DEDICATION
FOR MY MOM AND DAD
CONTENTS
Dedication
Introduction
Part One
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Part Two
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Part Three
Chapter 23
Chapter 24
Chapter 25
Chapter 26
Chapter 27
Chapter 28
Chapter 29
Chapter 30
Chapter 31
Technical Appendix
Acknowledgments
Sources
Index
About the Author
Credits
Copyright
About the Publisher
INTRODUCTION
It was after midnight and
many of the guests had
already gone to bed, leaving
behind
their
amber-tailed
tumblers
of
high-end
whiskey. The poker dealer
who had been hired for the
occasion from a local casino
had left a half hour earlier,
but the remaining players had
convinced her to leave the
table and cards so that they
could keep playing. The
group still hovering over the
felt and chips was dwarfed by
the vaulted, wood-timbered
ceiling, three stories up. The
large wall of windows on the
far side of the table looked
out onto a long dock, bobbing
on the shimmering surface of
Lake Tahoe.
Sitting at one end of the
table, with his back to the
lake,
twenty-nine-year-old
Erik Voorhees didn’t look
like someone who three years
earlier had been unemployed,
mired in credit card debt, and
doing odd jobs to pay for an
apartment in New Hampshire.
Tonight Erik fitted right in
with his suede oxfords and
tailored jeans and he bantered
easily with the hedge fund
manager sitting next to him.
His hairline was already
receding, but he still had a
distinct,
fresh-faced
youthfulness to him. Showing
his boyish dimples, Erik
joked
about
his
poor
performance at their poker
game the night before, and
called it a part of his “long
game.”
“I was setting myself up
for tonight,” he said with a
broad toothy smile, before
pushing a pile of chips into
the middle of the table.
Erik could afford to
sustain the losses. He’d
recently sold a gambling
website that was powered by
the enigmatic digital money
and payment network known
as Bitcoin. He’d purchased
the gambling site back in
2012
for
about
$225,
rebranded it as SatoshiDice,
and sold it a year later for
some $11 million. He was
also sitting on a stash of
Bitcoins that he’d begun
acquiring a few years earlier
when
each
Bitcoin
was
valued at just a few dollars. A
Bitcoin
was
now
worth
around $500, sending his
holdings into the millions.
Initially snubbed by investors
and serious business folk,
Erik was now attracting a lot
of high-powered interest. He
had been invited to Lake
Tahoe by the hedge fund
manager sitting next to him at
the
poker
table,
Dan
Morehead, who had wanted
to pick the brains of those
who had already struck it rich
in the Bitcoin gold rush.
For Voorhees, like many
of
the
other
men
at
Morehead’s
house,
the
impulse that had propelled
him into this gold rush had
both everything and nothing
to do with getting rich. Soon
after he first learned about the
technology from a Facebook
post, Erik predicted that the
value of every Bitcoin would
grow astronomically. But this
growth, he had long believed,
would be a consequence of
the
multilayered
Bitcoin
computer
code
remaking
many of the prevailing power
structures
of
the
world,
including Wall Street banks
and national governments—
doing to money what the
Internet had done to the
postal service and the media
industry. As Erik saw it,
Bitcoin’s growth wouldn’t
just make him wealthy. It
would also lead to a more just
and peaceful world in which
governments
wouldn’t
be
able to pay for wars and
individuals
would
have
control over their own money
and their own destiny.
It was not surprising that
Erik, with ambitions like
these, had a turbulent journey
since
his
days
of
unemployment
in
New
Hampshire. After moving to
New York, he had helped
convince
the
Winklevoss
twins, Tyler and Cameron, of
Facebook fame, to put almost
a million dollars into a startup
he helped create, called
BitInstant.
But
that
relationship ended with a
knock-down, drag-out fight,
after which Erik resigned
from the company and moved
to Panama with his girlfriend.
More recently, Erik had
been spending many of his
days in his office in Panama,
dealing with investigators
from the US Securities and
Exchange Commission—one
of the top financial regulatory
agencies—who
were
questioning a deal in which
he’d sold stock in one of his
startups for Bitcoins. The
stock had ended up providing
his investors with big returns.
And the regulators, by Erik’s
assessment, didn’t seem to
even
understand
the
technology. But they were
right
that
he
had
not
registered his shares with
regulators. The investigation,
in any case, was better than
the situation facing one of
Erik’s former partners from
BitInstant, who had been
arrested two months earlier,
in January 2014, on charges
related to money laundering.
Erik, by now, was not
easily rattled. It helped that,
unlike
many
passionate
partisans, he had a sense of
humor about himself and the
quixotic movement he had
found himself at the middle
of.
“I try to remind myself
that Bitcoin will probably
collapse,” he said. “As bullish
as I am on it, I try to check
myself and remind myself
that new innovative things
usually fail. Just as a sanity
check.”
But he kept going, and
not just because of the money
that had piled up in his bank
account. It was also because
of the new money that he and
the other men in Lake Tahoe
were helping to bring into
existence—a new kind of
money that he believed would
change the world.
THE BITCOIN CONCEPT first
came onto the scene in more
modest circumstances, five
years earlier, when it was
posted to an obscure mailing
list by a shadowy author
going by the name Satoshi
Nakamoto.
From
the
beginning,
Satoshi envisioned a digital
analog to old-fashioned gold:
a new kind of universal
money that could be owned
by
everyone
and
spent
anywhere. Like gold, these
new digital coins were worth
only what someone was
willing to pay for them—
initially nothing. But the
system was set up so that, like
gold, Bitcoins would always
be scarce—only 21 million of
them would ever be released
—and hard to counterfeit. As
with gold, it required work to
release new ones from their
source, computational work
in the case of Bitcoins.
Bitcoin also held certain
obvious advantages over gold
as a new place to store value.
It didn’t take a ship to move
Bitcoins from London to New
York—it took just a private
digital key and the click of a
mouse. For security, Satoshi
relied
on
uncrackable
mathematical formulas rather
than armed guards.
But the comparison to
gold went only so far in
explaining why Bitcoin ended
up attracting such attention.
Each ingot of gold has always
existed independent of every
other ingot. Bitcoins, on the
other hand, were designed to
live
within
a
cleverly
constructed,
decentralized
network, just as all the
websites in the world exist
only within the decentralized
network
known
as
the
Internet. Like the Internet, the
Bitcoin network wasn’t run
by some central authority.
Instead it was built and
sustained by all the people
who hooked their computers
into it, which anyone in the
world could do. With the
Internet,
what
connected
everyone together was a set
of software rules, known as
the Internet protocol, which
governed how information
moved around. Bitcoin had its
own software protocol—the
rules that dictated how the
system worked.
The technical details of
how all this worked could be
mind-numbingly complicated
—involving advanced math
and cryptography. But from
its earliest days, a small
group of dedicated followers
saw that at its base, Bitcoin
was, very simply, a new way
of creating, holding, and
sending
money.
Bitcoins
were not like dollars and
euros, which are created by
central banks and held and
transferred by big, powerful
financial institutions. This
was a currency created and
sustained by its users, with
new money slowly distributed
to the people who helped
support the network.
Given that it aimed to
challenge some of the most
powerful institutions in our
society, the Bitcoin network
was, from early on, described
by its followers in utopian
terms. Just as the Internet
took power from big media
organizations and put it in the
hands
of
bloggers
and
dissidents, Bitcoin held out
the promise of taking power
from banks and governments
and giving it to the people
using the money.
This was all rather high-
minded stuff and it attracted
plenty
of
derision—most
ordinary folks imagined it
falling somewhere on the
spectrum
between
Tamagotchi pet and Ponzi
scheme, when they heard
about it at all.
But Bitcoin had the good
fortune of entering the world
at a utopian moment, in the
wake of a financial crisis that
had exposed many of the
shortcomings of our existing
financial and political system,
creating
a
desire
for
alternatives. The Tea Party,
Occupy Wall Street, and
WikiLeaks—among others—
had divergent goals, but they
were united in their desire to
take power back from the
privileged elite and give it to
individuals. Bitcoin provided
an apparent technological
solution to these desires. The
degree to which Bitcoin
spoke to its followers was
apparent from the variety of
people who left their old lives
behind to chase the promise
of
this
technology—
aficionados
like
Erik
Voorhees and many of his
new friends. It didn’t hurt that
if Bitcoin worked, it would
make
the
early
users
fabulously wealthy. As Erik
liked to say, “It’s the first
thing I know where you can
both get rich and change the
world.”
Given the opportunity to
make money, Bitcoin was not
only attracting disaffected
revolutionaries. Erik’s host,
Dan Morehead, had gone to
Princeton and worked at
Goldman
Sachs
before
starting his own hedge fund.
