Aaron van Wirdum is the technical editor at Bitcoin Magazine. Finn Brunton is the author of “Digital Cash: The Unknown History of the Anarchists, Utopians, and Technologists Who Created Cryptocurrency.” In this episode, they tackle the history of digital currency. Topics include:
- the motivations behind the earliest attempts to create digital currencies, and who was behind those attempts
- the Extropian philosophy and how digital currency was born out of it
- how the cypherpunks came together and eventually began implementing tools that would lead to the creation of digital currencies
- the problems faced during the development of digital money, from double-spending to privacy, centralization, and spam
- the development of a public key protocol and why it was so significant
- the characteristics of earlier forms of digital currency like e-cash, hashcash, b-money, and bit gold, as well as their differences
- the original purpose of proof-of-work and how it was developed
- Hal Finney’s essential contributions to the creation of earlier digital currencies, and later, Bitcoin
- previous implementations of blockchain and how Bitcoin came to reinvent and utilize it
- which previous digital currencies come closest to Bitcoin
- and who they think Satoshi Nakamoto is …
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Episode links:
Aaron Van Wirdum: https://twitter.com/AaronvanW
Finn Brunton: http://finnb.net
Digital Cash: The Unknown History of the Anarchists, Utopians, and Technologists Who Created Cryptocurrency: https://press.princeton.edu/books/hardcover/9780691179490/digital-cash
Aaron’s Bitcoin magazine series on the early days of digital currency: https://bitcoinmagazine.com/articles/genesis-files-how-david-chaums-ecash-spawned-cypherpunk-dream https://bitcoinmagazine.com/articles/genesis-files-hashcash-or-how-adam-back-designed-bitcoins-motor-block https://bitcoinmagazine.com/articles/genesis-files-if-bitcoin-had-first-draft-wei-dais-b-money-was-it https://bitcoinmagazine.com/articles/genesis-files-bit-gold-szabo-was-inches-away-inventing-bitcoin
Aaron on What Bitcoin Did discussing the stories: https://www.whatbitcoindid.com/podcast/the-beginners-guide-to-bitcoin-part-3-bitcoins-pre-history-and-the-cypherpunks-with-aaron-van-wirdum
Breaker Mag Interview with Finn Brunton about his book: https://breakermag.com/new-book-reveals-cryptos-radical-origins/
Transcript:
Laura Shin:
Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. A journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full time. Subscribe to Unchained on Youtube where you can watch the videos of me and my guests. Go to YouTube.com/C/UnchainedPodcast and subscribe today.
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Laura Shin:
This is the third installment in the Why Bitcoin Now series, which takes a closer look at Bitcoin and the context of larger macroeconomic forces such as the pandemic and geopolitical moves happening in crypto. The topic of today’s episode is the history of digital currency. Here to discuss are Aaron van Wirdum, technical editor at Bitcoin magazine and Finn Brunton, the author of Digital Cash, The Unknown History of the Anarchists, Utopians, and Technologists Who Created Cryptocurrency. Welcome Aaron and Finn.
Aaron van Wirdum:
Thanks Laura. Thanks for having us.
Laura Shin:
To really understand the history of digital currency we need to know who the people were who were interested in creating digital currency. Who were some of these original groups of people that were working on this and what were their motivations?
Aaron van Wirdum:
Do you want to start, Finn?
Finn Brunton:
Yeah. Yeah, sure. I was just going to say I’ll jump in. It’s a really interesting community and I think one of the challenges for us now, seeing how Bitcoin has evolved and is evolving, is to be able to look back and understand the diversity of motivations that sort of originally brought them to this because everyone, I think, who is working in computer science or early network computing in the 1960’s and 1970’s, they already knew that online transactions were going to be a thing. People were already thinking about, in depth, what it meant to buy and sell online, what it would mean to have a receipt or sign your name to something or exchange tokens of value, and they also knew that there were ways that they could make it work that would be huge improvements over, say, credit card transactions, which already existed in a much earlier format. So, when we look back at people like, just to put out a few names, David Chaum, who was one of the sort of great early pioneers of digital cash, Timothy C. May, Cypherpunk, and sort of, Anarcho-capitalism/crypto anarchist, Hal Finney who has obviously become very famous retrospectively for his role in the development of Bitcoin. We see a mix of people who are all trying to figure out how to solve the problem of exchanging digital tokens over what would become the internet in a way that would allow them to create, not just commerce, but the kinds of commerce that they wanted to see in the world, and I think that maybe kind of brings us to some of their motivations. Some of them were looking for ways that they could exchange existing territorial currencies, but do so anonymously and securely online, the same way that you would pay for something with physical cash.
Laura Shin:
And by territorial, you mean fiat currencies?
Finn Brunton:
Oh, yes. Yeah. I mean, basically currencies you know, minted and issued by the country you happen to be in. So, yeah, finding a way to sort of exchange dollars just as you would by withdrawing dollars in cash and paying with them, and I wanted to use that territorial distinction because there were others who had similar interests in the technology but with the goal of producing tokens that were native to the network, right, that were sort of particular to transnational computer networks and would sort of draw their characteristics from that new context. So, I think we can go through a bunch of these different characters and their different kinds of interests and goals, but I think it’s really useful for us to start with that premise, that everybody knew that this was coming, and the question was, in what form does it come, what are your goals, what are your visions for the world that you want the money to carry out?
Laura Shin:
And Arron?
Aaron van Wirdum:
Yeah. I think there were sort of two main drives. I think, that sort of led to this development, and I think one half, this is really exemplified by folks, for example David Chaum, who was the first to start talking about this, if money becomes digital that could have a very unpleasant consequence of making every transaction traceable, which means that there might be some database somewhere that exactly details who’s paying who, when, and you know, this could become, like a big panopticon, right, which is a scary idea, I think, or at least he thinks and I happen to agree with that. I think that, that’s a very scary idea that someone would have, because if you don’t have privacy that really affects your behavior, even if you’re not sure that someone’s watching you, like that’s the trick behind the panopticon, right, just the idea that someone might be watching you, that’s a very unfree idea and you can’t really be yourself and develop yourself and you know, we could get into examples where you know, let’s say you’re a homosexual in a country where the government doesn’t have too fond of a perception of homosexuality, then you know, you cannot buy certain things in certain stores because you may get government agencies behind you, and keep in mind, since this is digital it’s not even just today’s government you need to worry about, like if there’s a database then it could be the government ten years into the future that doesn’t like homosexuals so you know, the panopticon is very, or David Chaum, thought this was very scary idea. So, this was really a sort of privacy angle and then you add another motivation, which was, there’s something wrong with our money, there’s something wrong with fiat currency. For example, Hayek wrote about this like the Austrian business cycle and how the money itself and the way central banks manage it…
Laura Shin:
Just explain who Hayek was, I think the first name was Friedrich, right?
Aaron van Wirdum:
Yeah. Friedrich Hayek. He’s often also known just as Hayek or F. A. Hayek. He was an Austrian economist, and Austrian economics is a field of economics, today most Austrian economists aren’t actually from Austria, but Hayek was actually from Austria. The University of Vienna is where this school of thought developed. It’s a different way of looking at economics, more of a priori way of thinking about the world and economics. So, he has, for example, and other Austrians had, this critique on how money works and I think this train of thought led Hayek at some point to propose stateless currency. So, free markets for currency, and I think this was another driver. I would say Chaum was probably the first, but then when some Austrians and Extropians, we’ll get to that in a bit, when they sort of realized money could become digital they also saw that means we can reinvent money, we can make a better money in their view, a better money.
Laura Shin:
Let’s talk about the Extropians, because they were sort of precursors to Cypherpunks and they’re very colorful. Who were they, and what were there motivations, and what did they want to do?
