, you can change the ledger and force the rest of the system to agree with you. You can compromise the TRUST of the ledger.

The solution to THIS problem is the “distributed” component of the mining process. A company or government that maintains its own ledger cannot be trusted. But if it is maintained by many other entities, ones not associated with the user of the ledger, it can. The trick of course, as outlined above, is that no ONE entity, or collusion of entities can own more than 51 of the hashing power.

So under the right conditions, where mining is done by the public, and where mining is distributed into small pools with many different players, the Bitcoin “public transaction ledger” really CAN be TRUSTED, but only if they are “mined”.