Morehead was a leading
figure among the moneyed
interests who had recently
been
pumping
tens
of
millions of dollars into the
Bitcoin ecosystem, hoping for
big returns. In Silicon Valley,
investors and entrepreneurs
were clamoring to find ways
to use Bitcoin to improve on
existing payment systems like
PayPal, Visa, and Western
Union and to steal Wall
Street’s business.
Even people who had
little sympathy for Occupy
Wall Street or the Tea Party
could understand the benefits
of a more universal money
that doesn’t have to be
exchanged at every border;
the advantages of a digital
payment method that doesn’t
require you to hand over your
identifying information each
time you use it; the fairness
of a currency that even the
poorest people in the world
can keep in a digital account
without paying hefty fees,
rather than relying only on
cash; and the convenience of
a payment system that makes
it possible for online services
to charge a penny or a dime
—to view a single news
article or skip an ad—skirting
the current limits imposed by
the 20- or 30-cent minimum
charge for a credit card
transaction.
In the end, though, many
of the people interested in
more practical applications of
Bitcoin still ended up talking
about the technology in
revolutionary terms: as an
opportunity to make money
by disrupting the existing
status quo. At the dinner a
few hours before the late-
night poker game, Morehead
had joked about the fact that,
at the time, all the Bitcoins in
the world were worth about
the same amount as the
company Urban Outfitters,
the purveyor of ripped jeans
and dorm room decorations—
around $5 billion.
“That’s just pretty wild,
right?” Morehead said. “I
think when they dig up our
society, all Planet of Apes–
style, in a couple of centuries,
Bitcoin is probably going to
have had a greater impact on
the
world
than
Urban
Outfitters. We’re still in early
days.”
Many
bankers,
economists, and government
officials
dismissed
the
Bitcoin fanatics as naive
promoters of a speculative
frenzy not unlike the Dutch
tulip mania four centuries
earlier. On several occasions,
the Bitcoin story bore out the
warnings
of
the
critics,
illustrating
the
dangers
involved in moving toward a
more digitized world with no
central authority. Just a few
weeks before Morehead’s
gathering, the largest Bitcoin
company in the world, the
exchange known as Mt. Gox,
announced that it had lost the
equivalent of about $400
million worth of its users’
Bitcoins and was going out of
business—the latest of many
such scandals to hit Bitcoin
users.
But none of the crises
managed
to
destroy
the
enthusiasm of the Bitcoin
believers, and the number of
users kept growing through
thick and thin. At the time of
Morehead’s gathering, more
than 5 million Bitcoin wallets
had been opened up on
various websites, most of
them outside the United
States.
The
people
at
Morehead’s
house
represented the wide variety
of characters who had been
drawn in: they included a
former Wal-Mart executive
who had flown in from
China,
a
recent
college
graduate from Slovenia, a
banker from London, and two
old fraternity brothers from
Georgia Tech. Some were
motivated by their skepticism
toward
the
government,
others by their hatred of the
big banks, and yet others by
more
intimate,
personal
experiences.
The
Chinese
Wal-Mart
executive,
for
instance, had grown up with
grandparents who escaped the
communist revolution with
only the wealth they had
stored
in
gold.
Bitcoin
seemed to him like a much
more
easily
transportable
alternative in an uncertain
world.
It was these people, in
different places with different
motivations, who had built
Bitcoin and were continuing
to do so, and who are the
subject of this story. The
creator of Bitcoin, Satoshi,
disappeared back in 2011,
leaving behind open source
software that the users of
Bitcoin could update and
improve. Five years later, it
was estimated that only 15
percent of the basic Bitcoin
computer code was the same
as what Satoshi had written.
Beyond the work on the
software, Bitcoin, like all
money, was always only as
useful and powerful as the
number of people using it.
Each new person who joined
in made it that much more
likely to survive.
This, then, is not a normal
startup story, about a lone
genius molding the world in
his image and making gobs of
money. It is, instead, a tale of
a group invention that tapped
into many of the prevailing
currents of our time: the
anger at the government and
Wall
Street;
the
battles
between Silicon Valley and
the financial industry; and the
hopes we have placed in
technology to save us from
our own human frailty, as
well as the fear that the power
of technology can generate.
Each of the people discussed
in this book had his or her
own reason for chasing this
new idea, but all their lives
have been shaped by the
ambitions, greed, idealism,
and human frailty that have
elevated Bitcoin from an
obscure academic paper to a
billion-dollar industry.
For some participants, the
outcome has been the type of
wealth
on
display
at
Morehead’s house, where the
stone
entranceway
is
decorated with Morehead’s
personal heraldic crest. For
others, it has ended in poverty
and even prison. Bitcoin itself
is always one big hack away
from total failure. But even if
it does collapse, it has already
provided one of the most
fascinating tests of how
money works, who benefits
from it, and how it might be
improved. It is unlikely to
replace the dollar in five
years, but it provides a
glimpse of where we might
be when the government
inevitably stops printing the
faces of dead presidents on
expensive paper.
The morning after the big
poker game, as the guests
were packing up to go,
Voorhees sat at the end of the
pier
behind
Morehead’s
house, which was sitting high
above the water after a winter
with little snowfall. The joy
he had shown at the poker
table the night before was
gone. He had a look of
chagrin on his face as he
talked
about
his
recent
decision to resign as the CEO
of the Bitcoin startup he had
been running in Panama. His
position with the company
had prevented him from
speaking
about
the
revolutionary
potential
of
Bitcoin, for fear that it could
hurt his company.
“My
passion
is
not
running a business, it is
building the Bitcoin world,”
he explained.
On top of that, his
girlfriend had grown tired of
living in Panama and Erik
was missing his family back
in the United States. In a few
weeks he was planning to
move back to Colorado,
where he grew up. Because of
Bitcoin, though, he would be
going home a very different
person from what he was
when he left. It was a
situation that many of his
fellow
Bitcoiners
could
sympathize with.
PART ONE
CHAPTER 1
January 10, 2009
It was a Saturday. It was his
son’s birthday. The Santa
Barbara
weather
was
beautiful. And his sister-in-
law was in from France. But
Hal Finney needed to be at
his computer. This was a day
he had been anticipating for
months and, in some sense,
for decades.
Hal didn’t even try to
explain to his wife, Fran,
what was occupying him. She
was a physical therapist and
rarely
understood
his
computer work. But with this
one, where would he even
begin? Honey, I’m going to
try to make a new kind of
money.
That, in essence, was his
intention when, after a long
morning run, he sat down in
his modest home office: a
corner of his living room with
an old sectional desk, taken
up
primarily
by
four
computer screens of different
shape and make, all wired to
the separate computers he
used for work and personal
pursuits. Any space that
wasn’t occupied by computer
equipment was covered in a
jumble of papers, exercise
books, and old programming
manuals. It wasn’t much to
look at. But sitting there, Hal
could see his patio on the
other side of his living room,
bathed in California sun, even
in the middle of January. On
the carpet to his left lay Arky,
his
faithful
Rhodesian
ridgeback, named after a star
in the constellation Boötes.
This was where he felt at
home, and where he had done
much of his most creative
work as a programmer.
He fired up his hulking
IBM ThinkCentre, settled in,
and clicked on the website
he’d gotten in an e-mail the
previous day while he was at
work: www.bitcoin.org.
Bitcoin had first crossed
his screen a few months
earlier, in a message sent to
one of the many mailing lists
he subscribed to. The back-
and-forth
was
usually
between
the
familiar
personalities
he’d
been
talking to for years who
inhabited
the
relatively
specialized corner of coding
where he worked. But this
particular e-mail came from
an unfamiliar name—Satoshi
Nakamoto—and it described
what was referred to as an “e-
cash” with the catchy name
Bitcoin. Digital money was
something
Hal
had
experimented with for a long
time, enough to make him
skeptical about whether it
could
ever
work.
But
something jumped out in this
e-mail. Satoshi promised a
kind of cash that wouldn’t
need a bank or any other third
party to manage it. It was a
system that could live entirely
in the collective computing
memory of the people who
used it. Hal was particularly
drawn to Satoshi’s claim that
users could own and trade
Bitcoins without providing
identifying information to any
central authorities. Hal had
spent most of his professional
life working on programs that
allowed people to elude the
ever-watchful gaze of the
government.
After reading the nine-
page description, contained in
what looked like an academic
paper,
Hal
responded
enthusiastically:
“When Wikipedia started
I never thought it would
work, but it has proven to be
a great success for some of
the same reasons,” he wrote
to the group.
