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Stellar, Bitcoin, and the Psychology of Trust

The summer after my junior year of college, I landed an internship at a marine and reef conservation non-profit in LA. I was in school in Pennsylvania at the time, which meant I’d be jetting off to a city on the opposite side of the country where I knew exactly one person. I’ve always had a rather laissez-faire approach to travel, so it didn’t occur to me until about two weeks prior to my start date that I didn’t actually have a place to stay. I certainly would have been in good company had I ended up joining the ranks of Venice Beach’s homeless population for the summer, but I opted for a more mainstream approach and started scouring Craigslist. When I finally found an apartment that seemed suitable, I set up a Skype call with the woman who would be subletting it. She gave me a virtual, highly pixelated tour of the place, (which could have been literally anywhere) and in light of this rigorous analysis I wisely decided to wire her several thousand dollars as an advance on the apartment.

Once I’d finished congratulating myself for being such an adult, it occurred to me to ask her how I’d be getting the keys to the place. “Oh, don’t worry!”, she said. “They’ll be under the flower pot on the porch”. Reassured in the way that only a naïve twenty year old could be, I packed my things and hopped on a plane.

Short of using an escrow service which would have cost me a large chunk of the total amount, there wasn’t much I could’ve have done in the situation. I went with blind trust, hardly a solid foundation for a modern digital economy. Bitcoin has the potential to build a much more solid foundation, and that’s what makes it so revolutionary. Its value is not really that it’s an exceptional payments protocol : payments are only a small subset of the As Marc Andreessen put it, “Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer.” Bitcoin’s real differentiating factor is the blockchain, which enables geographically distributed parties who do not trust each other to transact in a virtual environment, without needing a third party.

The media has been all aflutter recently with commentary on bitcoin’s plummeting price, but I’ve long been of the mind that this doesn’t matter anyway. Bitcoin is much more useful as a payment rails, an enabler of transactions on an open, global network — in other words, an “IP layer” for this type of payment system. Stripe CTO and Stellar Foundation advisor Greg Brockman described the concept of bitcoin as protocol in his excellent blog post on the matter.

Stellar is a fork of Ripple. It also draws a great deal from Bitcoin, and is optimized for the specific use case of transferring value between pairs of currencies. While Stellar as currency has a market value, its core utility is serving as a conversion path between other currencies as a protocol. The network is composed of gateways, and users hold balances with gateways. As a user, I can make a deposit with a gateway and in return I receive an amount of credit which I can then use to send money in various currencies to other people on the network. This means that using Stellar as an intermediary, I can make a deposit to a gateway in USD and then send Euros to my grandmother in Italy without ever actually having any Euros. The network will pair me with another user who wants to convert euros to dollars and fulfill both sides of the exchange order.

One of the major differentiating factors between Stellar and Bitcoin is that the former requires trust, while the latter does not. If you’re using an intermediary like Coinbase, Circle, or an exchange, you are trusting them, but that’s not ultimately necessary in order to use Bitcoin. This requirement of trust might seem trivial, but it’s actually a huge differentiator. Unlike Bitcoin, which is asset-based, Stellar (like its precursor Ripple) is a debt-based network, meaning that while Stellar is an asset, the other currencies on the network are issued as debt instruments, and exist as balances. Stellar users have to trust the gateway cold wallet, which is how they receive funds. You can choose the amount of trust you place in a given gateway, denominated in the balance you hold with it. Still, you have to trust that when the gateway tells you it will allow you to withdraw a certain amount of money in a given currency in exchange for your credits, it will actually do so. If not, it’s completely irrational to use the system in the first place. The network’s ability to operate is a function of whether this kind of trust is present.

Bitcoin relies on mathematical proof rather than faith and goodwill. In the financial world, you don’t want to hope that someone can be trusted, you want to know so. It’s entirely rational, and in that sense — in that it doesn’t require trust — Bitcoin is superior. Ultimately, however, what matters is not just whether something is theoretically superior, but whether it works in practice. If it does, and it actually provides value to its users, they will be willing to look past its shortcomings and use it regardless. Stellar has the potential to make this happen; reliance on trust will not necessarily be a hindrance to its adoption or an indicator that the project will fail.

Countless studies indicate that people are inherently bad at evaluating risk. In the past few months, a series of security breaches affecting traditional payment networks have given consumers every reason not to trust them. Personal data of somewhere between 70 and 110 million people was stolen from Target. Fifty million credit card numbers were stolen from Home Depot. JP Morgan Chase announced it suffered a monumental data breach in which data about 76 million households and 7 million small businesses was stolen. In 2014 alone, there have been nearly 600 data breaches, yet most consumers seem entirely unphased and haven’t changed their behavior at all in response. While it’s true that consumers don’t actually lose money in the process and the inconvenience of ordering a new card is relatively small, the credit card companies are eating the loss, and those costs are ultimately passed back to the consumer. Bitcoin and other cryptocurrencies can avoid this entirely, as personal identifying information (PII) is never attached to a transaction.

I see two main causes at play for consumers’ apparent lack of concern at the data breaches affecting them: a preference for convenience over security, and a deeply-ingrained inclination to trust. Society is predicated on such an inclination. As David DeSteno writes in The Truth About Trust, “the potential benefits from trusting others considerably outweigh the potential losses on average. The ever-increasing complexity and resources of human society — its technological advancement, interconnected social capital, and burgeoning economic resources — all depend on trust and cooperation. . . . More can be achieved by working together than by working alone. That’s why we trust — plain and simple. The need to increase resources — whether they be financial, physical, or social — often necessitates depending on others to cooperate.” Amazingly enough, for the most part this strategy is actually successful; when I got to the apartment in LA, I found the key under the pot exactly as promised.

Being distrustful is a consistent psychological burden, one which consumers generally reject. If we can’t be convinced to do something as simple as change our passwords in the face of known security breaches, it’s unlikely that concern for a hypothetical scenario in which a gateway doesn’t pay out will keep us from adopting Stellar. Right now the number of people using Stellar is too small to make any claims about the network’s long term fungibility, but I’m looking forward to seeing the ecosystem develop.

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