Finn Brunton:
Well this is, I think this is a pretty extraordinary history and it’s also one that really weaves together those two threads, that have just been so well explained, in that the challenge that. One challenge where both of those sides met, right, the privacy thread and the money reform thread, the new money thread, the global money, free money thread, one of the places where those met was the idea that there was a real danger as money became digital, that the ways it was designed could halt or interfere with the kinds of innovation and activity that, that digitization might unlock. So, from the Chaumian perspective, if your privacy is being limited and you know, Chaum, I think, had a really, like prescient fear about this, right, one that has come true in a lot of ways, which was basically, it’s not just that could then be used to track you, for example, but it could also be used to data mine your transactions, and just as was said, to use those transactions against you in various ways or to potentially do things like change the prices in real time you know, to like gouge you around things that they knew that you had to pay for or knew that you had to pay at a particular time, or what have you. So, there’s a whole sense, like okay, that will A. drive people away from digital currency because it will be this bad deal and B. that will dramatically limit the scope of human freedom in a lot of different directions, and then the sort of monetary reform side, right, you know, new money, different kinds of money, part of the fear, the notion with this, which can be debated, but the notion with this was in part that the ability of sovereign states to control their money and use tools to manage the money supply could potentially interfere with the kinds of investment, and innovation, and transformation, especially technological transformation, that might be possible if you had other kinds of economics at work. So, the reason I say that was that the Extropians were a remarkable group in that they really unified both of those threads and they were kind of the place where those threads met, and historically I think the Extropians are especially significant because almost everyone who was of significance in the genesis of bitcoin, like passed through their ranks in one way or another, was a fellow traveler, was on their mailing list you know, hung out with them, was an active card carrying Extropian etcetera. So, the Extropians, these two threads met, and the reason why I wanted to explain them in a little depth was to understand their unique perspective. The Extropians, as their name would suggest, saw themselves as having a kind of cosmic task and the cosmic task was the opposite of entropy. Instead of a steady decline of complexity into noise, and eventually some kind of entropic heat death, they wanted more complexity, more transformation, more information on, like a cosmic scale, more life, like they thought of the scale of billions of years. They were interested in, not just like becoming rich, but becoming, like you know, immortal minds embedded on silicon in you know, far future physical forms expanding throughout the universe at the speed of light. That scope of ambition is really an amazing thing to consider when you think about how it reflects back on, okay so what do you do today, what do you do this morning, and the Extropian answer was we try to build the platforms that will fuel the innovation that will bring about things like amazing medical breakthroughs, amazing technological breakthroughs, like you know, seemingly science fictional technologies that could be realized now, and we will put ourselves financially in the position of being able to take advantage of those when they arrive. So, the idea is that if you can build an economic machine that is sufficiently, like powerful in terms of driving innovation, of accelerating change, then maybe you could bring about the inventions that would make it possible for you to live forever and to create utopia, right, and like, I say this kind of as someone who really admires the scale of this ambition but also to emphasize that until you go back and read the Extropian documents it’s hard to realize that I’m not exaggerating at all, right, like they really wanted to figure out what can we do that can create the greatest possible future for trillions of minds over billions of years, and the answer came back to one of the things is develop digital cash.
Aaron van Wirdum:
Yeah. There’s this, like futuristic idea that of course always existed, like something like Star Trek, but the Extropians were really the first, but first of all they thought that something was very realistic that could actually achieve with actual technology that’s improving exponentially. So, within their lifetime you know, they could live forever, for example, and the other thing is that instead of some sort of Star Trekian benevolent government that is sort of like a perfect you know, people-made central planning thing or democracy or whatever, I’m not a Star Trek fan, I don’t even know exactly what the characters looks like, but the Extropians, they really thought as a free market thing, like they had a very Austrian economics idea about it and freedom, and individuals should realize this progress, and governments were interfering with that, like government regulation was standing in the way. If you just let individuals be free, if you just let markets be markets, then this futuristic utopia could become a reality. That’s what I would add.
Finn Brunton:
Yeah. Actually, that brings up a really good point, which is that they went another kind of way, I think, of understanding some of the unique elements that went into digital cash is that it evolved eventually into bitcoin, was exactly that fact that they were, and part of what they inherited from their interest in Austrianism, was the fundamental commitment to emergence, right, like sort of superior things came about not through foresightful planning, but through the emergence and interaction, the emergence out of the interaction of unknown complex factors. So, that means that they really wanted to design a kind of digital cash that had the minimal amount of oversight, essentially that could kind of enable things to evolve with the least amount of control, which is you know, in many ways something that’s very different from almost any other kind of money that has been sort of developed or administered.
Laura Shin:
Yeah. And you see that ethos almost in cryptocurrency today, and by the way, so, I know many people will listen to this on the podcast, but also, we do record this on video and I just can’t help but notice that there’s a poster behind Arron’s head that says, Cypherpunk future’s something… the future is now, yeah, what is that?
Aaron van Wirdum:
That’s a print by Martin Fisher. He’s an artist from Prague. He’s involved with art collective and they founded the Paralelní Polis. I don’t know if you’ve heard of that. It’s like a collective of artists and hackers and they got really into bitcoin as well. So, this is part of a series of Cypherpunk. I think the series is called Cypherpunk, future is now.
Laura Shin:
Okay. Yeah. I wondered if it was some…
Aaron van Wirdum:
It’s got, what does it have, it’s got an email from Tim May. I think it’s the crypto manifesto print is on it.
Finn Brunton:
Oh, yeah. Yeah. Awesome.
Laura Shin:
Cool. Interesting. All right. So, one other, just like little comment I want to make about the Extropians was when I was reading Finn’s book, they also had reputation currencies that were kind of like, almost like a personal token basically, and there was something about it, I was like, oh my gosh, this is like cryptocurrency but just a long, long time ago. So, it was pretty funny, but anyway, I also wanted to ask, what were the main problems that these creators of digital currencies were trying to solve? I think probably many of them are well known to bitcoiners, but you know, let’s just go through them so the people have a baseline.
Aaron van Wirdum:
I think that’s skipping ahead a little bit but that’s fine, I think the main problem…
Laura Shin:
Oh, because we didn’t get into the Cypherpunks.
Aaron van Wirdum:
Yeah. The Cypherpunks are like, they were sort of doing it step by step.
Laura Shin:
Yes. Sorry, that was the second part of my question. I forgot that we didn’t get into that part. So, lets talk about that.
Aaron van Wirdum:
Okay. Well, I would say the first problem, the main problem that any digital currency scheme had was the dobule spending problem, right? So, if you make cash digital, if you make money digital, then a central problem there is that if you have a digital dollar bill then you can just copy it and send it to people, right, and that sort of defeats the point of money. I would say that’s sort of the central, the main idea, but there’s many problems they solve, it was sort of a step-by-step process towards bitcoin where they figured out to solve one problem after the other you know, privacy is one and decentralization is one.
Laura Shin:
But lets talk about the Cypherpunks, like how did they come out of the Extropians, how were they different, how were they similar, what were their motivations and what was their philosophy?
Aaron van Wirdum:
So, can I start this one, Finn?
Laura Shin:
Yeah. Go head.
Finn Brunton:
Yeah. Yeah. Yeah.