In the face of skepticism
from others on the e-mail list,
Hal had urged Satoshi to
write up some actual code for
the system he had described.
A few months later, on this
Saturday in January, Hal
downloaded Satoshi’s code
from the Bitcoin website. A
simple .exe file installed the
Bitcoin
program
and
automatically opened up a
crisp-looking window on his
computer desktop.
When
the
program
opened for the first time it
automatically generated a list
of Bitcoin addresses that
would be Hal’s account
numbers in the system and
the password, or private key,
that gave him access to each
address. Beyond that, the
program had only a few
functions. The main one,
“Send Coins,” didn’t seem
like much of an option for
Hal given that he didn’t have
any coins to send. But before
he could poke around further
the program crashed.
It didn’t deter Hal. After
looking at his computer logs,
he wrote to Satoshi to explain
what had happened when his
computer had tried to link up
with other computers on the
network. Apart from Hal, the
log showed that there were
only two other computers on
the network and both of those
were from a single IP
address,
presumably
Satoshi’s, tied to an Internet
provider in California.
Within an hour, Satoshi
had written back, expressing
disappointment
with
the
failure. He said he’d been
testing it heavily and never
encountered any trouble. But
he told Hal that he had
trimmed down the program to
make it easier to download,
which must have introduced
the problem.
“I guess I made the wrong
decision,” Satoshi wrote with
palpable frustration.
Satoshi sent Hal a new
version of the program, with
some of the old material
restored, and thanked Hal for
his help. When it, too,
crashed, Hal kept at it. He
finally got it running using a
program that operated outside
Microsoft Windows. Once it
was up, he clicked on the
most
exciting-sounding
function in the drop-down
menu:
“Generate
Coins.”
When he did this, the
processor in his computer
audibly clicked into gear at a
high clip.
With everything running,
Hal could take a break and
attend to his familial duties,
including a family dinner at a
nearby Chinese restaurant and
a small birthday party for his
son. The instructions Satoshi
had
included
with
the
software said that actually
generating coins could take
“days or months, depending
on
the
speed
of
your
computer and the competition
on the network.”
Hal dashed off a quick
note telling Satoshi that
everything was working: “I
have to go out but I’ll leave
this version running for a
while.”
Hal had already read
enough to understand the
basic work his computer was
doing. Once the Bitcoin
program was running, it
logged into a designated chat
channel
to
find
other
computers
running
the
software—basically
just
Satoshi’s computers at this
point. All the computers were
trying
to
capture
new
Bitcoins, which were released
into the system in bundles of
fifty coins. Each new block of
Bitcoin was assigned to the
address of one user who
linked into the network and
won a race of sorts to solve a
computational puzzle. When
a computer won one round of
the race and captured new
coins, all the other machines
on the network updated their
shared record of the number
of Bitcoins owned by that
computer’s Bitcoin address.
Then the computers on the
network would automatically
begin racing to solve a new
problem to unlock the next
batch of fifty coins.
When Hal returned to his
computer in the evening, he
immediately saw that it had
made him 50 Bitcoins, now
recorded next to one of his
Bitcoin addresses and also
recorded on the public ledger
that kept track of all Bitcoins.
These,
the
seventy-eighth
block of coins generated,
were among the first 4,000
Bitcoins to make it into the
real world. At the time they
were worth exactly nothing,
but that didn’t dampen Hal’s
enthusiasm.
In
a
congratulatory
to
Satoshi that he sent to the
entire mailing list, he allowed
himself a flight of fancy.
“Imagine that Bitcoin is
successful and becomes the
dominant payment system in
use throughout the world,” he
wrote. “Then the total value
of the currency should be
equal to the total value of all
the wealth in the world.”
By his own calculations,
that would make each Bitcoin
worth some $10 million.
“Even if the odds of
Bitcoin succeeding to this
degree are slim, are they
really 100 million to one
against? Something to think
about,” he wrote before
signing off.
HAL FINNEY HAD long been
preoccupied by how, in look
and texture, the future would
be different from the present.
One of four children of an
itinerant petroleum engineer,
Hal had worked his way
through
the
classics
of
science fiction, but he also
read calculus books for fun
and eventually attended the
California
Institute
of
Technology. He never backed
down from an intellectual
challenge.
During
his
freshman year he took a
course on gravitational field
theory that was designed for
graduate students.
But he wasn’t a typical
nerd. A big, athletic guy who
loved to ski in the California
mountains, he had none of the
social awkwardness common
among Cal Tech students.
This active spirit carried over
into his intellectual pursuits.
When he read the novels of
Larry Niven, which discussed
the
possibility
of
cryogenically
freezing
humans and later bringing
them back to life, Hal didn’t
just ponder the potential in
his dorm room. He located a
foundation
dedicated
to
making this process a reality
and signed up to receive the
Alcor
Life
Extension
Foundation’s
magazine.
Eventually he would pay to
have his and his family’s
bodies put into Alcor’s frozen
vaults near Los Angeles.
The advent of the Internet
had been a boon for Hal,
allowing him to connect with
other people in far-flung
places who were thinking
about similarly obscure but
radical ideas. Even before the
invention of the first web
browser, Hal joined some of
the
earliest
online
communities, with names like
the
Cypherpunks
and
Extropians, where he jumped
into debates about how new
technology
could
be
harnessed to shape the future
they all were dreaming up.
Few questions obsessed
these groups more than the
matter of how technology
would alter the balance of
power between corporations
and governments on one hand
and individuals on the other.
Technology
clearly
gave
individuals
unprecedented
new powers. The nascent
Internet allowed these people
to communicate with kindred
spirits and spread their ideas
in ways that had previously
been impossible. But there
was constant discussion of
how the creeping digitization
of life also gave governments
and
companies
more
command over perhaps the
most valuable and dangerous
commodity in the information
age: information.
In
the
days
before
computers,
governments
certainly kept records about
their citizens, but most people
lived in ways that made it
impossible to glean much
information about them. In
the
1990s,
though—long
before the National Security
Agency was discovered to be
snooping on the cell phones
of ordinary citizens and
Facebook’s privacy policies
became a matter for national
debate—the
Cypherpunks
saw that the digitization of
life made it much easier for
the authorities to harvest data
about citizens, 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.
The Cypherpunk Manifesto,
delivered to the mailing list in
1993
by
the
Berkeley
mathematician Eric Hughes,
began: “Privacy is necessary
for an open society in the
electronic age.”
This line of thinking was,
in part, an outgrowth of the
libertarian politics that had
become popular in California
in the 1970s and 1980s.
Suspicion
regarding
government had a natural
appeal for programmers like
Hal, who were at work
creating a new world through
code, without needing to rely
on anyone else. Hal had
imbibed these ideas at Cal
Tech and in his reading of the
novels of Ayn Rand. But the
issue of privacy in the
Internet age had an appeal
beyond libertarian circles,
among human rights activists
and other protest movements.
None of the Cypherpunks
saw a solution to the problem
in
running
away
from
technology. Instead, Hal and
the others aimed to find
answers in technology and
particularly in the science of
encrypting
information.
Encryption technologies had
historically been a privilege
largely reserved for only the
most powerful institutions.
Private individuals could try
to
encode
their
communications,
but
governments
and
armed
forces almost always had the
power to crack such codes. In
the 1970s and 1980s, though,
mathematicians at Stanford
and MIT made a series of
breakthroughs that made it
possible, for the first time, for
ordinary people to encrypt, or
scramble, messages in a way
that could be decrypted only
by the intended recipient and
not cracked even by the most
powerful supercomputers.
Every user of the new
technology, known as public-
key
cryptography,
would
receive a public key—a
unique jumble of letters and
numbers that serves as a sort
of address that could be
distributed
freely—and
a
corresponding private key,
which is supposed to be
known only by the user. The
two
keys
are
related,
mathematically, in a way that
ensures that only the user—
let’s call her Alice, as
cryptographers often did—
with her private key, can
unlock messages sent to her
public key, and only she can
sign
off
on
messages
associated with her public
key. The unique relationship
between each public and
private key was determined
by
complicated
math
equations
that
were
constructed so cleverly that
no one with a particular
public key would ever be able
to work backward to figure
out the corresponding private
key—not even the most
powerful supercomputer. This
whole setup would later play
a central role in the Bitcoin
software.
Hal was introduced to the
potential
of
public-key
cryptography in 1991 by the
pathbreaking
cryptographer
David Chaum, who had been
experimenting with ways to
use public-key cryptography
to protect individual privacy.
“It seemed so obvious to
me,” Hal told the other
Cypherpunks of his first
encounter
with
Chaum’s
writing. “Here we are faced
with the problems of loss of
privacy,
creeping
computerization,
massive
databases, more centralization
—and
Chaum
offers
a
completely different direction
to go in, one which puts
power into the hands of
individuals
rather
than
governments
and
corporations.”
