This article is an excerpt from the Shortform book guide to "The Bitcoin Standard" by Saifedean Ammous. Shortform has the world's best summaries and analyses of books you should be reading.
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How trustless is bitcoin, really? How are trustless transactions executed on the bitcoin network?
The bitcoin network is designed in such a way that it makes it possible to complete financial transactions without the need for trust. The payee can’t default on the payment because the transaction is verified by the whole network—a large number of independently-operated servers all over the world.
Here’s how bitcoin makes trustless transactions possible.
Bitcoin Is Based on Verification Instead of Trust
How trustless is bitcoin, really? Bitcoin is based on a system of complete verification, which eliminates the need for trust. Many other types of transactions require a degree of trust: If someone writes you a check, you’ll only accept it as payment if you trust that their check won’t bounce. If someone pays you with a credit card, the credit card company acts as a trusted third party, verifying her credit and guaranteeing payment of her debts. But that means the credit card company can block any transaction that it disapproves of, even if the payer and the payee both approve of it. But with bitcoin, there’s no need to trust either the payer or a third party because of its system of complete verification.
Complete verification means that the network first checks to make sure the payer can make the payment (they have sufficient funds in their account) and then irreversibly transfers the funds, ensuring that the payer does make the payment. Furthermore, these checks are performed not just by a single payment processor, but by a majority of the network. To default on a payment or make a fraudulent payment, the payer would have to gain control of a majority of the entire bitcoin network, which, as we’ve discussed, would be virtually impossible. This is how the network ensures that the payer can’t default, eliminating the need for trust.
Ammous points out that this is ideal for settlements between parties located in different countries, who might have limited options for enforcing an agreement to pay. It also means that all bitcoin transactions are final, irreversible, and immune to third-party stipulations, much like paying someone in cash or gold.
But, as Ammous concedes, this approach also creates a large amount of redundancy (relative to using a trusted third party like a credit card company) since each transaction is independently verified by a majority of the entire network, not just a single server. This redundancy reduces the efficiency and speed of processing transactions.
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Here's what you'll find in our full The Bitcoin Standard summary:
- Why bitcoin has the potential to replace the gold standard
- What makes bitcoin stronger than fiat money
- Why bitcoin will never be a global currency for day-to-day transactions
