The evolution of Bitcoin
Episode 1. Block height: 761100. Exactly 14 years ago today, Satoshi Nakamoto published the Bitcoin Whitepaper. A brief historic recap of the evolution of Bitcoin.
A short summary of Bitcoin and Macroeconomics:
Eurozone price level: The general price level in the eurozone rises to 10.7%, an all-time high, as recession looms.
Musk Twitter Take-over: Musk sealed the $44 billion deal late Thursday, vowing the social media platform would not become a ‘free-for-all hellscape.’ As one of his first moves, he fired several longtime top Twitter executives, including former CEO Parag Agrawal. Let that sink in.
Bitcoin in numbers: Bitcoin's monthly volatility has been lesser than both Nasdaq and S&P 500 recently. Overall, Bitcoin’s volatility shrinks to an all-time low.
October 31st, 2008: Satoshi Nakamoto, the mysterious Bitcoin founder, published the nine-page-long Bitcoin Whitepaper. Happy Bitcoin Whitepaper Day folks! 🎉
It was on October 31st, 2008 that Satoshi released Bitcoin’s Whitepaper, which was titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. To commemorate this day, let's take a brief look at how Bitcoin evolved. Just keep in mind:
“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.” - Satoshi Nakamoto
Although Bitcoin was the first established cryptocurrency, there had been previous attempts at creating online currencies with ledgers secured by encryption. Bitcoin, like many other disruptive technologies, stands on the shoulders of many thought leaders and inventors. It did not come out of nowhere, as many might think. Let's dive in and explore the evolvment of the Bitcoin Network.
The Pre-Bitcoin era
In the days before computers, governments certainly kept records about their citizens, but most of the people lived in ways that made it impossible to glean much information about them. This changed suddenly in the 1990s with the broader use and distribution of computers. The Cypherpunks saw that the digitization of life made life more convenient for the citizens, but also easier for the authorities to harvest data about them, making the data vulnerable to capture by nefarious actors. The Cypherpunks became consumed by the question of how people could protect their personal information and maintain their privacy.
None of the Cypherpunks saw a solution to the problem in running away from technology. Instead, they tried to find answers in technology and particularly in the science of encrypting information. To share information and to keep each other up to date, a Cypherpunk mailing list was created. In 1993 the ‘Cypherpunk Manifesto’ by Berkeley mathematician Eric Hughes was delivered to the recipients of the mailing list and began with the following words:
“Privacy is necessary for an open society in the electronic age.”
The existing financial system was viewed by the Cypherpunks as one of the biggest threats to individual privacy. Few types of information reveal as much about a person as financial transactions. It's no accident that financial records are one of the primary ways that fugitives are tracked down. Eric Hughes's Cypherpunk Manifesto had dwelled on this problem at great length:
"When my identity is revealed by the underlying mechanism of the transaction, I have no privacy. I cannot here selectively reveal myself; I must always reveal myself.”
Cold, hard cash had long provided an anonymous way of making payments, but this cash did not make the transition over to the digital realm. As soon as money became digital, some third parties, such as banks, were always involved and therefore able to trace transactions. Therefore, the top priority of the Cypherpunks was to create a kind of cash in the digital world.
A major problem with pure digital money is that it can be copied infinitely, the first significant hurdle that had to be solved technically to invent a digital currency was the problem of arbitrary multiplicability of digital files. This leads us first to a project called hashcash.
Hashcash
In 1997 a British researcher named Adam Back released to the Cypherpunk mailing list his plan for something he called ‘hashcash’, which solved one of the most basic difficulties holding back the digital-currency project: the seeming impossibility of creating any sort of digital file that can’t be endlessly copied.
To solve this problem, Back had a very clever idea, which would later be an important building block for the Bitcoin software. Back's concept made creative use of one of the central cogs of public-key cryptography: Hash functions. These are math equations that are easy to solve but hard to reverse-engineer, just as it is easy to multiply 21 and 21, but much harder to figure out what two numbers can be multiplied together to get 21,000,000. With hashcash, computers essentially had to figure a much more complicated calculation task. So hard, in fact, that all a computer could do was try out lots of different guesses with the aim of eventually finding the right answer. As soon as a computer found the right answer, it would earn hashcash.