As usual, when Hal found
something exciting, he didn’t
just passively read up on it.
On nights and weekends,
after his job as a software
developer, he began helping
with a volunteer project,
referred to as Pretty Good
Privacy, or PGP, which
allowed people to send each
other messages that could be
encrypted using public-key
cryptography. The founder of
the project, Phil Zimmerman,
was an antinuclear activist
who wanted to give dissidents
a
way
to
communicate
outside
the
purview
of
governments. Before long,
Zimmerman brought Hal on
as the first employee at PGP.
Idealistic projects like
PGP generally had a small
audience. But the potential
import of the technology
became
apparent
when
federal prosecutors launched
a criminal investigation into
PGP and Zimmerman. The
government
categorized
encryption technology, such
as PGP, as weapon-grade
munitions,
and
this
designation made it illegal to
export. While the case was
eventually dropped, Hal had
to lie low with his own
involvement in PGP for years
and could never take credit
for some of his important
contributions to the project.
THE
EXTROPIANS
AND
Cypherpunks were working
on
several
different
experiments that could help
empower individuals against
traditional
sources
of
authority. But money was,
from the beginning, at the
center of their efforts to
reimagine the future.
Money is to any market
economy what water, fire, or
blood is to the human
ecosystem—a basic substance
needed for everything else to
work.
For
programmers,
existing currencies, which
were
valid
only
within
particular national borders
and subject to technologically
incompetent banks, seemed
unnecessarily
constrained.
The science fiction that Hal
and others had grown up on
almost always featured some
kind of universal money that
could span galaxies—in Star
Wars it was the galactic credit
standard; in the Night’s Dawn
trilogy it was Jovian credit.
Beyond
these
more
fanciful
ambitions,
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 like
Alice, the cryptographers’
favorite, as her financial
transactions. If snoopers get
access to her credit card
statements they can follow
her movements over the
course of a day. 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,”
Hughes wrote.
“Privacy in an open
society requires anonymous
transaction
systems,”
he
added.
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
party, such as a bank, was
always involved and therefore
able to trace the transaction.
What Hal, Chaum, and the
Cypherpunks wanted was a
cash for the digital age that
could
be
secure
and
uncounterfeitable
without
sacrificing the privacy of its
users. The same year as
Hughes’s
manifesto,
Hal
wrote an e-mail to the group
imagining a kind of digital
cash for which “no records
are kept of where I spend my
money. All the bank knows is
how much I have withdrawn
each month.”
A month later, Hal even
came up with a cheeky
moniker for it: “I thought of a
new name today for digital
cash: CRASH, taken from
CRypto cASH.”
Chaum
himself
had
already come up with his own
version of this by the time the
Cypherpunks got interested.
Working out of an institute in
Amsterdam, he had created
DigiCash, an 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.
When
Mark
Twain Bank in the United
States began experimenting
with DigiCash, Hal signed up
for an account.
But Chaum’s effort would
rub Hal and others the wrong
way.
With
DigiCash,
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
bankrupt in 1998, DigiCash
went down with it. These
concerns pushed Hal and
others to work toward a
digital cash that wouldn’t rely
on any central institution. The
problem, of course, was that
someone needed to check that
people
weren’t
simply
copying and pasting their
digital money and spending it
twice.
Some
of
the
Cypherpunks simply gave up
on the project, but Hal wasn’t
one to fold so easily.
Ironically for a person so
eager to create new money,
Hal’s
interest
wasn’t
primarily
financial.
The
programs he was writing, like
PGP,
were
explicitly
designed to be available to
anyone, free. His political
distrust
of
government,
meanwhile, was not driven by
selfish
resentment
about
paying taxes. During the
1990s Hal would calculate
the maximum bill for his tax
bracket and send in a check
for that amount, so as to
avoid the hassle of actually
filling out a return. He bought
his modest home on the
outskirts of Santa Barbara
and stuck with it over the
years. He didn’t seem to mind
that he had to work out of his
living room or that the blue
recliners in front of his desk
were wearing thin. Instead of
being motivated by self-
interest, his work seemed
driven by an intellectual
curiosity that bubbled over in
each e-mail he wrote, and by
his sense of what he thought
other people deserved.
“The work we are doing
here, broadly speaking, is
dedicated to this goal of
making Big Brother obsolete.
It’s important work,” Hal
would write to his fellow
travelers. “If things work out
well, we may be able to look
back and see that it was the
most important work we have
ever done.”
CHAPTER 2
1997
The notion of creating a new
kind of money would seem,
to many, a rather odd and
even pointless endeavor. To
most modern people, money
is always and everywhere
bills and coins issued by
countries. The right to mint
money is one of the defining
powers of a nation, even one
as small as the Vatican City
or Micronesia.
But that is actually a
relatively recent state of
affairs. Until the Civil War, a
majority of the money in
circulation in the United
States was issued by private
banks,
creating
a
crazy
patchwork of competing bills
that could become worth
nothing if the issuing bank
went down. Many countries
at
that
time
relied
on
circulating coins from other
countries.
This was the continuation
of a much longer state of
affairs in which humans
engaged in a seemingly
ceaseless effort to find better
forms of money, trying out
gold, shells, stone disks, and
mulberry bark along the way.
The search for a better
form of money has always
been about finding a more
trustworthy and uniform way
of valuing the things around
us—a single metric that
allows a reliable comparison
between the value of a block
of wood, an hour of carpentry
work, and a painting of a
forest. As sociologist Nigel
Dodd put it, good money is
“able to convert qualitative
differences between things
into quantitative differences
that enable them to be
exchanged.”
The money imagined by
the Cypherpunks looked to
take
the
standardizing
character of money to its
logical extreme, allowing for
a universal money that could
be spent anywhere, unlike the
constrained
national
currencies we currently carry
around and exchange at each
border.
In their efforts to design a
new
currency,
the
Cypherpunks were mindful of
the characteristics usually
found in successful coinage.
Good money has generally
been durable (imagine a
dollar bill printed on tissue
paper), portable (imagine a
quarter that weighed twenty
pounds), divisible (imagine if
we had only hundred-dollar
bills and no coins), uniform
(imagine if all dollar bills
looked different), and scarce
(imagine bills that could be
copied by anyone).
But beyond all these
qualities,
money
always
required something much less
tangible and that was the faith
of the people using it. If a
farmer is going to accept a
dollar bill for his hard-earned
crops, he has to believe that
the dollar, even if it is only a
green piece of paper, will be
worth
something
in
the
future. The essential quality
of successful money, through
time, was not who issued it—
or even how portable or
durable it was—but rather the
number of people willing to
use it.
In the twentieth century,
the dollar served as the global
currency in no small part
because most people in the
world
believed
that
the
United States and its financial
system had a better chance of
surviving
than
almost
anything else. That explains
why people sold their local
currency to keep their savings
in dollars.
Money’s relationship to
faith has long turned the
individuals who are able to
create and protect money into
quasi-religious figures. The
word money comes from the
Roman god Juno Moneta, in
whose temple coins were
minted. In the United States,
the governors of the central
bank, the Federal Reserve,
who
are
tasked
with
overseeing the money supply,
are treated like oracles of
sorts; their pronouncements
are scrutinized like the goat
entrails of olden days. Fed
officials are endowed with a
level
of
power
and
independence given to almost
no other government leaders,
and the task of protecting the
nation’s currency is entrusted
to a specially created agency,
the Secret Service, that was
only later given the additional
responsibility of protecting
the life of the president.
Perhaps the most famous,
if flawed, oracle of the
Federal
Reserve,
former
chairman Alan Greenspan,
knew
that
money
was
something that not only
central bankers could create.
In a speech in 1996, just as
the
Cypherpunks
were
pushing forward with their
experiments, Greenspan said
that he imagined that the
technological
revolution
could bring back the potential
for private money and that it
might actually be a good
thing:
“We
could
envisage
proposals in the near future
for issuers of electronic
payment obligations, such as
stored-value cards or ‘digital
cash,’ to set up specialized
issuing
corporations
with
strong balance sheets and
public credit ratings.”
IN THE YEARS right after
Greenspan’s speech, there
was a flurry of activity in the
Cypherpunk world. In 1997 a
British
researcher
named
Adam Back released on the
Cypherpunk mailing list his
plan for something he called
hashcash, which solved one
of the most basic problems
holding back the digital-cash
project:
the
seeming
impossibility of creating any
sort of digital file that can’t
be endlessly copied.
