# The Value of Trustlessness By [Bhau](https://paragraph.com/@bhau) · 2022-11-21 --- Whereas Trust is delegated to 3rd parties in our legacy systems, **Distributed Ledger Technology** (DLT) systems are [**Trustless**](https://ethereum.org/en/developers/docs/smart-contracts/verifying/#trustlessness). This means **_Trust is embedded within computer code_**, and so the **_network participants do not need to Trust each other_** for the system to function. This is important because, in legacy systems, 3rd parties extract value due to **Moral Hazard**. ![In Economics, a Moral Hazard arises when there is no incentive to guard against the Risk of negative outcomes. I.e. why worry about gambling with billions, when the fine will be only a few million?](https://storage.googleapis.com/papyrus_images/abd931aca4d088298e4981be87676e1d2bb1e3009030670730f523daab04fc6f.png) In Economics, a Moral Hazard arises when there is no incentive to guard against the Risk of negative outcomes. I.e. why worry about gambling with billions, when the fine will be only a few million? A Transaction is an **event**. Therefore, **Distributed Ledger Technology** (DLT) is a **breakthrough** in our collective ability to **_verify_ events**. In Traditional Finance, this is a simple accounting of balances on a centralized ledger, and it is reliant upon 3rd parties for verification. ![Whether it’s information, goods, services, or anything of value – an exchange will require the accounting of balances.](https://storage.googleapis.com/papyrus_images/370affa36c90cb0b04901f4c0b92f5c1acf6ae734b07ef64f5cbc91b97cc0dbb.png) Whether it’s information, goods, services, or anything of value – an exchange will require the accounting of balances. The two-sided accounting of debits and credits is known as **Double-Entry Accounting**. This method of book-keeping necessitates **_auditing (verification)_** by 3rd parties to assure nobody is “cooking their books” (_See: Enron, 2008 Global Financial Crisis, and more recently FTX, Celsius, Voyager, 3AC, Terra-LUNA_). ### Trustlessness of Bitcoin In 2008, The Bitcoin Network pioneered the innovation of **Trustless Value Exchange** by employing [**Triple-Entry Accounting**](https://youtu.be/PwOWPMQAPW0?t=101). ![This event – the accounting of balances without third parties – is verified by the network of distributed ledgers with the Proof-of-Work consensus algorithm.](https://storage.googleapis.com/papyrus_images/2e4b9a36ad8e1fb4014df6f3160784b76e841a8495c73aeb0f369f5b4ca743f7.png) This event – the accounting of balances without third parties – is verified by the network of distributed ledgers with the Proof-of-Work consensus algorithm. **Triple-Entry Accounting** combines the two-sided accounting of debits and credits - **_the subtracting of numbers on one ledger, and the subsequent addition of those numbers in another ledger_** - with nearly instantaneous **auditing** and **_verification_** of the event, facilitated by **cryptography** and **distributed computing**. ![Learn more: What is Bitcoin? A Paradigm Shift: The Trust Revolution - https://www.youtube.com/playlist?list=PLgYEpAvl66ZPpxst4cpayp9bQGhgk8sNw](https://storage.googleapis.com/papyrus_images/27715fb87264e7802809d962df462548b9225de2e0037da289baa4f917d42849.png) Learn more: What is Bitcoin? A Paradigm Shift: The Trust Revolution - https://www.youtube.com/playlist?list=PLgYEpAvl66ZPpxst4cpayp9bQGhgk8sNw As evidenced by the title [Bitcoin: A **Peer-to-Peer** Electronic Cash System](https://bitcoin.org/bitcoin.pdf), Trustless Value Exchange was the intended purpose, and it is an important advancement for humanity. ### Trustlessness of Ethereum The Ethereum Network builds upon this breakthrough: it **_couples_** **Trustless Value Exchange** with the **Trustless Execution of Contracts**. In web3, such contracts are known as **Smart Contracts 🤝**. > In the pre-web3 world, Contracts were facilitated, audited, and enforced by third parties (E.g., the legal code in a jurisdiction). In web3, Smart Contracts are facilitated, audited, and enforced in a **peer-to-peer manner** without 3rd parties. ![Ethereum was previously governed with a Proof-of-Work consensus algorithm, which required miners.](https://storage.googleapis.com/papyrus_images/1c1bd56a01432e8a1782f316c448f4facae5ce99fb04ccfcd1e13394f48f4040.png) Ethereum was previously governed with