Aaron van Wirdum:
Okay. Okay. Yeah. So, David Chaum wanted to create digital cash, right, like he had this idea of how to do it, he had an idea of how to create digital cash, and by digital cash, by the way, I specifically mean privacy. He was on the privacy side. He cared about privacy. This was in 1980. This was just after public cryptography was even invented, it was pretty fast. Now, he ended up in Amsterdam, because he had a girlfriend there, and then at some point he won a government contract to create a digital tollbooth system. The Dutch wanted to create toll roads on their roads through some sort of electronic system where they track which cars are driving where. Well, Chaum thought that’s not a good idea, I don’t want the government to know where each car is driving, so I have a better idea. I have a private solution. He was able to convince the government that it was in fact the better idea and that he was able to do it. So, he founded the company called DigiCash and this company, he created this tollbooth system, but then he also, as part of the company, he also wanted to create a digital cash system.
Okay. So, this digital cash system was centralized, to be clear. There was a central database at the company, but he used clever cryptographic schemes to make sure that the database ideally, it’s a bit complicated, it’s a bit nuanced how private it was, and there was a lot of debate about it, but the general idea was people paying each other don’t know who they’re paying, don’t know the real names, and the company shouldn’t know either. So, at some point, because you asked about Cypherpunks, I’ll sort of get to Cypherpunks. Eric Hughes, he was an American, he was interested in digital cash and he actually went to work at DigiCash, but he became disillusioned because some of the choices that DigiCash was making, I have to scrape my memory what his problems were with it, I don’t remember. He had some problems with how it was being assigned or how the company was planning to make money or something.
Laura Shin:
I think some of it was, and you know, I don’t know exactly what you’re referencing, but I think some of it was the business decisions that Chaum could not make, where he was getting all these really amazing offers, like from Microsoft. Is that different?
Aaron van Wirdum:
That was much later. Eric Hughes was, like in the early days of the company and he immediately had some problem and it had to do with being able to use the system offline and that came with a bunch of tradeoffs as opposed to just using it online without tradeoffs, like it had some sort of secret chip in it, like an unforgeable chip, there’s a better term for it. Anyway, that was his problem. So, after a couple of weeks he was out. He wanted to move back to California, and he was looking for a home near the coast, and he met up with an old friend called Tim May.
Tim May had been working at Intel and made a lot of money because he solved the big problem and he had stock options, and at one point he did the math and he figured, you know what, I’m 34 years old but I can retire, something like that around that age. So, he retired, and he spent a year on the beach. He bought a house near the ocean and he spent a year on the beach reading books and he was reading a lot of Cypherpunk books. So, also economics and these kinds of things, but also Cypherpunk and Cypherpunk is sort of this vision of the future where the internet has some sort of parallel role in the society. That was usually one of the themes of Cypherpunk books. He got into contact with another, sorry, this is becoming a long story, and they had another friend who was starting a company that was about selling information. The internet was brand new. This was like late 80’s, early 90’s, late 80’s I think still when this happened. His friend was thinking of starting a company about selling information and then Tim May realized, wait, if you can sell information anonymously, that could completely change the world, because if you can sell data anonymously that means you can sell secrets, like government employees can sell secret data, if you’re working at a big company you can sort of anonymously sell the secrets of that corporation and completely, I mean in his mind it was a revolutionary concept that you could anonymously sell information online. In order to do that you needed something to sell it with, anonymously. So, you needed digital cash. Okay. Eric Hughes and Tim May met up and they started talking about this kind of stuff and Tim May went further in his mind, like he started to think about if this is possible, and if we have digital cash the potential is complete disruption of government, like it could realize an anarchic vision of the future where people don’t pay taxes, there’s no such thing as government secrets, all that. So, it was a very anarchist vision.
Tim May and Eric Hughes started to talk about that, both super fascinated about this, and then after a couple of days they asked themselves, they questioned if all of these amazing tools exist, because they had been invented in the 70’s and 80’s, if all of this stuff exists then where is it, why is no one actually using any of this, and that’s where they came to the idea, that’s where they got the idea to found the Cypherpunks, which was a group in California. At first they met physically, they met physically at Eric Hughes’ house, I think there wasn’t even furniture there then so they were sitting on the floor, and they were discussing these ideas and they made the plan to actually use these tools and make it a reality, allow people to discuss comforts online anonymously, anonymous cash, anonymous information markets, all of this. So, that was sort of the Cypherpunk ethos, if all of these tools exist let’s make them a reality. That’s what they agreed to do.
Laura Shin:
Yeah, Finn? What do you want to add?
Finn Brunton:
Yeah. I would love to add in, I think that’s a fantastic account of like the whole kind of trajectory of this history and I think also, like in that account you can sort of see the different problems that are coming up, that they’re sort of going to make up the manifest of stuff that digital cash needs to be able to do and how they’re trying to address those problems, right? So, it’s going to have to be, like it’s not going to be like a credit card where like you verify your identity you know, and then like a ledger is debited somewhere to switch over to someone else’s identity and all these transaction records are being produced. Instead it’s going to be like a token, it’s got to be a token, but that means the token has to be the uncopiable, right, like I have to be able to transmit it to you without us being able to you know, trivially duplicate it. It has to give away nothing about our transaction, but there’s another, like all the kind of problems that we can see in like the bullet point list at the beginning of the Nakamoto whitepaper about bitcoin, right, like all the issues that bitcoin addresses, but then there’s another sort of bigger problem even in some ways, which is threading through the story of Cypherpunks, which is what you would use this currency for, and I don’t mean that in just a kind of trivial, like what could you buy with it way, but like one of the ways that you make a currency, not just valuable, but something that is in use, something that is, as they say in the currency business, passing current you know, something the people actually transact, is you have to make it something that can provide access to value and to potentially sustainable value over time, right, like you have to assume that when you put money into this the value of that money is going to be stored in some way, if it diminishes it’s diminishing on some kind of known schedule. So, this was one of the problems that they faced, like one of the ways that May put it, which I think really captures the problem, is that he challenged people on the mailing list. He said, we’ve built anonymous email systems and those are technically challenging, but they’re socially easy, because everyone gets what anonymous email is, but when I say that we need to make a digital coin, what is that digital coin, and when I say, here, I’m giving you ten digital coins, what makes that something that someone else is going to use, that they’re going to, like make a part of their lives, that they’re going to start essentially having more and more of a personal stake in, which is what will really help to get that currency over the line into actual circulation, and the answer to that, and I think this is the place where we can also see some of the challenges that these currencies were going to face, the answer to that, that May presented, is that we’re going to start by making it a way that you can access kinds of things, kinds of value, that you can’t get any other way, right, like he had a fantastic section in this long manifesto that he wrote where he lays out all of the different communities that are going to drive the adoption of digital cash and related anonymizing technologies. The way that we identify everything that is currently excluded by law or custom, like existing areas of commerce, and then we make this into things that can be. So, from that perspective one of the reasons for understanding the importance is that it starts out with the idea of selling secrets, right, like this can make something really valuable. May hypothetically sketched out a system of crypto credits and part of the premise of those crypto credits was that you could get them as payment for selling secrets over this anonymous secret sharing platform that’s sort of WikiLeaks meets the Silk Road almost in some ways, and it was a direct inspiration for both of those, but he says, okay, so you can be paid in those crypto credits and then you can use those to buy other information, and this is not what the currency is ultimately going to be, but this is the wedge that helps to break apart the structure of existing currencies. This is the thing that is what you can do with this currency, you couldn’t do any other way, and this is what will help to drive it’s adoption and circulation, and I think that really helps us understand that this was a bigger problem that a lot of different digital cash projects faced, not just what can you use it for, but what kinds of value does this let you access that you couldn’t get any other way. What’s the kind of, as it were, literal unique value proposition that this is going to offer to you?
Laura Shin:
Yeah. So, now we’re almost half-way through and we haven’t even dived into some of the actual solutions that came along the way, but quickly, why don’t we just go over…So, I think, probably some of the other main problems that these creators of digital currencies were trying to resolve, in addition to double-spending and privacy, or centralization you know, having a central point of failure was something they had to overcome, spam was another one, and then there was kind of one key technological development that happened early that helped kind of enable these different digital currencies, and this was the development of a public-key protocol by Whitfield Diffie and Martin Hellman. Can you talk about you know, what this was and why this was so significant?