To solve this problem,
Back had a 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: cryptographic
hash functions. These are
math equations that are easy
to solve but hard to reverse-
engineer,
just
as
it
is
relatively easy to multiply
2,903 and 3,571 using a piece
of paper and pencil, but
much, much harder to figure
out what two numbers can be
multiplied together to get
10,366,613. With hashcash,
computers essentially had to
figure out which two numbers
can be multiplied together to
get 10,366,613, though the
problems for hashcash were
significantly harder than that.
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.
When a computer found the
right answer, it would earn
hashcash.
The creation of hashcash
through this method was
useful in the context of digital
money because it ensured that
hashcash would be scarce—a
characteristic of most good
money but not of digital files,
which are generally easily
duplicated. A computer had
to perform lots of work to
create each new unit of
hashcash, earning the process
the name “proof-of-work”—
something that would later be
a
central
innovation
underpinning Bitcoin. The
main problem with Back’s
system, as a type of digital
money,
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 problem
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
his program, two different
members of the Cypherpunk
list came up with systems that
solved some of hashcash’s
shortcoming, creating digital
tokens that required a proof-
of-work, but that could also
be reused. One of these, a
concept called bit gold, was
invented by Nick Szabo, a
security
expert
and
Cypherpunk who circulated
his idea to close collaborators
like Hal Finney in 1998, but
never actually put it into
practice. Another, known as
b-money, came from an
American named Wei Dai.
Hal created his own variant,
with a decidedly less sexy
name: reusable proofs of
work, or RPOWs.
The conversation around
these
ideas
on
the
Cypherpunk list and among
related
groups
sometimes
resembled the bickering of
rivalrous brothers trying to
one-up each other. Szabo
would
snipe
at
other
proposals, saying that they all
relied
too
much
on
specialized
computer
hardware instead of software.
But these men—and they
were all men—also built up
deep respect for each other.
And
even
as
their
experiments
failed,
their
ambitions grew beyond just
anonymous money. Among
other things, Back, Szabo,
and
Finney
sought
to
overcome the costs and
frustrations of the current
financial system in which
banks charged fees with
every transaction and made it
difficult to move money over
international borders.
“What we want is fully
anonymous,
ultra
low
transaction cost, transferable
units of exchange. If we get
that going (and obviously
there are some people trying
DigiCash, and a couple of
others),
the
banks
will
become
the
obsolete
dinosaurs they deserve to
become,” Back told the
Cypherpunk list soon after
releasing hashcash.
The Cypherpunk seekers
were given a platonic ideal to
shoot for when science fiction
writer
Neal
Stephenson
published
his
book
Cryptonomicon in 1999. The
novel,
which
became
legendary in hacker circles,
imagined
a
subterranean
world that was fueled by a
kind of digital gold that
allowed people to keep their
identities private. The novel
included lengthy descriptions
of the cryptography that made
it all possible.
But 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. The
experiments also suffered
from a more fundamental
difficulty, which was the
issue of getting people to use
and value these new digital
tokens. 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 turning coal into diamonds.
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
Halloween, 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
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 blockchain.
The process by which this
all
happened
had
many
layers, and it would take even
experts months to understand
how they all worked together.
But the basic elements of the
system can be sketched out in
rough terms, and were in
Satoshi’s paper, which would
become known as the Bitcoin
white paper.
According to the paper,
each user of the system could
have one or more public
Bitcoin addresses—sort of
like bank account numbers—
and a private key for each
address. The coins attached to
a given address could be
spent only by a person with
the private key corresponding
to the address. The private
key was slightly different
from a traditional password,
which has to be kept by some
central authority to check that
the user is entering the correct
password. In Bitcoin, Satoshi
harnessed the wonders of
public-key cryptography to
make it possible for a user—
let’s call her Alice again—to
sign off on a transaction, and
prove she has the private key,
without anyone else ever
needing to see or know her
private key.*
Once Alice signed off on
a transaction with her private
key she would broadcast it
out to all the other computers
on the Bitcoin network.
Those
computers
would
check that Alice had the coins
she was trying to spend. They
could do this by consulting
the public record of all
Bitcoin transactions, which
computers on the network
kept a copy of. Once the
computers confirmed that
Alice’s address did indeed
have the money she was
trying
to
spend,
the
information about Alice’s
transaction was recorded in a
list of all recent transactions,
referred to as a block, on the
blockchain.
The exact method used to
add blocks to the blockchain
was
perhaps
the
most
complicated
part
of
the
system. At the simplest level,
it
involved
a
sort
of
computational race between
all computers on the network,
modeled after the contest that
Adam Back had invented for
hashcash. The computer that
won the race was responsible
for inscribing the most recent
block of transactions onto the
blockchain.
Equally
important, the winner also
received a bundle of new
Bitcoins—50 Bitcoins when
the network actually started
operating. This was, indeed,
the only way new Bitcoins
could be brought into the
world. The reward of new
coins
helped
encourage
Bitcoin users to set their
computers to partake in the
communal work of recording
transactions.
If
there
were
disagreements about which
computer won the lottery, the
record of transactions that
had already been adopted by
the most computers on the
network would prevail. If, for
example,
most
of
the
computers on the network
believed Alice won the latest
race, but a few computers
believed that Bob won the
race, the computers that used
Bob’s record of transactions
would be ignored by other
computers on the network
until they joined the majority.
This democratic method of
decision making was valuable
because it prevented a few
bad computers from going
rogue
and
assigning
themselves
lots
of
new
Bitcoins;
rogue
elements
would have to capture a
majority of the computers on
the network to do this.
Alterations to the Bitcoin
software, which would run on
the computer of every user,
would also be decided by
means of this democratic
model. Any user could make
a change to the open source
Bitcoin software, but the
changes would generally be
effective
only
when
a
majority of the computers on
the network adopted the
altered
version
of
the
software. If a lone computer
began running a different
version
of
the
Bitcoin
software it would essentially
be ignored by the other
computers and would no
longer be part of the Bitcoin
network.
To recap, the five basic
steps of the Bitcoin process
were laid out as follows:
• Alice initiates a transfer
of Bitcoins from her
account by signing off
with her private key and
broadcasting the
transaction to other
users.
• The other users of the
network make sure
Alice’s Bitcoin address
has sufficient funds and
then add Alice’s
transaction to a list of
other recent
transactions, known as a
block.
• Computers take part in a
computational race to
have their list of
transactions, or block,
added to the blockchain.
• The computer that has
its block added to the
blockchain is also
granted a bundle of new
Bitcoins.
• Computers on the
network start compiling
a new list of
unconfirmed recent
transactions, trying to
win the next bundle of
Bitcoins.
The
result
of
this
complicated
process
was
something
that
was
deceptively simple but never
previously
possible:
a
financial network that could
create and move money
without a central authority.
No bank, no credit card
company, no regulators. The
system was designed so that
no one other than the holder
of a private key could spend
or take the money associated
with a particular Bitcoin
address. What’s more, each
user of the system could be
confident
that,
at
every
moment in time, there would
be
only
one
public,
unalterable record of what
everyone
in
the
system
owned. To believe in this, the
users didn’t have to trust
Satoshi, as the users of
DigiCash had to trust David
Chaum, or users of the dollar
had to trust the Federal
Reserve. They just had to
trust their own computers
running the Bitcoin software,
and the code Satoshi wrote,
which was open source, and
therefore
available
for
everyone to review. If the
users didn’t like something
about the rules set down by
Satoshi’s software, they could
change the rules. People who
joined the Bitcoin network
were, quite literally, both
customers and owners of both
the bank and the mint.
But so far, at least, all
Satoshi
had
done
was
describe this grand scheme.
DESPITE ALL THE advances
described in the Bitcoin
paper, a week after it was
posted, when Hal Finney
chimed in for the first time,
there
were
only
two
responses
on
the
cryptography mailing list.
Both
were
decidedly
negative. One noted computer
security expert, John Levine,
said that the system would be
easily
overwhelmed
by
malicious hackers who could
spread a version of the
blockchain that was different
from the one being used by
everyone else.
“The good guys have
vastly
less
computational
firepower than the bad guys,”
Levine wrote on November 2.
“I also have my doubts about
other issues, but this one is
the killer.”
Levine’s concern was a
valid one. The Bitcoin system
Satoshi described relied on
computers reaching decisions
by majority rule. Early on,
when
there
were
fewer
computers on the network, it
would be easier to become
the majority and take over.
But Satoshi’s hope was that
there wouldn’t be much of an
incentive to take over the
system early on, 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.
Another longtime veteran
of the Cypherpunk debates,
James Donald, said that “we
very, very much need a
system,” but the way he read
the paper, the database of
transactions, the blockchain,
would quickly become too
big for users to download.
