In Defense of “Trusted Third Parties”

Third parties

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The promise of the blockchain, cryptocurrencies and smart contracts is rooted in the belief that trusted third parties (TTP) should be eliminated from many transactions in our daily lives.

In cryptography, a TTP (C) acts as a facilitator between two parties (A and B)  in a transaction. Parties A and B both trust the TTP, which acts as a form of security.

Trusted third party in cryptography

 

TTPs are used in many commercial marketplace transactions today, from real estate, to stock trading to consumer goods.

The logic behind blockchain technology replacing TTPs is that conventional TTPs are not only expensive, but are also inefficient and introduce risky security holes.

Blockchain based distributed public ledger technology applications are positioned as inherently trustworthy, less expensive, more reliable solutions to conventional TTPs.

A decentralized cryptographic ledger, such as Bitcoin, functions as a store of value even though it is not owned or governed by anyone, nor managed by a central authority.

Tim Ferriss Nick Szabo trusted third parties

One of the earliest arguments for solving the TTP problem was published in 2001, eight years before Bitcoin was implemented, by the well-respected computer scientist and attorney, Nick Szabo.

Probably like most non-computer scientist cryptographers, I first heard about Nick through the Tim Ferriss podcast (podcast #244), many years after this 2001 post on the Nakamoto Institute website.1

In the podcast, Tim, Nick and Naval (Ravikant) have an excellent discussion about the nature of blockchain and its promise for solving all sorts of problems involving TTPs.

During the podcast, Naval argues (somewhat gleefully) that many human jobs will be eliminated by blockchain based applications in the future.

Are TTPs Really That Much of a Problem?

But are TTPs really a problem humans actually want to solve… Or do transactions involving some TTPs just need improving…?

There is a difference between a high value transaction made overly complex because of a pointless bureaucracy and a high value transaction involving a useful trusted third party.

The former famously frustrates freedom and independence… The latter adds incremental independence, value and freedom.

However, there are shades of grey across the spectrum.

Individual freedom and independence, like beauty, is in the eye of the beholder. Feelings of personal independence span a wide, subjective spectrum…

While security holes can exist and cause problems, I suspect that TTPs are not viewed as problematic by consumers in the vast majority of situations related to business and commerce.

Indeed, in most consumer scenarios, trusted third parties are viewed as enhancements.

TTPs are enhancements because in many cases they assume responsibility for liabilities, compliance and regulations that the parties would not want to have to worry about.

Human TTPs are also enhancements to human transactions because the parties involved can expect to communicate with the TTP at any time, if needed.

Indeed, if I am a party to a transaction, I can expect communication with my TTP even if it is NOT needed… Even when it may be viewed as completely ridiculous, unnecessary or irrational by the TTP.

Hand holding is an expected part of any high value transaction.

As such, human TTPs are important to high value transactions, not so much because they are secure, which we hope they will be, but because they provide some “on call” humanity.

My Accountant as Trusted Third Party

An accountant is a good example.

Tax accounting is perfect for computers because it involves very complex rules between you, the IRS and state departments of revenue.

The tax code is something that very few people can understand. 2

However, in theory, blockchain driven accounting and tax collection software could eliminate bureaucracy, while offering a transparent record of payments made, and collected, by government. It could lead to more transparency and greater efficiency in the use of public funds, etc.

However, the services my accountant provides go beyond these concerns.

My accountant helps me think through tax avoidance issues in a more thoughtful way than the software he most assuredly uses to help him do his job. My accountant also happens to be an attorney… This additional “free” expertise provides me with a unique perspective on tax payments or anything else that pops up.

He is also a genuinely warm and thoughtful person. As such, if I am having an emotional breakdown at tax time, he is there. And the additional services (again often perceived as “free”) he and his team provide me and my family go far beyond the accuracy and security of my dealings with him.

Bob’s Watches as Trusted Third Party

Another example is buying a Rolex.

If you’re in the market for a $5,000-20,000 Swiss timepiece, you could go to a high-end place like Tourneau, or you could visit a local jeweler and see what they have… or you could look online for new and used Rolex options.

Bob's Watches as Trusted Third Party

In searching around online, you might end up at Bob’s Watches, a website that sells used Rolex’s that are guaranteed genuine.

Now, as an illiquid asset, a used Rolex could be a perfect thing to harness blockchain technology to provide an immutable record of provenance via serial numbers, etc.

With a blockchain application, in theory, you could buy a used Rolex from a guy named “Bob” that you met online…

Then again, you might prefer knowing that there’s a store named Bob’s Watches with a physical location that you could visit somewhere with a phone number and employees you can call if you’re not satisfied.

Who cares if they’re getting a cut of the action? I want a guaranty that I can call someone if something goes wrong.

After all, if you’ve ever been to Chinatown in NYC, you know there are some pretty amazing fake Rolexes out there.

Blockchain: Customer Service Antimatter?

As humans are by nature involved in human transactions, mistakes will be made and fraud will occur.

With a TTP, we know that help is out there somewhere, in the off chance that we need someone to call (or blame).

The opposite is often true in pure blockchain utopia…

Without a trusted third party, who do you call if something goes horribly wrong… What if a blockchain smart contract is set in motion that you believe is wrong? Who do you object to?

Terminator smart contract

Immutable irreversibility is not always a good thing.

If it turns out that my $10,000 used Rolex was actually from Canal Street, I may have no recourse, but at worst, I’m out $10,000… At least it’s not life threatening.

What about the bleakest imagining of a blockchain-driven application, one involving a killer robot executing a remote smart contract driven “hit”… In such a situation, the target  could not hope to get away from, or reason with, his or her would be killer…

At least if a good old fashioned hitman comes for me, I could hope to try get away or reason with him.

Trusted third parties are valuable because they simultaneously offer comfort that nothing is going wrong, and that nothing illegal is happening, while also providing assurance that there is a “higher power” to call, or escalate to, in the event we need to do so.

Or, if more likely in our closed box, AI driven future, we are just frankly unsure of what the heck happened in the first place!

Blockchain may offer a less expensive, more secure solution to important transactions… but in most transactions humans also want trusted third parties to talk to. TTPs to listen, if needed, if we have a new point of view, to help us deal with unexpected situations, and to understand that as humans we should have the freedom to change our minds…


 

Footnotes

  1. Many members of the cryptocurrency community believe that Nick Szabo is Satoshi Nakamoto.
  2. Indeed, this is more or less how Quickbooks, TurboTax, etc. and H&R Block make money, namely by using software and non-accountants to help with accounting work at tax time.