Aaron van Wirdum:
Shall I?
Finn Brunton:
Sure. Sure.
Aaron van Wirdum:
So, this predates digital cash, right? Public key came before digital cash. So, for context, before public-key cryptography, cryptography itself was really something that belonged in the realm of, like secret agencies. So, government agencies or the military, or these kind of domains, these were the sort of people who were generally doing encryption and one of the major challenges they all faced was that prior encryption schemes was, always the case that the public had, was that prior encryption schemes, it was always the case that the decryption key was the same as the encryption key. So, that’s called symmetric encryption. What Whitfield, Diffie, and Hellman really invented is this public-key cryptography system where you can publicly share your key with anyone. So, with symmetric encryption, sorry, I should have mentioned this, the challenge is that you can only communicate privately if you first met in real life in some way because you got to exhange the key, if you exchange the key over an insecure line then the snoop can just listen to the key and listen to your whole conversation. So, really it only works if you meet up somewhere. Now an added benefit, public-key cryptography allows anyone to communicate privately without having to meet first. Another added benefit was that you could sign messages. So, if the world knows that this is my public key then I can sign messages, which is a mathematical trick, doing a mathematical equation on other data, and then I’d prove that the only person that could have done that is the person who has the private key that corresponds to the public key, right? So, this trick of owning, or signing information, this is used in digital cash schemes to prove ownership. So, you prove, at least at bitcoin, and let’s see, well anyways, you prove ownership over specific coin by signing away ownership. I forgot your question, but does that answer it?
Laura Shin:
Yeah. Yeah. Well, just to understand you know, what it was that they developed and why that was crucial to the development of Bitcoin. All right. So, then what we’re going to talk about the early forms of digital currency such as Ecash, and Hashcash, B-money, and Bit Gold, etcetera, but first a quick word from the sponsors who make this show possible.
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Back to my conversation with Aaron van Wirdum and Finn Brunton. So, David Chaum is a name that’s come up several times and we did talk a little bit about Ecash and his company DigiCash, but why don’t we just dive into the details on Ecash. How did it work, what breakthroughs did it contain that later led to Bitcoin, and what were its flaws?
Finn Brunton:
I can maybe you know, just kind of provide a very kind of cursory overview, which was that, and one of the things that really distinguishes it from a lot of other kinds of digital cash that came subsequently, was the notion that you didn’t have to worry about how it was minted, right, like you didn’t have to worry about how it was created because it was not new money. Instead it was a format that you could transfer your existing money into that would let you spend it digitally in a way that was analogous as possible to exchanging cash itself. So, the notion was, in very, very simple terms, that when you withdrew Ecash, it would take the form of just like withdrawing money from an ATM, and you might even do it as an ATM into a payment card, but it would not be, like you were handling you know, a debit card or a credit card where you swipe it and it checks in with the central ledger and then it transfers the money if you can prove your right to transfer it. Instead it would be as though you had an envelope of physical cash with you. If you lost that card the cash was gone. The reason why that was especially important was that, that meant that you’re holding a kind of digital money token that didn’t need to know anything about you. So, you could like get into your cab or go to your convenience store, slot it in, authorize the transfer of the money and then at that point their point-of-sale terminal would be able to check, in a way that ties very nicely back into how Aaron was just describing public-key cryptography, that could check and say, is this money token signed by an issuing bank, right? So, there would be, like you know, basically Well’s Fargos you know, key would be used to sign this token to say, we will redeem this token for 20 US dollars blah, blah, blah. So, it would check if that was okay, if so, it would transfer that into the, like the wallet as it were, the digital wallet of the merchant, and then the merchant could bring that in and deposit it, and it would be just as if they were taking in, like that zip bag, from you know, a retail store filled with cash.
So, a couple of reasons why that sort of layout is really important for understanding how different something like Bitcoin is, the first is that they didn’t need to build any kind of technical minting mechanism to limit the production of money because that was a central bank issue, all this is, is a format. The second thing is, that is anonymizes you, but it doesn’t anonymize the merchant, and that was part of the promise that Chaum made, right, like the person who deposits this digital cash is going to have to deposit it into some named bank account if they want to redeem it for money that they can spend. So, that means that it would, and this was money that makes the customer anonymous but would still be very difficult to use for purposes like money laundering you know, bribery you know, blah, blah, blah. Then, the sort of last tricky detail about it goes back to that point about tollbooths, right? So, like how do you make this work if you’re not in a situation, because remember we’re talking about the 1980’s, 1990’s you know, we’re not all blanketed in like you know, LTE data everywhere, how do you make it so someone can’t just spend the same signed money token at a bunch of different places and then all those merchants try to deposit it, maybe the first one gets it back and everyone else is told sorry, you just accepted a bounced check and we have no way to connect it back, and Chaum and a group of collaborators came up with a wonderfully elegant set of solutions that were basically such that if you spent the same money, I believe more than twice, then there was a way in which that could be used to deanonymize that money. So, there was a whole set of solutions, but again, the whole premise here is that it’s not digital cash the way that we might think of it, it’s literally just trying to make existing money digital. So, this might be a really nice way to kind of segue into something like Hashcash, which is a way to try to think about, like how can we produce money that is not about translating central bank money digitally, but instead about making natively digital money.
Laura Shin:
Yeah. Before we get into Hashcash lets talk a little bit more about Ecash and DigiCash. So, DigiCash was the company and it was using the Ecash system, and you know, it was generating quite a bit of buzz and getting a lot of multinational companies interested in using it. So, what happened with it?
Aaron van Wirdum:
Well, Laura, that depends on who you ask.
Finn Brunton:
I can confirm that. You get some different stories about how that went down.
Aaron van Wirdum:
Yeah. Apparently, Chaum and the company was basically selling a technology. Like Finn said, they weren’t necessarily creating money themselves, they were creating a money layer, like you could layer it on top of other existing currencies. So, a bank could, for example, could use this to issue digital cash, and apparently there was a lot of interest for this and definitely a lot of buzz around this company. It was seen as sort of one of the next big things that, that you know, Silicon Valley, and during the 90’s people were talking about, like you know, the companies that were big then were like Yahoo, and DigiCash was definitely seen as, like one of the potential next big ones. Apparently Chaum got a couple of fairly good offers, maybe he didn’t think they were good, and for some reason there were no big deals struck, and at some point this started to annoy employees at the company and that’s kind of when it started to fall apart. I think this is a version of history that’s hard to disagree with. The disagreement is to what extent Chaum was maybe at fault or like to what extent he was being too stubborn is what some people will claim you know, he definitely doesn’t think that was the case. So, yeah.
Laura Shin:
Just quickly, I did also see some people saying that he had kind of a Cypherpunk sense of paranoia. That you know, maybe some of the details weren’t as good as they appeared and that kind of thing, which definitel that is part of that ethos. And Finn, what were you going to say?
Finn Brunton:
I was just going to say that I think we can look back at that moment in DigiCash and really kind of understand where we are now in terms of a prediction that Chaum made, like I believe in his testimony to Congress in the early 90’s, which was that if we don’t get good privacy protecting digital cash by design then we are going to get digital cash that just routes around territorial currencies entirely. I think he really foresaw the idea that, like he had come up with a really specific framework for how this could work that would allow it to kind of play really well with existing institutions, and if that didn’t come to past, people were going to just start building their own.