In
the
weeks
that
followed, Hal was essentially
Satoshi’s only defender. On
the cryptography list, Hal
wrote that he wasn’t terribly
worried about the attackers
that Levine talked about. But
Hal admitted that he wasn’t
sure how the whole thing
would work in practice, and
expressed a desire to see
actual computer code, rather
than
just
a
conceptual
description.
“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 wrote to the group.
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 kinks. Not long after
that, in January 2009, Satoshi
sent the complete code to the
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.
The
software
also
mandated that the winner of
each block would get fifty
coins for the first four years,
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.
On the first day, when
Hal downloaded the software,
the network was already up
and running. For the next few
days, not much activity was
being added to the blockchain
other than a computer on the
network (usually belonging to
Satoshi) winning fifty coins
every ten minutes or so. But
on Sunday evening the first
transaction took place when
Satoshi sent Hal ten coins to
make sure that this part of the
system
was
working
smoothly. To complete the
transaction, Satoshi signed
off with the private key
associated with the address
where the coins were stored.
This
transaction
was
broadcast to the network—
essentially
just
Hal
and
Satoshi at this point—and
was
registered
in
the
blockchain a few minutes
later
when
Satoshi’s
computers won the next
round of the hash function
lottery. At that point, anyone
who downloaded the software
would download the entire
blockchain up to the point,
which included a record of
the ten coins that Hal had
received from Satoshi, as well
as the fifty coins that Hal had
won on Saturday.
In the first weeks, other
early adopters were slow to
buy in. Satoshi was using his
own computers to help power
the network. Satoshi was also
doing everything possible to
sell
the
technology,
responding quickly to anyone
showing the slightest interest.
When a programmer in Texas
wrote to Satoshi late one
night, expressing his own
familiarity with electronic
currency and cryptography,
he had an answer from
Satoshi the next morning.
“We
definitely
have
similar interests!” Satoshi
wrote
with
innocent
enthusiasm, before describing
the challenge that confronted
Bitcoin:
You know, I think
there were a lot more
people interested in
the 90’s, but after
more than a decade of
failed Trusted Third
Party based systems
(DigiCash, etc.), they
see it as a lost cause. I
hope they can make
the distinction, that
this is the first time I
know of that we’re
trying a non-trust
based system.
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.”
Hal acknowledged that
the author could prove to be
right, but came to Satoshi’s
defense again: “Bitcoin has a
couple of things going for it:
one is that it is distributed,
with no single point of
failure,
no
‘mint,’
no
company with officers that
can
be
subpoenaed
and
arrested and shut down.”
Even Hal’s enthusiasm,
though, appeared to flag at
times. As his computer kept
working at full capacity,
trying to generate new coins,
he began to worry about the
carbon
dioxide
emissions
caused by all the computers
racing to mint coins. After his
son, Jason, complained about
the wear and tear it was
causing to the computer, Hal
turned off the Generate Coins
option. Hal also had begun to
fear that with a public ledger
of all transactions—even if
everyone was represented by
a confusing-looking address
—Bitcoin might not be as
anonymous as he initially
thought.
And then something much
worse
happened.
Hal’s
speech began slurring. He
became increasingly sluggish
during his marathon training.
Soon, all his free moments
were spent visiting doctors,
trying
to
identify
the
mysterious
ailment.
Eventually it was diagnosed
as Lou Gehrig’s disease, the
degenerative condition that
would gradually cause all his
muscles to wither away inside
his body. By the time he
learned this, Hal was out of
the
Bitcoin
game.
He
wouldn’t return until his
condition was much worse
and Bitcoin’s was much
better.
CHAPTER 3
May 2009
In early May, a few months
after
Hal
Finney’s
last
messages, Satoshi Nakamoto
received an e-mail written in
stilted but precise English.
“I have a good touch on
Java and C languages from
school courses (I’m studying
CS), but not so very much
development experience yet,”
read the note, signed Martti
Malmi.
This was clearly not the
voice of a grizzled veteran of
the Cypherpunk movement
like Hal. But Martti displayed
something more important at
this point: eagerness.
“I would like to help with
Bitcoin, if there’s something I
can do,” he wrote.
Satoshi had gotten a few
promising e-mails since Hal
had disappeared two months
earlier, but Martti was already
demonstrating
more
commitment than the others.
Before
reaching
out
to
Satoshi, Martti had written
about
Bitcoin
on
anti-
state.org, a forum dedicated
to the possibility of an
anarchist society organized
only by the market. Using the
screen name Trickster, Martti
gave a brief description of the
Bitcoin idea and asked for
thoughts:
A widespread
adoption of such a
system sounds like
something that could
have a devastating
effect on the state’s
ability to feed on its
livestock. What do
you think about this?
I’m really excited
about the thought of
something practical
that could truly bring
us closer to freedom
in our lifetime :-)
Now we just need
some convincing
proof that the software
and the system work
securely enough to be
taken into real use.
Martti included a link to
this post in his first e-mail to
Satoshi, and Satoshi quickly
read it and responded.
“Your understanding of
Bitcoin is spot on,” Satoshi
told him.
MARTTI’S ENTHUSIASM HELPED
CONFIRM the shift in strategy
Satoshi had made since the
beginning of the year. Back
when
Satoshi
had
first
launched the software, his
writings were drily focused
on the technical specifications
of the programming.
But after the first few
weeks,
Satoshi
began
emphasizing
the
broader
ideological motivations for
the software to help win over
a broader audience, and
privacy was only a part of it.
In a February posting on the
website
of
the
P2P
Foundation,
a
group
dedicated to decentralized,
peer-to-peer
technology,
Satoshi led off by talking
about
problems
with
traditional, or fiat, currencies,
a term for money generated
by government decree, or fiat.
“The root problem with
conventional currency is all
the trust that’s required to
make it work,” Satoshi wrote.
“The central bank must be
trusted not to debase the
currency, but the history of
fiat currencies is full of
breaches of that trust.”
Currency debasement was
not an issue the Cypherpunks
had discussed much, but
Satoshi made it clear with this
posting, and not for the last
time, that he had been
thinking about more than just
the
concerns
of
the
Cypherpunks when designing
the Bitcoin software. The
issue that Satoshi referred to
here—currency debasement
—was, in fact, a problem
with
existing
monetary
systems that had much more
potential widespread appeal,
especially in the wake of the
government-sponsored bank
bailouts that had occurred just
a few months earlier in the
United States.
Throughout
history,
central banks have been
accused of debasing their
currencies by printing too
much
new
money—or
reducing the precious metal
content
in
coins—thus
making the existing money
worth less. This had been a
passionate political cause, in
certain circles, since the end
of the gold standard, the
policy by which every dollar
was backed by a certain
quantity of gold.
The gold standard was the
most popular global monetary
system at the start of the
twentieth century. Not only
did gold link paper money to
something
of
physical
substance; the standard also
served as a mechanism for
imposing restraint on central
banks. The Federal Reserve
and other central banks could
print more money only if they
managed to get their hands on
more gold. If they ran out of
gold, no more money and no
more spending.
The
restriction
was
suspended during the Great
Depression, so that central
banks around the world could
more
money
to
stimulate the economy. After
World War II, the world’s
leading economies went back
to a quasi–gold standard, with
all currencies having a set
value in gold—though it was
no longer possible to actually
turn dollars in to collect
physical
gold.
In
1971
Richard
Nixon
finally
decided to cut the value of the
dollar loose from any anchor
and end the gold standard
permanently. The dollar and
most other global currencies
would be worth only as much
as someone was willing to
pay for them. Now the value
of the dollar arose from the
commitment of the United
States government to take it
for all debts and payments.
Most economists approve
of the move away from the
gold standard, as it allowed
central banks to be more
responsive to the ups and
downs
of
the
economy,
putting more money into
circulation when the economy
grew or when people weren’t
spending and the economy
needed a jolt. But the policy
has
faced
impassioned
criticism, particularly from
antigovernment circles, where
many believe that the end of
the gold standard allowed
central banks to print money
with no restraint, hurting the
long-term value of the dollar
and allowing for unbridled
government spending.
Until 2008, though, this
was a relatively niche issue,
even among libertarians. That
changed during the financial
crisis,
after
the
Federal
Reserve helped bail out big
banks and stimulate the
economy by printing lots of
money. This fanned fears that
the new money flooding the
market would make existing
money and savings worth
less.
Suddenly,
monetary
policy was a mainstream
political issue and the Fed
was a sort of national villain,
with “END THE FED” bumper
stickers becoming a common
sight. The issue became one
of the first criticisms of the
existing financial system that
gained popular appeal after
the financial crisis.
