_{Brought to you by:}

“Trust can only be offered and accepted, not demanded.”

— Niklas Luhmann

Trusting times in crypto

In the conclusion of his seminal white paper, Satoshi summarized Bitcoin by describing his intention to create “a system for electronic transactions without relying on trust.” 

He might not be entirely pleased with how things have turned out.

Crypto is often described as “trustless,” but crypto people have proven to be a surprisingly trusting bunch, as evidenced by the popularity of things like Binance, Tron, Base and most trustingly of all, Tether. 

This might soon change. If Tether is sanctioned by the US government, as seems increasingly likely, there will be a system-wide price to pay for that trusting behavior. 

But this might be for the best: By stress-testing crypto’s resistance to censorship, Tether sanctions would reveal in whom we are placing our trust and at what potential cost.

To believe that Ethereum is censorship-resistant, for example, we have to trust that some of Ethereum’s all-important block builders will ignore the OFAC list and build blocks with transactions involving sanctioned addresses (like Tether’s, if it were added).

Some block builders almost certainly would defy OFAC (as many have done with Tornado Cash), in which case Ethereum would pass the test of censorship resistance.

But that happy outcome is not written into code. 

Block builders are ultimately people, which means it’s people, not lines of code, that have the power to choose which transactions will be added to the Ethereum blockchain.

This is not exactly the “code is law” ideal of cypherpunk dreams. But it may be as close as we can get because “blockchain applications are never fully trustless,” as Vitalik explained in a 2020 blog post. 

Fortunately, blockchains do not have to be fully trustless to be worthwhile — the real innovation with blockchains is not that they make trust unnecessary, but that they eliminate trust in centralized third parties (if we choose to).

When we do, though, we still have to trust that people will act in the way they are incentivized and predicted to act.

“Trust,” as Vitalik defines it, “is the use of any assumptions about the behavior of other people.”

Even in “trustless” crypto, we make many assumptions about other people’s behavior. That means — to understand the risks we’re taking — we have to not only understand crypto code, but also the incentives that shape crypto behavior.

Some of those incentives are exogenous to Ethereum — like the entirely understandable desire to not go to jail (which will likely prompt the biggest block builders to exclude Tether transactions from Ethereum blocks if OFAC tells them to).

Some of the incentives are endogenous — “proof-of-stake networks achieve consensus through trust,” according to the authors of Resistance Money, primarily because they require reliance on trusted nodes or parties to determine the canonical chain in the event of a dispute.

Sanctions against Tether might be a test of how well this trust-based system of consensus works — assuming that USDT doesn’t go straight to zero, which it might. 

"If the US wanted to kill us, they can press a button and kill us anywhere," Tether’s CEO Paolo Ardoino told CoinDesk yesterday.

I hope it doesn’t come to that. But if it does, it will be a useful (and expensive) lesson in trust — and not just for holders of USDT, because crypto trust exists on a spectrum with Tether at one end and Bitcoin at the other.

But even Bitcoin isn’t entirely trustless.

“With Bitcoin, you’re counting on bitcoin miners to follow the Bitcoin protocol,” Matt Weinberg of the Princeton DeCenter told me.

If, for example, the US government were to capture a majority of the mining power in the Bitcoin network, would you trust that the network would continue to operate the way everyone expects it to?

No, of course not — and while it probably won’t ever come to that, edge cases can be instructive. 

If crypto was genuinely trustless, you wouldn't ever have to think about behavior and incentives — but even with Bitcoin, you do.

This is not a bad thing. 

The Princeton DeCenter argues that the purpose of blockchains is to enable “large-scale trustful cooperation without centralized intermediaries,” (emphasis added) and I’d argue that is just as Satoshi envisioned it, even if it’s not as trustlessly peer-to-peer as true cypherpunks would like it to be.

But even if absolute trustlessness was technically feasible, the complexity of any such solution would make removing trust practically infeasible.

Most users would simply have to take someone at their word that the solution will work as advertised.

This is just human nature — trust is a cognitive shortcut we all use to reduce the impossible complexity of living in society, as Niklas Luhmann wrote in Trust and Power.

USDT is similarly a useful shortcut for getting US dollars onchain that’s been enabled by our trust in Tether.

But the risk is that sanctions against Tether (the type of centralized authority Satohsi warned us about) could (perhaps ironically) cause a crypto-wide crisis.

The most common cause of financial crises is when something that people thought was worth a dollar (eg, bank deposits or money market funds) is suddenly worth less than a dollar — and millions of crypto users appear to be trusting that USDT will always be worth a dollar. 

You, prudently skeptical reader, know that USDT’s dollar-peg is not guaranteed by code, of course. 

But I don't think that puts us in any position to dismiss Tethers’ more trusting believers — because how many of us really understand how the blockchains we use actually work?

For better and worse, most of us simply trust that they do.

— Byron Gilliam

Brought to you by:

MANTRA is a purpose-built RWA layer-1 blockchain capable of adherence and enforcement of real world regulatory requirements. As a permissionless chain, MANTRA empowers developers and institutions to seamlessly participate in the evolving RWA tokenization space by offering advanced tech modules, compliance mechanisms, and cross-chain interoperability.

Key Features:

• Built using Cosmos SDK, IBC compatible, with CosmWasm supported

• Secured via a sovereign PoS validator set

• Scalable up to 10k TPS

• Built-in Modules, SDKs and APIs to create, trade and manage regulatory compliant RWAs

• Improved User Experience to onboard non-native users and institutions to Web3

1. Tether denies it is being investigated by US government 

2. Record BTC price in sight as bitcoin ETF flows surge

3. An industry CEO’s final plea to Trump, Harris 

4. VanEck begins SOL staking with Kiln partnership

5. Stacks fortifies Bitcoin ties with Nakamoto upgrade

The Real Reason Kraken Built an L2

Andrew and Hilmar dive into why companies are rushing to launch their own chains. Tune in to unpack the technical decisions behind launching an L2 and the prediction that hundreds of new L2s will emerge in coming months. 

Listen to Empire on Spotify, Apple Podcasts or YouTube.