Aaron van Wirdum:
Yeah. That’s also one of the reasons why Chaum and the Cypherpunks didn’t always get along as well. There were also patent debates between them, but yeah, because like Finn explained, there were actually some ways in which Ecash users could be deanonymized. It would, for example, require the spender and the bank to cooperate, but anyway, there were some weaknesses and Cypherpunks really, really didn’t like that, and then they couldn’t build their own version of it because Chaum had the patent. So, there was friction there, but yeah, Chaum thought the Cypherpunks were actually too radical, they were too radical for his taste, the stuff I just explained about Tim May’s vision of anarchy and cryptoanarchy, Chaum wasn’t really onboard with that. So, yeah, he did make this prediction indeed, Finn is right, he made this prediction to Congress that if something like Ecash wouldn’t be adopted, then something more radical would come along.
Laura Shin:
And here we are.
Aaron van Wirdum:
Here we are.
Laura Shin:
So, that was back in the 90’s and there was another development, this was proposed in 1992, which was proof-of-work and it was just proposed in a paper and obviously that’s a key technology in Bitcoin. Who developed that, and how does it work, and what was the original purpose of proof-of-work?
Aaron van Wirdum:
Yeah. So, the first version was developed by Dwork and Noar?
Finn Brunton:
Yeah. Cynthia Dwork. Yeah. Dwork and Noar.
Aaron van Wirdum:
Yeah. So, it was meant as postage. I’ve never interviewed them. Have you interviewed them, Finn?
Finn Brunton:
No
Aaron van Wirdum:
Yeah. I’ve chatted with Adam Back a lot, of course, who reinvented it. So, I’ll just tell you Adam Back’s version of the story, is that okay, because I know more about that, and I think the motivations were similar, I think, like they want to invent the same thing, Adam Back reinvented, individually, a couple of years later. So, the idea was that during the 90’s you know, around the mid 90’s, spam was becoming an issue. This was email spam you know, it’s free to send as many emails as you want so you can send ten million emails trying to sell penis enlargements or whatever you’re spamming, and then there was also the thing with the Cypherpunks, they had remailers. So, they were offering technology that would allow you to email through them, and you could email through a network or remailers, and it’s kind of like Tor, today, that similar technology. So, you could use that, but these were being spammed as well. People just sending spam through these remailers. So, that was costing all sorts of resources for the people that were running these remailers, which included a lot of Cypherpunks, they would run that stuff themselves to offer privacy to anyone who wanted it. So, it was being abused so they were starting to think about how can we counter this abuse and they started to think in the direction of postage for the internet, but then the question is, how do we do the postage. Now one way, I should note, another solution to deal with spam is to have it banned by the government, but the problem with having it banned by the government is that you get the government involved in deciding what kind of data people can send to each other and the Cypherpunks really didn’t like this idea, in parts because you know, this would be the camel’s nose under the tent, that’s the newest expression, right? If you let government decide that then who knows what else they’ll decide. It will end with, like drivers licences for the internet.
So, they wanted to come up with their own solution for that and the solution they were thinking was like, we need a postage system. So, we need something that resembles postage. There were a couple of ideas about it. One idea resembled Ecash, use Ecash as postage, but Ecash wasn’t really ready yet and they had their own problems with Chaum and all of that. So, then at some point Adam Back came up with a solution of proof-of-work, Hashcash, which meant that there were implementation details that could differ but the general idea was if you mail someone then you need to actually first solve, like a puzzle, it’s not really a puzzle, actually Dwork’s and Noar’s version was a puzzle, Adam Back, a bit different, but you need to prove that you spent energy, which means you hashed the email a bunch of times until you get a hash of the email that would be considered valid by whoever’s accepting the email, and because not all of the hashes would be considered valid by the protocol, you’d have to try a bunch of times, this cost a little bit of energy, and only if you’ve done that they will accept the email otherwise it will just bounce. Now, the idea that if you’re sending an email alone it would just cost you five seconds of computing power, something like that, so it’s not really a big deal. If you’re a spammer trying to send out penis enlargement emails you have to do that ten million times and ten million times, times five seconds, and now all of a sudden it’s going to be super expensive to spam everyone in the world or spam these remailers. So, that’s at least Adam Back’s motivation for coming up with it. I am assuming Dwork and Noar had a similar idea of the problem.
Laura Shin:
Yeah. Just for people, because now we’re getting a little bit technical and I know not all of my audience is very technical, but a hash is like a random string of numbers and letters and it’s kind of hard to create but easy to reverse and engineer to check it and verify it, and so that’s you know, kind of commonly used now in Bitcoin and cryptocurrencies. So, now lets just talk about Hashcash you know, we’ve been talking about Adam Back and in 1997, currently Adam is well known, he’s the cofounder and CEO of Blockstream, and in 1997 he proposed Hashcash to the Cypherpunks mailing list, and so who was he at that time, and what was Hashcash, and how did it work?
Aaron van Wirdum:
Do you want to?
Finn Brunton:
I mean, I think, yeah, I think it’s been very well explained, kind of the goal, and I think one crucial thing to understand about how Adam was proposing it was that it begins, like in many ways, part of what he’s worked out is a technology with a lot of different potential applications that people can start, kind of you know, feeling out what it’s going to be like and he writes this kind of series of papers, and proposals, and emails which are pretty fascinating because you can actually watch the idea evolve, right, where it starts as thinking you know, as thinking of it as some kind of postage system and one particular aspect of that to understand is that Hashcash would be unique, right, like each, I believe the exact way that this worked involved the notion of you know, hash as you know, this sort of string of data and you can set particular parameters around like how you know, unlikely you want that version to be so that you can essentially escalate the amount of work that it takes, but nonetheless, it’s a string of data that’s based on existing data. So, part of the original sort of system for Hashcash was the idea that the original data would be, for example, your email, the exact timestamp when it was sent, the From and To and so on and the reason for that was that, that would make it so that a spammer could not simply, like generate Hashcash in five seconds and then just you know, control C, control V, onto ten million emails. So, it has to be uniquely generated for each message.
So, the reason why that’s especially interesting is that it begins to dawn on all of the, kind of the circle that Back was working with, the larger kind of Cypherpunk community, that if there could be a way that you could use Hashcash to not just create, like unique one-off, like bits of proof-of-work for particular emails, but as some kind of effort limiter that you could, like reuse or link to some, like larger project, well there might be a lot more that you could do with this technology. So, in, I believe it’s 2002, Back has been reading and thinking about some posts by Wei Dai, who has become obvious, like very kind of famous in our world and in our community for coming up with the B-money model and a variety of different kinds of ways of thinking about digital currency and making a lot of contributions to cryptography more broadly, and part of the premise of B-money is that, okay, what if we had a kind of digital currency that we could exchange and that all of the people who held it could collectively be part of the, as it were, bank that issued it, and Back begins to talk about, well, what if you could actually use Hashcash as a kind of minting mechanism for a currency, right? So, you could actually use Hashcash as a way of saying, we will make it you know, this level of difficult to produce new currency, and then if there’s too much currency floating around the community can make it this level of difficult and slow down the production of new currency for a while you know, there’s a lot of different ways of thinking about this, but now you can start to see an answer to that question of not just what stops double spending, but what stops you from flooding the market by control C, Control Ving your currency over and over again. Well, maybe the answer is a Hashcash-like tool that can, like slow down, or moderate, or demand work for the production of digital money. So, that’s where we see how it…
Laura Shin:
Was Hashcash ever used?