When Satoshi released
Bitcoin, just months after
these bank bailouts, the
design
provided
a
tidy
solution for people worried
about a currency with no
restraints. While the Federal
Reserve had no formal limits
on how much new money it
could
create,
Satoshi’s
Bitcoin software had rules to
ensure that new Bitcoins
would be released only every
ten minutes or so and that the
process of creating new coins
would stop after 21 million
were out in the world.
This
apparently
small
detail in the system carried
potentially
great
political
significance
in
a
world
worried
about
unlimited
printing of money. What’s
more,
the
restraints
on
Bitcoin creation helped deal
with one of the big issues that
had bedeviled earlier digital
moneys—the matter of how
to convince users that the
money
would
be
worth
something in the future. With
a hard cap on the number of
Bitcoins,
users
could
reasonably
believe
that
Bitcoins
would
become
harder to get over time and
thus would go up in value.
These rules were all a late
addition to the code and
Satoshi had not played them
up early on. But now that he
needed to sell it to the public,
this feature of Bitcoin became
a big draw. Martti Malmi, the
young man who wrote to
Satoshi in early May, proved
the wisdom of emphasizing
this. Martti didn’t know
cryptography
but
as
a
political
junkie
he
was
immediately
drawn
to
Bitcoin’s
revolutionary
potential.
“There’s no central bank
to debase the currency with
unlimited creation of new
money,” Martti wrote on the
anti-state.com forum.
This was the first but not
the last time that the Bitcoin
concept’s many layers, and its
openness
to
new
interpretations, would allow
the project to pick up crucial
new followers.
Satoshi
quickly
gave
Martti practical suggestions
for how he could help the
project. The most important
was the simplest: to leave his
computer on with the Bitcoin
program
running.
Five
months after Bitcoin was
launched, it was still not
possible to trust that someone
somewhere was running the
Bitcoin program. When a new
person tried to join, there
were
often
no
other
computers
or
nodes
to
communicate with. It also
meant
that
Satoshi’s
computers
were
still
generating almost all the
coins. When Martti joined in,
he quickly began winning
them on his laptop, which he
kept running except when he
needed the computing power
for his video games.
As
to
the
more
complicated
programming
needs, Satoshi told Martti that
there was “not much that’s
easy right now.” But, Satoshi
added, the Bitcoin website
did
need
introductory
material for beginners and
Martti seemed like the right
person for the job.
“My writing is not that
great—I am a much better
coder,”
Satoshi
wrote,
encouraging Martti to try his
hand.
Two days later, Martti
proved Satoshi right by
sending
a
lengthy
but
accessible
document
addressing
seven
basic
questions, ready to be posted
on the Bitcoin website. Martti
provided straightforward, if
occasionally stilted, answers
to questions like, “Is Bitcoin
safe?” and “Why should I use
Bitcoin?” To answer the
latter, he cited the political
motivations:
Be safe from the
unfair monetary
policies of the
monopolistic central
banks and the other
risks of centralized
power over a money
supply. The limited
inflation of the
Bitcoin system’s
money supply is
distributed evenly (by
CPU power)
throughout the
network, not
monopolized to a
banking elite.
Satoshi
liked
the
document so much that Martti
was
quickly
given
full
credentials for the Bitcoin
website, allowing him to
make any improvements he
wanted. Satoshi particularly
encouraged Martti to help
make the site look more
professional and get users up
to speed.
WHEN MARTTI FOUND Bitcoin
in the spring of 2009, he was
in his second year at the
Helsinki
University
of
Technology. If Hal Finney
was the opposite of the
normal tech geek, Martti
lived up to type. Lanky, with
birdlike features, Martti shied
away from social contact. He
spoke in a slow, halting voice
that sounded almost as if it
were computer generated. He
was happiest in his room with
his computer, writing code,
which he had learned to do at
age twelve, or hammering
away at enemies in online
games, while listening to
heavy
metal
music
on
headphones.
Martti’s
reclusive,
computer-centric life led him
to the ideas behind Bitcoin,
and ultimately to Bitcoin
itself.
The
Internet
had
allowed a teenage Martti to
discover and explore political
ideas that were far from the
Finnish social democratic
consensus. The ideas of the
libertarian
economists
he
began
following,
which
encouraged people to create
their own destiny, aligned
with
Martti’s
lone-wolf
approach to life, even if it
ignored
the
incredible
education that Martti had
received thanks to Finland’s
strong government and high
taxes. Who needs the state
when you have talent and
ideas?
During his college years,
Martti had become fascinated
by the rise in Scandinavia of
the
Pirate
Party,
which
promoted technology over
political engagement as the
way to move society. Napster
and other music sharing
services hadn’t waited for
politics to reform copyright
law; they forced the world to
change. As Martti pondered
these
ideas
he
began
wondering whether money
might be the next thing
vulnerable to technological
disruption. After a brief
spasm
of
random
web
searches, Martti had found his
way to the primitive website
at Bitcoin.org.
Within a few weeks of his
initial
exchanges
with
Satoshi, Martti had totally
revamped
the
Bitcoin
website. In place of Satoshi’s
original
version,
which
presented
complicated
descriptions of the code,
Martti led off with a brief,
crisp description of the big
ideas, aimed at drawing in
anyone
with
similar
ideological interests.
“Be
safe
from
the
unstability
caused
by
fractional reserve banking
and the bad policies of the
central banks,” read the
newly designed site.
The onslaught of new
users was slow to arrive,
however. A few dozen people
downloaded
the
Bitcoin
program in June, to add to the
few
hundred
who
had
downloaded
it
since
its
original release. Most had
tried it once and then turned it
off. But Martti kept at it.
After releasing the new
website, Martti turned to the
software’s actual underlying
code. He did not know C++,
the programming language
that Satoshi had written
Bitcoin in, so Martti began
teaching himself.
Martti had time for all of
this because he failed to land
a summer programming job
—a failure that gave Bitcoin a
much-needed boost over the
next months. Martti got a
part-time job through a temp
agency, but he would spend
many of his days and nights
at the university computer lab
and find himself emerging at
dawn. As he learned C++,
Martti was going through the
laborious
process
of
compiling his own version of
the code that Satoshi had
written, so that he could
begin making changes to it.
He
and
Satoshi
communicated regularly and
fell into an easy rapport.
While
Satoshi
never
discussed anything personal
in these e-mails, he would
banter with Martti about little
things. In one e-mail, Satoshi
pointed to a recent exchange
on the Bitcoin e-mail list in
which a user referred to
Bitcoin
as
a
“cryptocurrency,” referring to
the cryptographic functions
that made it run.
“Maybe it’s a word we
should use when describing
Bitcoin. Do you like it?”
Satoshi asked.
“It sounds good,” Martti
replied. “A peer to peer
cryptocurrency could be the
slogan.”
As the year went on they
also worked out other details,
like the Bitcoin logo, which
they mocked up on their
computers and sent back and
forth, coming up, finally, with
a B with two lines coming out
of the bottom and top.
They also batted back and
forth potential improvements
to
the
software.
Martti
proposed
making
Bitcoin
launch automatically when
someone
turned
on
a
computer, an easy way to get
more nodes on the network.
Satoshi loved it: “Now
that I think about it, you’ve
put your finger on the most
important missing feature
right now that would make an
order of magnitude difference
in the number of nodes.”
Despite Martti’s relative
lack
of
programming
experience, Satoshi gave him
full permission to make
changes to the core Bitcoin
software on the server where
it
was
stored—something
that, to this point, only
Satoshi could do. Starting in
August, the log of changes to
the software showed that
Martti was now the main
actor. When the next version
of Bitcoin, 0.2, was released,
Satoshi gave credit for most
of
the
improvements
to
Martti.
But both Satoshi and
Martti were struggling with
how to get more people to use
Bitcoin in the first place.
There were other computers
on the network generating
coins, but the majority of
coins were still captured by
Satoshi’s own computers.
And throughout 2009 no one
else was sending or receiving
any Bitcoins. This was not a
promising sign.
“It would help if there
was something for people to
use it for. We need an
application to bootstrap it,”
Satoshi wrote to Martti in late
August. “Any ideas?”
Returning to school for
the fall semester, Martti
worked on several fronts to
address this. He was eager to
set up an online forum where
Bitcoin users could meet and
talk. Long before Bitcoin,
online forums had been
where Martti had come out of
his shell as a teenager,
allowing him a social ease
that he never had in real-life
interactions. He could almost
be someone else. Indeed,
when Martti and Satoshi
eventually set up a new
Bitcoin forum, Martti gave
himself the screen name that
would become his alter ego in
the Bitcoin world: sirius-m.