The creation of hashcash ensured that the digital money was scarce, a main characteristic of most good moneys. Because a computer needs a lot of computing power, to earn hashcash, the process was called ‘proof-of-work’ (PoW) something that would later be a central innovation underpinning Bitcoin.
Through PoW, hashcash has solved the problem of arbitrary multiplicability, because now substantial computing power (ressources) has to be applied to create new units, similar to the process of digging out Gold from the ground. Though, a central problem with Back's hashcash was that each hashcash unit could be used only once, and everyone in the system needed to create new units whenever they wanted to use any. Another issue was that a person with unlimited computing power could produce more and more hashcash and reduce the overall value of each unit.
A year after Back released hashcash, two different members of the Cypherpunk mailing list came up with systems that solved some of hashcash`s shortcomings, creating digital tokens that required PoW but that could also be reused.
Bit-Gold
One was the concept called Bit-Gold, invented by Nick Szabo, a security expert. Bit-Gold combines different elements of cryptography and mining to accomplish decentralization. These elements include time-stamped blocks that are stored in a title registry and are generated using PoW strings. Szabo proposed a decentralized PoW function that could be securely stored, transferred, and assayed with minimal trust. However, Szabo never actually put his idea in practice.
B-Money
The other idea was invented by Wei Dai, a computer engineer and graduate of the University of Washington, who published an essay in 1998 introducing the concept of B-Money. Wei Dai’s paper provided the general outline for the currency, which in many ways predates the modern-day digital currency world. Dai described B-Money as a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts amongst themselves without outside help.
Dai's concept for B-Money included a number of specific features that have become common to cryptocurrencies today, including the requirement for computational work in order to facilitate the digital currency, the stipulation that this work must be verified by the community in a collective ledger, and rewarding workers for their input. To ensure that transactions remained organized, Dai proposed that collective bookkeeping would be necessary, with cryptographic protocols helping to authenticate transactions. Further, Dai suggested the use of digital signatures, or public keys, for authentication of transactions and enforcement of contracts. However, like Bit-Gold, B-Money was never officially launched. It remained in existence only as a proposal.
DigiCash
The first real world attempt to create digital private money was called DigiCash created by Cypherpunk David Chaum. Working out of an institute in Amsterdam, Chaum had created DigiCash, online money that could be spent anywhere in the world without requiring users to hand over any personal information. The system harnessed public-key cryptography to allow for what Chaum called blind digital signatures, which allowed people to sign off on transactions without providing any identifying information.
There was one big difficulty with DigiCash though: A central organization, namely Chaum’s company, needed to confirm every digital signature. This meant that, a certain degree of trust needed to be placed in that central organization not to tinker with balances or go out of business. Indeed, when Chaum’s company went bust in 1998, DigiCash went down with it. This pushed the cypherpunks to work toward a digital cash that wouldn’t rely on any central institution. Easier said than done, though.
All the experiments that the Cypherpunks were doing in the real world continued to hit practical hurdles. No one could figure out a way to create money without relying on a central institution that was vulnerable to failure or government oversight. By the time Satoshi Nakamoto came onto the scene, history had made many of Bitcoin's most likely fans very jaded. The goal of creating digital money seemed as much of a dream as creating the philosopher’s stone.
“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.” - Satoshi Nakamoto
The Bitcoin era
In August 2008 Satoshi emerged out of the mists in an e-mail sent to the creator of hashcash, Adam Back, asking him to look at a short paper describing something called Bitcoin. Back hadn't heard of it or Satoshi, and didn't spend much time on the e-mail, other than to point Satoshi to other Cypherpunk experiments that he might have missed.