Finn Brunton:
There were some interesting, like test versions, and there have been, like other applications that are not in this exact lineage of people using these kinds of like small scale proofs of work, but as far as like being applied to money goes, I don’t know from the institutional side, but from the Cypherpunks side, I believe people start really exploring how to use these ideas, and they always credit Back, and they’re all in conversation with each other, but it doesn’t necessarily take the form of Hashcash as such, right, like they definitely were actually able to get it to run, like we have you know, emails that Hal Finney was sending that were kind of experimenting with Hashcash, but when we start to see it actually being used, it’s often in the form of something like Hal Finney’s visible proof-of-works system where he basically said, like he came up with a really ingenious way to have proofs of work that you could generate that, you could then essentially turn into a server that would say, like okay, this has been deposited with me. I’m going to verify that this is still valuable and then I’m going to issue it again that someone else can use it in an exchange. The premises of digital currencies appearing based on Hashcash, but that’s kind of where they’re already starting to mutate.
Aaron van Wirdum:
It turned out if you put a Hashcash filter on your email inbox and no one is using Hashcash, then you’re never getting any emails. So, it sort of has this chicken-and-egg problem, and as Hashcash for email, that never really caught on, but like Finn said, it was a major milestone. What it sort of did was it tied real world resources, namely energy, and it tied it into the digital world. So, now you have something digital that proves that it had real world resources being burned in this case, like it ties the real world to the digital world, and that’s why people started thinking about it in terms of money, because yeah, for money, money needs to be scarce, that’s one of the things money needs to be. So, if you can tie real world scarcity to it then it works. The problem with Hashcash as money was that computers get faster every year, much faster every year, so then it gets much harder you know, you have this risk of inflation if you have a certain difficulty for, which Hashcash would have had, then it gets easier to create new money every year and after a couple of years you know, the system gets overflown by inflation, cheap money. So, like Finn said, yeah, that was sort of the next problem they had to solve, like how do we solve this inflation problem, and that turned out not to be so easy.
Laura Shin:
Yeah. Eventually it did get resolved with Bitcoin, but before we get to that, two things. So first, lets just very briefly talk about who Hal Finney was because he’s so important and we haven’t really discussed him, and then we’ll talk about B-money because that was the next digital currency. So, very briefly, who was Hal Finney?
Aaron van Wirdum:
Hal Finney was a digital currency enthusiast from the earliest days. He was on the Extropian mailing list and Extropian meetings where he was already you know, that was sort of his thing, digital cash, and then he became part of the Cypherpunks and again, he was always on the sort of front line of the discussion of digital cash and what it should be, and every time someone had a proposal he was the first to jump on it, review it, explain it to others. At some point he created his own digital currency RPOW, which Finn briefly mentioned, which was based on proof- of-work and had the same type of chip that I mentioned in the context of Chaum’s systems-of-work. There’s a better term for it which is escaping me, unforgeable-type of chip, that’s what he used, but yeah, Hal Finney was always there. He was always on the frontline of digital currency discussions, debates, reviews. That’s the way it was.
Finn Brunton:
He was very much a figure of, and I feel like it’s really important to, like capture the way that when you look back over the history of digital cash, like he’s always there, just like what was said, right, like to the point of being you know, Nakamoto’s correspondent and like you know, chief figure in the very earliest days of Bitcoin, but he was also in a way that I want to, like you know, especially because he passed away you know, quite young relatively and very you know, tragically and unfortunately, that he also had a real role of like emotional leadership in a lot of ways, like through the whole history of this. When he was you know, just arguing with Cypherpunks about directions that they could be developing digital cash tools, he said that, and this always really struck me in the context of you know, this you know, mailing list where people are arguing over technical points, he said, we may look back on this and understand that this was the most important work that we have ever done you know, like he was really someone who kind of like carried the torch for a lot of these projects, but yeah, he is someone as well, I think, who helps us kind of segue maybe into the Bitcoin era a little bit because he really, like you know, carried a lot of these same projects, and ideas, and questions straight from the periods we’ve been talking about into Nakomoto’s publication.
Aaron van Wirdum:
He was also, just to mention, he was also a major contributor to GPG in the early days. GPG, am I saying that right?
Laura Shin:
Yeah. Pretty good privacy, which is, just remind me, it’s a protocol for, is it encrypted?
Aaron van Wirdum:
For public-key cryptography, yes, to communicate, which was sort of the first implementation of that idea that Whitfiled, Diffie, and Hellman invented.
Laura Shin:
Okay. Yeah. So, lets move onto B-money, which brings in another character who’s really important. In 1998 Wei Dai proposed B-money, and Arron, in an article on B-money you called it Bitcoins first draft and I remember when I read about it in Finn’s book I made a little note. Is B-money the closet precursor to Bitcoin, because when I was reading it I was like, woah, but let’s talk about you know, who was Wei Dai and then Arron, why did you call B-money a first draft of Bitcoin?
Aaron van Wirdum:
Well, I actually have to correct that, Laura. I think I mentioned it in a note in the article because it turned out that Bit Gold, and so there was Szabo’s proposal and B-money, I think Bit Gold actually predated B-money. I didn’t know that when I wrote the article, but it was very close, like they were discussing all the same mailing list, Szabo and Wei Dai and others, they were on the same mailing list, not just the cypherpunks mailing list, also another one. So, they’re contemporaries, that’s the word, right? It was the same time, but B-money, what’s interesting about B-money, several things are interesting about B-money, but one of the things that is interesting about B-money, and Finn mentioned this I think, is this idea that the ledger of ownership of the currency itself, in Chaum’s case at DigiCash, it was centralized and this meant, actually they had a play money version of Ecash as well and people started to value this, and actually it was called Cyberbucks, and people actually had this play money, but they started to value it so it was sort of working as money, but then when DigiCash went down, then all of a sudden the central server was down so their money was gone, right? So, it had a central point of failure. B-money was one of the first attempts to solve this. So, instead of a central point, instead of a central server that was maintaining the balances of everyone, they shared this. Now it’s a little bit hand wavy how they would have done this and how they would have solved certain problems, or to put it differently, they didn’t solve all the problems, but you know, it was a big step. I would say that was probably the most important idea, that’s what I focused my article on at least, that the ownership of balances was maintained on a decentralized distributed ledger, every time someone makes a payment, everyone updates the ledgers. So, everyone has the same idea of who owns what, not just one person, so anyone, nothing can be shut down, no one can cheat, no individual can cheat about how much they own because then the rest of the network would just notice that and not accept that version. There’s no pressure point for the government to target and to maybe install all sorts of regulation or you know, by decentralizing distributing the ownership of currency you do away with the central point of failure. I would say that was the big innovation that both B-money and Bit Gold, around the same time, brought to the world.
Laura Shin:
And what was the flaw in B-money, like why didn’t it go anywhere?
Aaron van Wirdum:
There were a couple of problems with it. I would say one problem was, so for example, the double spending problem was not really solved because you know, if I copy my coins so to say and send the same transaction, well the same coin, to two different people on two different parts of the network and they do it at the same time, then they both haven’t updated their ledger yet for the transaction, so it sort of conflicts then, they’re both going to argue that their transaction was first and there’s no way for the network to sort of resolve this. Now he had some sort of idea of maybe having tiers of users, where some users would be sort of like power users and others would be more like client users and then these power users would have to sort out who was first. Another problem I would say was how to get the money into circulation. He had some ideas about it. He had some idea about you know, either these power users could figure out how much new currency was needed and based on that adjust proof-of-work difficulty, like Finn just mentioned. There were some other sort of rough ideas, but that’s how I would describe it. They were rough ideas. It wasn’t a final design of a system that could have been implemented, it was a great innovation in that it was a good idea but it wasn’t quite, the details were still a little bit murky and wavy I would say.
Laura Shin:
Yeah. And one thing that was interesting was what you described with the power users, they would kind of obtain that position by putting down a deposit which could be slashed and so it’s essentially a proof-of-stake system, or what we would recognize as that today and I found that pretty fascinating. There was another difference, which is that B-money had a different monetary policy from Bitcoin, what was its monetary policy?
