Imagine having worked your whole life, prudently saving as much money as you can in order to retire comfortably, and then one day without notice 47.5% of all your bank deposits above a certain threshold vanished.
Gone, just like that. No way of getting it back.
Your retirement money that you'd spent the last two decades contributing towards stolen without recourse.
Years of living frugally to save that money, but nobody cares.
Can you imagine what that would be like?
You might shake your head and proclaim that this would never happen...
...Well I regret to inform you that it already has happened.
Cypriots already understand the flaw of the existing financial system
As part of the bail-in of Bank of Cyprus, depositors taking losses — estimated roughly at around 4 billion euros — will get shares in the bank. Those depositors hardest hit are pension funds belonging to employees for state-run companies, followed by private savers of which some of the biggest are Russians.
...Depositors at Laiki, which is being wound down and folded into Bank of Cyprus, saw most of their uninsured savings wiped out and are unlikely to get any shares in Bank of Cyprus.
Let that sink in a moment...
Depositor's money stolen to the tune of 4 billion euros.
To top it off, account holders were limited to access their own money at a rate of 300 euros per day.
You might ask why this atrocity happened?
The answer is greed, irresponsible leverage and gambling with other people's money.
So, who is to blame?
The bankers that haphazardly and wrecklessly took on over leveraged bets? It's the obvious direction to point your finger. It's one of the reasons why bankers have such a bad reputation.
But really, nobody is specifically to blame.
It's actually a systemic problem. A broken system which incentivizes the wrong things. A system through which the fundamental underpinnings are tied together with trust. A system that rewards devious behavior, allowing a very small number of people in trusted positions to reap huge monetary gain by essentially gambling with other people's money.
You trust that the banks are being responsible with the money you deposit. You trust that they're taking on reasonable and well adjusted investments and not getting themselves overexposed.
How far has trusting centralized and powerful institutions got us so far? Try asking a Cypriot.
We've repeatedly seen that systems that rely on trust and the good nature of a small number of privileged people will, at some point, inevitably fail.
If an actor has the possibility to prosper handsomely (get rich), even at the expense of innocent parties, and without recourse, then it's repeatedly been shown that human nature is susceptible to temptation.
Even if not all actors behave in such a reprehensible fashion, a high enough percentage will. And this percentage is significant enough to cause issues at the systemic level, as we have experienced multiple times.
We saw it in the credit crunch of 2008 and we saw it again in Cyprus in 2013.
It may seem like I'm a cynic of human nature, or perhaps that I just have an axe to grind with banks and centralized authority. But that's really not the case. I don't care about banks. It's just that the the greatest bank robberies of all time are the most obvious poster children of how trusted systems fail.
Instead, I want to highlight what is already blatantly obvious.
Humans are predictable and our brains contain bugs at the operating system level. We can't handle power. It corrupts us. Greed takes over. And humankind is suffering from corruption at the highest level all over the world.
When we trust in the power of a privileged few, things don't work out well for the rest of us. The trust is inevitably abused, overtaken by greed, causing systemic issues that affect those at the bottom of the pile.
There must be a better way...
What does a Trustless Banking System Look Like?
If reliance on trust is the main weakness of our traditional models, perhaps we can build a trustless system?
And if we can, what might it look like?
Imagine a banking system where:-
- The logic of what happens when you deposit money into the bank is written into code.
- Anyone can see the code, audit it and verify its intentions.
- You have complete transparency over the actions that the "bank" will take. Code is "law".
- The code can't be changed without the majority of the network agreeing with the proposed change
- The bank is owned by everyone. No single entity has control over the bank.
- The power of the network is distributed among the thousands of node operators that support it, rather than a single entity at the top
- Every transaction in the network is stored on a ledger and visible to everyone
Revisiting the systemic issues that caused the 2008 and 2013 banking bail outs. How would this trustless system prevent over leveraged and wreckless bets from being made?
Simply - it's the code.
The code determines the bets that are allowed to be made. If you, as a depositor, are unhappy with the risk tolerance, you can choose not to deposit your money into that specific contract.
So really, instead of depositing your money into a bank, you become your own bank.
You're responsible for determining where your money is best placed. And you don't have to trust that insiders are doing the right things.
As the code is law, and no single entity has power over the code, you know that your money is safe from greedy and powerful actors that are incentivized to take huge risks with your money.
Trustless systems prevent the accumulation of power to a privileged few at the top of the pile, instead flattening the power distribution curve and allocating it to everyone in equal measures.
Trustless systems have potentially huge ramifications for many industries:-
- Supply chain management and eliminating fraud
- Real estate
- Electoral voting
- Authenticity verification
- Medical records
- Censorship resistance
The Value Proposition for Blockchain and Cryptocurrencies
Blockhain is a remarkable piece of technical innovation that, for the first time in the history of humankind, gives us the possibility of creating truly decentralized systems that are highly effective at eliminating corruption.
It really is a game changer.
It flattens power curves and gives power back to the little guy. It protects from censorship resistance and manipulation from devious actors.
High transaction fees, slow throughput, inability to scale and poor user experience are to blockchain what dial up and bandwidth limitation was to the internet before it took over the world.
They're valid criticisms, but they're facets of an immature technology that are going to be overcome.
If you turn your back on blockchain because your transaction fees are a little too high, or your Bitcoin stash is too volatile for you to stomach, or you had to wait 10 minutes for the transaction to go through, then you've missed the point entirely.
Bitcoin is the oldest cryptocurrency - it's only 12 years old. Have you forgotten the dialling tone orchestra you had to endure when you wanted to connect to the internet for the first time 30 years ago?
We are making inroads in the blockchain trilemma of scaleability, decentralization and security.
It's only a matter of time until, one by one, these technical problems are solved and the result is an innovation that promotes liberty and fairness to anyone with an internet connection.
That's the value proposition of cryptocurrency.