Six weeks later, on October 31st, 2008, Satoshi sent a more fleshed-out proposal to a specialized, and heavily academic, mailing list focused on cryptography, one of the main successors to the Cypherpunk list, which was defunct. As was typical in this community, Satoshi gave no information about his own identity and background, and no one asked. What mattered was the idea, not the person. In careful, dry language, Satoshi opened with a bold claim to have solved many of the problems that had dogged the long search for the holy grail of universal money.
"I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party," the e-mail began.
The nine-page PDF attached to the e-mail made it clear that Satoshi was deeply versed in all the previous efforts to create a self sustaining digital money. Satoshi's paper cited Back and Wei Dai, as well as several obscure journals of cryptography. But Satoshi put all these earlier innovations together to create a system that was quite unlike anything that had come before it.
Rather than relying on a central bank or company to issue and keep track of the money, as the existing financial system and Chaum's DigiCash did, this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the timechain (blockchain).
Despite all the advances described in the Bitcoin paper, a week after it was posted, when Hal Finney, an early cypherpunk, chimed in for the first time, there were only two responses on the cryptography mailing list so far. Both were decidedly negative:
"The good guys have vastly less computational firepower than the bad guys." John Levine
"We very, very much need a system, but with this system the database of transactions, the blockchain, would quickly become too big for users to download.” - James Donald
Both concerns were valid critics of Bitcoin in the early days. The Bitcoin system Satoshi described relied on computers reaching decisions by majority rule. At the beginning, when there were fewer computers on the network, it would be easier to become the majority and take the network over. Satoshis hope was, that this wouldn't be much of an incentive, when the network was small. Later on, if there was an incentive to attack the network, that would hopefully be because the network had attracted enough members to make it hard to overwhelm. Bitcoin has been designed in such a way that it always makes more sense to be loyal to the network than the other way around.
In the weeks that followed, Hal Finney was essentially Satoshi's only defender:
“This does seem to be a very promising and original idea, and I am looking forward to seeing how the concept is further developed.”
Hal's defense of the program led Satoshi to send him an early, beta version for testing. In test runs in November and December, they worked out some of the early problems. Not long after that, in January 2009, Satoshi sent the complete code to the mailing list. The final software made some interesting tweaks to the system described in the original paper. It determined that new coins would be assigned approximately every ten minutes, with the hash function lottery getting harder if computers were generating coins more frequently than that (difficulty adjustment).
The software also mandated that the winner of each block would get fifty coins for the first four years (the halving), twenty-five coins for the next four years, and half as much again every four years until 21 million coins were released into the world, at which point new coin generation would stop and the network need to sustain from transaction cost alone.
On January 11th, 2009, Hal was the first one other than Satoshi who ran the Bitcoin code. This in turn resulted in the first Twitter post where Bitcoin was mentioned. He tweeted the following:
In the first weeks, other early adopters were slow to buy in. It became clear, though, that Satoshi's program on its own was just a bunch of code, sitting on a server like so many other dreams hatched by programmers. Most of those dreams die, forgotten on a hard drive somewhere. Bitcoin needed more users and defenders like Hal to survive, and there weren't many to be found. A week after the program was released, one writer on the Cryptography mailing list wrote:
"No major government is likely to allow Bitcoin in its present form to operate on a large scale."
Contrary to many, Bitcoin has developed breathtakingly to this day. Today, Bitcoin is the most secure decentralized network on the planet. The hash-rate, the amount of processing and computing power being given to the #Bitcoin network through mining (PoW), just reached an all-time high of ~260 EXAhashes (260 million million hashes). Generally speaking, the higher the hash-rate, the more secure the network and the more people believe that Bitcoin will be successfull in the long term.
Looking back, it is very impressive how Bitcoin has developed over the last 14 years: From an entry in a mailing list of cypherpunks to a global network with millions of users. Today, Bitcoin is hope for a better and fairer future for many.
I can't wait to see what the next 14 years will bring. This is it for this episode. Happy Bitcoin Whitepaper day folks 🎉.
₿ critical, ₿ informed, ₿ prepared. Stay tuned for the next episode,
Nicecly presented. Good education. Important to divulge
I loved reading this! Thank you.