Aaron van Wirdum:
Yeah. So, I think why the main idea was that it would be a basket of goods in the same way that we have a basket of goods now and central banks use this to sort of manage inflation. So, there would be a basket of goods, and I have to think about this, it’s been a while since I wrote that article. I think every new coin, or every time someone hashes a new thing, it should be worth that basket of goods, so, it’s a long time.
Laura Shin:
Well, the main thing is he wanted it to be a stable currency. He did not believe in…
Aaron van Wirdum:
Yeah. That’s for sure. That was the goal. Yeah.
Finn Brunton:
It was very much like, yeah, it was a way of kind of reinventing the, you know, the notional goals of a central bank for a way that, like that kind of power users who are holding the currency would be able to act in its best interest as a kind of central bank, but with some really interesting, like yeah, kind of almost computational-like rachet mechanism that would sort of help them have the tools to keep that value constant, but yeah, I mean, I think it’s also really interesting to look back at things like this and likewise at Bit Gold as well, and to kind of see them as examples of things that were really trying to think about what long-term stability would look like for a digital currency, right, like you know, with all due respect to the Extropians you know, they were not afraid of, like bubbles or you know, crazy runaway speculative booms, because those might be the accelerants that they would need to sort of you know, crank up the motor of you know, far future innovation and it’s really interesting to look at some of these and see the ways that people were trying to look at gold, were speculatively talking about baskets of goods, were looking at inflation management, were trying to kind of think about how you would create something that would be more about stability as a store of value over time rather than, like volatility as a speculative instrument.
Laura Shin:
So, Bit Gold, I guess, was developed by Nick Szabo around this time, but I don’t think he publicly described it until 2005, and he had actually worked at DigiCash under Chaum. What else can you tell us about who Nick Szabo was at that time and then tell us a little bit more about the characteristics of BitGold?
Aaron van Wirdum:
Yeah. It was definitely early Cypherpunks as well, although he wasn’t as active in the list later on. I think it was mostly active in the early days and he really cared about privacy and these things. I would say yeah, he only publicly posted the idea for Bit Gold on his blog in, like 2005, but it was definitely, this was the other mailing list that I mentioned, they had another mailing list with Wei Dai, for example and apparently, that’s where he posted it around the same time, like 1998. Yeah. Privacy minded. Very libertarian. Inspired by Tim May. Tim May was sort of you know, the sort of crypto anarchy ideal, that was a big inspiration for a lot of them, not all of them, some were a little bit more, less radical you could say, but Nick Szabo was definitely into the whole crypto anarchy thing, and Bit Gold as well. Should we get into BitGold?
Yeah, so BitGold also used proof-of-work. The way BitGold did it was, it started with, like a candidate string. So, there was a string of numbers and then anyone could perform proof-of-work on top of that string. So, create a hash and like we’ve explained before, not all hashes are valid, so you need to prove that only certain answers are valid, which means you invested energy. Okay. Then you get a new string, if you win a new string, that string is yours, like it sort of becomes your ownership, it gets tied to your public key, it’s yours to have. So, the string itself is like the money. The other thing is that the string becomes the new candidate string. So, we started with the candidate string, it was hashed, you have a winning hash that becomes money, and now the new hash is also a candidate string so someone else can start hashing on that string, and that’s how you get, like a string of hashes. So, that resembles Bitcoin quite a bit, right? It’s also got a string of hashes, which is the blocking. So, this was embedded in Bit Gold. So, everyone’s winning this string. The string is money. Now one of the problems is, like we’ve discussed before, computers are getting faster every year, so it gets easier to develop, to find new strings every year. This becomes a problem because if I have a string that I found five years ago and it cost me you know, five days and we’re five years later and you got a string within five minutes because your computer is so much faster you know, are they really worth the same? That doesn’t really work well you know, so ideally, they should be equally hard to find. So, then he adds another layer where these strings would be traded against each other and that’s how the value of the different strings would be sort of measured against each other. So, newer strings would be worth less than older strings, and then there were sort of banks that would bundle these strings and that’s how you would get sort of an equal unit of account where one old string is, like worth ten new strings. So, you’ve got two bundles, one bundle has just one old string, one bundle has ten new strings, and these are sort of caught up and then you have money, like these make for the units of count. That was Bit Gold’s idea.
Finn Brunton:
I just wanted to emphasize that one kind of thread in Szabo’s work, that we can also see in Bit Gold, and another kind of way of thinking about the set of problems to solve, was that it was also trying to find a way to remove all of the so called trusted third parties, right, like to remove you know, any institution or person that you would have to trust to, for example, authenticate the value of something or to enable the transaction of something, or that you would trust in the production of the token of value you know, and so on. So, like it’s useful to think about these as a set of technologies that are all trying to slowly subtract the trusted third parties on which people normally rely in their transactions of money.
Aaron van Wirdum:
Yeah, but Nick Szabo didn’t really solve that problem. He tried.
Finn Brunton:
Yeah. Right. He wanted to. Yeah.
Aaron van Wirdum:
He wanted to, like that was the goal. That was the idea with the distributed ledger, but then it was you know, it’s a very hard problem to solve it turns out, and you know, he came up with, so that’s called Byzantine fault tolerance, I’m not saying this right.
Laura Shin:
Yeah. Byzantine fault tolerance.
Aaron van Wirdum:
They were like the type of systems that maybe airplanes would use, like several of the computers must all fail at the same time, but then it becomes tricky, like who’s actually running these computers and he, for example, didn’t really solve the Sybil problem, which is you know, anyone can fire up a thousand fake nodes you know, the sock puppet problem, and then sort of mess with consensus and you know, all lie about who owns what and then you’re joining this system as a new user and everyone’s you know, all of these thousands of sock puppets are telling you one thing and then these other computers, these other notes are telling you another, who’s telling the truth. This wasn’t a very properly solved system yet for Bit Gold. That was a big challenge.
Laura Shin:
So, then after that, Satoshi did come out with Bitcoin. In what ways did Bitcoin improve upon BitGold?
Aaron van Wirdum:
So, Bitcoin did something extremely clever. Satoshi did something extremely clever because he solved two big problems at once. So, one problem we’ve been dealing with is how do you get currency into circulation and the other problem is how do you get everyone to agree on the state of balances. Now, Satoshi actually tied these things together. So, there’s one way of getting new currency into circulation, which is through proof-of-work, and by the way, in Satoshi, in Bitcoin it’s not the proof-of-work themselves that are money you know, it’s just a way to determine who gets the new money. So, there’s sort of another obstruction later as well, which I think is also very important by the way. So, that’s one thing. There’s sort of this lottery of who gets the new money and then the winner of this lottery also has the right to determine, I’m simplifying, but gets the right to determine, okay, this is the real you know, if there isn’t consensus then this is now the consensus you know, the winner gets to decide. If there’s two winners at the same time, then it’s the next winner after that and then ultimately this is how it resolves. So, it’s these two problems that were solved in the same solution, which is you know, the sort of brilliance of Bitcoin I think.
Laura Shin:
We talked about Hal Finney a little bit earlier and he was crucial to the launch of Bitcoin, can we just tell a little bit about that story?