a Proof-of-Work consensus algorithm, which required miners. **Smart Contracts** 🤝 are executed within the **Ethereum Virtual Machine** (EVM). ![](https://storage.googleapis.com/papyrus_images/13869d6a55e9e130bc4ce24df7ba70e8afb2d5997f06fbf8a0f290aba0d556c6.png) By eliminating middlemen and value extraction mechanisms… ![](https://storage.googleapis.com/papyrus_images/60370e7270e57384a2b37ba84234055a1cbd737bd5d809caee2ef74a3807a5f1.png) …end users can obtain better interest rates on their U.S. dollars in Decentralized Finance (**DeFi**). Decentralized applications (**dApps**) like Compound and Aave are **exclusively** **peer-to-peer**. This means your coins are custodied - held - by Smart Contracts and your Digital Wallet only. **_No humans are involved_**. **Self-Custody**. ![DeFiRate - https://defirate.com/lend](https://storage.googleapis.com/papyrus_images/dd4212a713b991dd2c1e734d02450564f23defaea31ee025e15f48e6655ca338.png) DeFiRate - https://defirate.com/lend In contrast, custodians like Gemini, Coinbase, and Nexo are **NOT exclusively peer-to-peer**. They are centralized entities. **_Human operated_**. > Once you give them custody of your coins, they are free to do with them as they please. Moral Hazard compels. These entities have been known to take customer funds and gamble with them (_margin leverage is what they like to call it_), enabling them to offer deceptively high yields. But as [recent events have shown](https://www.coindesk.com/layer2/2022/11/11/how-sam-bankman-frieds-effective-altruism-blew-up-ftx/), most of them are essentially pyramid schemes driven by Greed. If it is a black box, it is centralized. dApps like Compound and Aave exercising the judicious application of Smart Contracts are **permission-less** and **transparent**, allowing complete scrutiny of transactions (**_auditing_**) on block explorers like [**Etherscan**](https://etherscan.io/). _E.g., depositing USDC into Aave will send an interest-bearing “a” token to your digital wallet. Below, a user deposited $1 USDC into Aave on Ethereum’s Layer 2 Arbitrum Network, and received an interest-bearing Aave token denoted as “aArbUSDC.”_ ![Transaction Hash -https://arbiscan.io/tx/0x0f9cf4a46db4d50763c958708ffa1a66ea76c5310ef549bbc3c12456b0234ed6](https://storage.googleapis.com/papyrus_images/1f3507c24cca1b4b0eb3a0aa96e72e6ef7a92bf94ea510cbc96034a5c5e7fc98.png) Transaction Hash -https://arbiscan.io/tx/0x0f9cf4a46db4d50763c958708ffa1a66ea76c5310ef549bbc3c12456b0234ed6 _Similarly, your digital wallet will receive a “UNI-V2” token for providing liquidity to an AMM (Automated Market Maker) DEX (Decentralized Exchange) like Uniswap. And so forth._ ![Transaction Hash -https://etherscan.io/tx/0xb3205c61fbefd4932cd7d96d13bff8540c3759fbdb32bdfaebc7f89ff9b3689d](https://storage.googleapis.com/papyrus_images/3288fcf914b7131d018e7dbc75443b56ec2775ae635c4b3229ab810c4f0f45a9.png) Transaction Hash -https://etherscan.io/tx/0xb3205c61fbefd4932cd7d96d13bff8540c3759fbdb32bdfaebc7f89ff9b3689d This exemplifies Triple-Entry Accounting, and unlocks **Double-Token Debt**. _Aave is an imperfect analogy because the creditor’s claim is not “callable” by the Smart Contract, hence the one-sided arrow._ ![More on Double-Token Debts in the Buttonwood Zero Whitepaper - https://cdn-scaliomcms-stage.s3.amazonaws.com/root/resource/lg/Buttonwood-Zero-Whitepaper-pdf-1656717059753.pdf](https://storage.googleapis.com/papyrus_images/6c5d94fed876873770d07ab3e8a8ff0a8644c3774bf4686ce4db2de6b22acd21.png) More on Double-Token Debts in the Buttonwood Zero Whitepaper - https://cdn-scaliomcms-stage.s3.amazonaws.com/root/resource/lg/Buttonwood-Zero-Whitepaper-pdf-1656717059753.pdf Learn more at [button.foundation](https://button.foundation/). ### Trustlessness of Medicine There is none. But it’s easy to change this. Our identities are basically NFTs (Non-Fungible Tokens) sitting in the healthcare system’s centralized ledger. We upload our identities to a Distributed Ledger, so that we can self-custody our NFTs. > Physicians are invited to [HPEC](https://www.hpec.io/). And then we build a new healthcare system, modeled upon DeFi’s Hierarchy of Needs: ![](https://storage.googleapis.com/papyrus_images/2a84eda57b784daf3615368a9aaf40e8e393c662ea9b9bf0891f3d33b13d60da.png) --- *Originally published on [Bhau](https://paragraph.com/@bhau/the-value-of-trustlessness)*