Decentralized blockchains create coins, or digital currencies which are defined as trustless because of the consensus methods used to validate transactions in an immutable ledger. But to truly understand the meaning of trustless we have to look at a traditional centralized system of currencies, such as the current fiat currency systems.
Fiat currency gets its trust from the backing of the government that issues it, as well as a number of economic and financial elements that can affect currency values. These include, but aren’t limited to inflation rates, debt levels, interest rates, trade agreements with other countries, and extend to political considerations as well as the workings of the public sector. All of these factors are out of the control of the currency users, even though it is these same users who elect the governments in control of the currencies. This all means trust has to come from a third party, and these can include organizations and individuals in the private sector.
By contrast, a trustless currency like Bitcoin, which is based on blockchain technology, has its value determined by the peer-to-peer nature of the currency. The currency is as valuable as the market decides, without any centralized intervention, such as that of a government. The value of these cryptocurrencies are still affected by outside forces, but it cannot be manipulated from within, because it works by the consensus of its users.
In addition, the potential for counterfeiting and fraud is greatly reduced, because transactions are transparent, or visible on the blockchain, which has already undergone verification before each transaction could be completed. It is this complete lack of dependence on a centralized entity that gives cryptocurrencies their trustless nature. Any user can transfer value to any other user, and governments are unable to confiscate user funds. Plus, the total basis for the value of the currency is based on the consensus of users who determine what the value is.