Finn Brunton:
Yeah. I mean you know, Finney was on that mailing list and responded really promptly. I mean, one thing that is often forgotten when we look back at Bitcoin is how dubiously it was initially greeted at the very, very first instance. The reason being, right, the dubiousness was because a lot of the people who were on that list had you know, many of them were people we’ve already talked about today or they were sort of people in the same milieu as a lot of the people we’ve talked about today. They’d seen you know, digital cash projects come and go, they’d like, tried them out, they’d kick the tires on them, maybe some of them remembered the days of, like Ghost Marks and Tacky Tokens, and all these various sort of experiments and projects and stabs, and so there was a fair amount of you know, kind of early you know, just people who were like, well, you didn’t think about this, or this is probably going to happen, or you really need to kind of map this out, and I think Finney is really important, both because he provides a bunch of concrete you know, technical advice and ideas about refining the project and kind of figuring out what its trajectory of improvement is going to be as it goes from whitepaper to working code, but Finney also was kind of one of the most important cheerleaders you know, the person who could say I really think there’s something here and I think there’s something that actually you know, like Finney was able to you know, both because he was really looking for something like this, but also because I think in a lot of ways he was very discerning about exactly the fact that this had in fact solved a couple of preexisting problems that no one had ever figured out how to address, certainly not as elegantly, and it tied those solutions together into a new package, into a new way that money could be. So, Finney was someone, who in a lot of ways, like maybe, I don’t know, I’m not sure, there can be room for disagreement at whether or not this is actually the case, but I’m really curious if Bitcoin would have become another, like kind of also ran draft towards you know, the next version of this technology were it not for the fact that Finney had really helped to like keep it all rolling forward at that specific moment.
Laura Shin:
Yeah. And was crucial to the launch because he was receiving the transactions.
Aaron van Wirdum:
I would add that I think Finney, apart from maybe Satoshi, I don’t even know about Satoshi, but I think Finney is the first sort of quote that I think shows that he understood sort of the value proposition of Bitcoin or understood why its value would or could bootstrap, right, which is this digital currency. Finney did a lot of work on prediction markets as well, and I won’t get into prediction markets entirely, but it’s sort of predicting the future with tokens and it has a lot of, like odds really like what are the odds of something happening, and Finney sort of did the math, like what are the odds of Bitcoin succeeding, maybe very small, but what are the odds and what would the Bitcoin be worth then, and then if you sort of do the math then he concludes, well, that means if there’s any chance of Bitcoin succeeding then it’s got to have some value because the odds, like it can’t be zero, there’s got to be some value and that’s how you know, that’s sort of how Bitcoins value bootstrap for scarcity and for this sort of thinking in odds. I thought it was a great early quote by Finney where he sort of understood why this could actually be big and might as well you know, it’s got to have some value and from then it could bootstrap.
Laura Shin:
I think the quote was that he looked at the value of all the money in the world and then said, well if the cap on Bitcoin is 21 million then one coin will be worth 10 million dollars if it does overtake all the value of all the money in the world.
Aaron van Wirdum:
Yeah. Then you can think how much would it cost to buy one and then you could sort of do the odds, and then I think the math he got to is like if the chance is even one hundred million to one that it will succeed then you should probably get some because you’re getting a good deal, yeah.
Laura Shin:
So, amongst all the precursors, who did Satoshi credit the most, or which previous attempts did Satoshi rely on most heavily?
Finn Brunton:
I actually have an unusual answer for this, which is, so there’s a couple of people that we haven’t talked about, and I mean this may be like a very dry historians kind of interest, but one thing that fascinates me is the relative lack of overlap between academic computer science and like kind of Cypherpunks computer science, or like kind of hacker digital cash development that people would keep kind of reinventing things on both sides without necessarily knowing that the other side had done it yet. So, there’s a bunch of people, many whom we’ve already talked about you know, Wei Dai, Adam Back, like people that Nakamoto was in touch with and was drawing on, but the people who get cited in the whitepaper are two computer scientists named Haber and Stornetta and theirs is a really interesting story, because in a lot of ways they invented the first blockchain but they didn’t invent it for money, right, they invented it as a way of irrefutably and publicly timestamping documents and their particular interest was actually kind of an amazing one to think about when we look at how Bitcoin now works, which is, right, so you have like benched, flat notebooks where you write in your results and there’s all these physical mechanisms that make it so that we can be sure that you aren’t, like fiddling with your numbers after the fact you know, there’s like numbered pages sewn in bindings. They said how do we do that digitally? We come up with a publicly verifiable mechanism, no trusted third parties, that relies on blockchain technology in their kind of earliest form and then we will periodically, like publish the verification hash in the lost and found section of the New York Times and everyone can use it to prove to themselves this system is still working. So, the reason why I say that is I think that’s one other thread that I think is really worth remembering in all this, is that there’s this whole history of, like changing the world through currency, but then there’s also a more abstract but equally important history, which is how do you irrefutably timestamp something digitally, how do you create a digital mechanism that allows you to say, in a way, that everyone can trust that this happened at such and such a time? So, that I think is something we can really see in all the ways in which Bitcoin itself then like led to all of these other blockchain applications that have continued to kind of run with the way that it was reintroduced through Bitcoin but then are now using it for a lot of different kinds of proofs.
Laura Shin:
Aaron, do you have any…
Aaron van Wirdum:
Yeah. Well, I don’t know Satoshi, I can’t look into his mind. I don’t know who inspired him to what extent. I will say you know, if I’m just looking at the different projects that we’ve discussed or that are out there, then Bit Gold is really pretty similar to Bitcoin. It was like getting pretty close and it’s notable that Szabo wasn’t mentioned in the whitepaper. Satoshi did later mention that Bitcoin was an implementation of Bit Gold somewhere on the Bitcointalk forums. So, I don’t know, I can’t make any claims on behalf of Satoshi and I’m not going to. I’ll just, from my own perspective, Bit Gold looks an awful lot like Bitcoin.
Laura Shin:
In your research, for both of you, who did you come to believe was the most likely candidate or candidates to be Satoshi Nakamoto?
Aaron van Wirdum:
I don’t care. I mean, it doesn’t matter. It doesn’t matter, Laura. He wanted to remain anonymous. That’s my answer.
Finn Brunton:
Yeah. I have a little bit of a really honest answer even though it sounds like a historians, like head fake, which is basically that I think that culturally historically the fact that Nakamoto not just is anonymous, but could be anonymous and still have this level of effect is actually far more consequential than any specific known identity could be. I think it tells us a lot more about the context, and the goals, and the sort of historical situation of Bitcoin then if we could definitively say that it was this or that person.
Laura Shin:
You guys…
Aaron van Wirdum:
It matters a lot as well that we don’t know and like it’s anonymous because that’s the whole point of Bitcoin, it can operate without anyone in charge of it or without anyone leading. Like that’s why it’s so brilliant.
Finn Brunton:
Absolutely.
Aaron van Wirdum:
Sorry, Laura. That’s the only answer I’m going to give you.
Finn Brunton:
I know why you asked, but you know, this is, yeah.
Laura Shin:
I was just about to say you guys both copped out, but your answers are, they make sense. All right. Well, this has been quite the tour through the history of digital currency. I really, really appreciate that you guys both came to discuss it. Why don’t you reveal where it is that people can learn more about you?
Aaron van Wirdum:
People can find me on Twitter at Arron van W. I still write for Bitcoin magazine, not just write but I also do podcasts and videos and these kind of things, so just on Bitcoin magazine in general. If you speak Dutch, we have our Dutch podcasts, which is the Bitcoin Show, which you can find on Youtube or Podcast apps.
Finn Brunton:
I am at Finnb.net. I’m very old fashioned, I just have a website, but there’s links to all my books and other materials there.
Laura Shin:
Great. Well, thank you both so much for coming on Unchained.
Aaron van Wirdum:
Thank you.
Finn Brunton:
Thank you for having me.
Laura Shin:
Thanks so much for joining us today. To learn more about the history of digital currency check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained Youtube channel. Go to Youtube.com/c/unchainedpodcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss and the team at CLK transcription. Thanks for listening!