The name had a cosmic
ring to it, and conveyed that
this was “sirius business,”
Martti thought to himself. But
it also had a more playful
meaning for Martti, who had
used the alias in a Harry
Potter role-playing game at
age thirteen.
The Bitcoin forum went
online in the fall of 2009 and
soon attracted a few regulars.
One of them, who called
himself NewLibertyStandard,
talked about the need for a
website where people could
buy and sell Bitcoins for real
money. Martti had been
talking with Satoshi about
something similar, but he was
all
too
glad
to
help
NewLibertyStandard. In the
very first recorded transaction
of Bitcoin for United States
dollars,
Martti
sent
NewLibertyStandard
5,050
Bitcoins to use for seeding
the new exchange. In return,
Martti got $5.02 by PayPal.
This trade raised the
obvious question of how
much a Bitcoin should be
worth. Given that no one had
ever bought or sold one,
NewLibertyStandard came up
with his own method for
determining its value—the
rough cost of electricity
needed to generate a coin,
calculated
using
NewLibertyStandard’s
own
electricity
bill.
By
this
measure, one dollar was
worth around one thousand
Bitcoins for most of October
and November 2009.
For Satoshi, though, more
important than buying and
selling Bitcoins was a way to
buy and sell other things for Bitcoins. That, as Satoshi
wrote to Martti, was the
critical thing needed for
enabling Bitcoin to catch on:
“Not saying it can’t work
without something, but a
really specific transaction
need that it fills would
increase the certainty of
success.”
The first, rather timid
thrust in this direction was
made by NewLibertyStandard
in a post on the new Bitcoin
forum:
What would you buy
or sell in exchange for
Bitcoins?
Here’s what I will
buy if the price is
right.
Paper bowls,
about 10 ounces (295
ml), no more than 50
count factory sealed.
Plastic cups, about
16 ounces (473 ml),
no more than 50
count, factory sealed.
Paper towels,
preferably regular size
Bounty Thick and
Absorbent, single roll,
factory sealed.
Another user wondered
what kind of wild celebration
NewLibertyStandard
was
planning
with
all
that
disposable plate ware.
“Bachelorhood?”
NewLibertyStandard
wrote
back.
Soon
thereafter,
NewLibertyStandard began a
Swap Variety Shop on his
exchange
website.
Its
selection was limited to a few
sheets of postage stamps and
SpongeBob
SquarePants
stickers.
Given this activity, it was
not
surprising
that
NewLibertyStandard
soon
shut down his exchange,
while the network stagnated.
Indeed, despite the recent
innovations, at various points
during late 2009 and early
2010 it appeared that the
amount of computing power
on the network was shrinking.
In the spring, Martti
himself had less time to
dedicate to the project after
he dropped out of school and
took a short-term, entry-level
IT job with Siemens. Satoshi
also went missing.
When
Martti
checked
back in with Satoshi, in May
2010, he wrote, “How are you
doing? Haven’t seen you
around in a while.”
Satoshi’s response was
vague: “I’ve been busy with
other things for the last month
and a half—I’m glad you
have been handling things in
my absence.”
In May a potential new
user wrote to the Bitcoin
mailing list, inquiring about
how to accept Bitcoin for his
web-hosting
business.
Sometime later he wrote
again:
“Wow,
not
one
response
in
months.
Amazing.”
Another participant on the
list, one of the first skeptics to
criticize Bitcoin back in the
fall of 2008, now wrote to
explain: “Yes—Bitcoin kind
of went dead.”
He recalled the early
debates on the cryptography
mailing list with Satoshi
about Bitcoin: “Long ago, I
had an argument with the guy
who
designed
it
about
scaling. I heard no more of it
—of course with no one using
it, scaling is not a problem. I
do not know if the software is
in usable condition, or has
been tested for scalability.”
But the apparent lack of
activity in certain parts of the
Bitcoin ecosystem obscured
the fact that at a slow but
steady rate it had been
attracting
a
tiny
but
increasingly
sophisticated
core of users who were easy
to miss if you didn’t look
carefully.
CHAPTER 4
April 2010
Laszlo
Hanecz,
a
Hungarian-born twenty-eight-
year-old software architect
who lived in Florida, heard
about
Bitcoin
from
a
programming friend he’d met
on Internet relay chat, known
as IRC. Assuming it was
some scam, Laszlo poked
around to figure out who was
secretly making money. He
soon realized there was an
interesting and high-minded
experiment going on and
decided to explore further.
He began by buying some
coins
from
NewLibertyStandard and then
building software so that the
Bitcoin code could run on a
Macintosh. But like many
good
coders,
Laszlo
approached a new project
with a hacker’s mind-set,
probing where he might break
it, in order to test its
robustness.
The
obvious
vulnerability here was the
system
for
creating,
or
mining, Bitcoins. If a user
threw a lot of computing
power onto the network, he or
she
could
win
a
disproportionate amount of
the new Bitcoins. Although
Satoshi
Nakamoto
had
designed the mining process
so that the hash function
contest would become harder
if computers were winning
the
mining
race
more
frequently than every ten
minutes, those users with the
most powerful computers still
had a much better chance of
winning a majority of the
coins.*
Until now, no one had an
incentive to throw lots of
computing
power
into
mining, given that Bitcoins
were
worth
essentially
nothing. But Laszlo decided
to test this vulnerability. He
understood that everyone on
the network was trying to win
the computational race with
the central processing unit, or
CPU, in his or her computer.
But the CPU was also
running
most
of
the
computer’s
other
basic
systems, so it was not
particularly
efficient
at
computing hash functions.
The graphics processing unit,
or GPU, on the other hand,
was custom-designed to do
the kind of repetitive problem
solving necessary to process
images and video—similar to
what was needed to win the
hash race function.
Laszlo quickly figured out
how to route the mining
process
through
his
computer’s GPU. Laszlo’s
CPU had been winning, at
most, one block of 50
Bitcoins each day, of the
approximately 140 blocks
that were released daily. Once
Laszlo got his GPU card
hooked in he began winning
one or two blocks an hour,
and occasionally more. On
May 17 he won twenty-eight
blocks; these wins gave him
fourteen hundred new coins
that day.
Satoshi knew someone
would eventually spot this
opportunity
as
Bitcoin
became more successful and
was not surprised when
Laszlo e-mailed him about
his project. But in responding
to Laszlo, Satoshi was clearly
torn. If one person was taking
all the coins, there would be
less of an incentive for new
people to join in.
“I don’t mean to sound
like a socialist,” Satoshi
wrote back. “I don’t care if
wealth is concentrated, but
for now, we get more growth
by giving that money to
100% of the people than
giving it to 20%.”
As a result, Satoshi asked
Laszlo to go easy with the
“highpowered hashing,” the
term coined to refer to the
process of plugging an input
into a hash function and
seeing what it spit out.
But
Satoshi
also
recognized that having more
computing power on the
network made the network
stronger as long as the people
with the power, like Laszlo,
wanted
to
see
Bitcoin
succeed. Bitcoin’s consensus
model, which demanded that
any new additions to the
blockchain—and any changes
to the Bitcoin software—had
to be approved by a majority
of the computers or nodes on
the network, ensured that
even if people tried to change
the rules, or screw up the
blockchain, they could not
succeed without support from
50 percent of the other
computers on the network.
This model did leave the
network vulnerable if one
person or group captured
more than 50 percent of the
computing power, in what
was referred to as a 51
percent attack. If Bitcoin
supporters like Laszlo could
add lots of computing power,
that would make it harder for
a bad guy to build up more
than 51 percent of the power.
And Laszlo did have the
network’s best interest in
mind. It became clear on the
forums that he was a good-
natured
guy
and
more
interested in ideas than in
personal wealth or success.
Indeed, as he mined coins, he
was eager to show how
Bitcoin could be used in the
real world. He posted in the
forum asking if anyone would
bake or buy him a pizza,
delivered to his home in
Jacksonville, Florida.
What I’m aiming for
is getting food
delivered in exchange
for Bitcoins where I
don’t have to order or
prepare it myself, kind
of like ordering a
“breakfast platter” at a
hotel or something,
they just bring you
something to eat and
you’re happy!
Having stockpiled about
70,000 Bitcoins by this time,
he offered 10,000 for a pizza.
For the first few days no one
accepted them. After all, what
would the person on the other
end do with the coins once
Laszlo sent them over? But
on May 22, 2010, a guy in
California offered to call
Lazlo’s local Papa John’s. A
short
while
later
a
deliveryman knocked on the
door
of
Laszlo’s
four-
bedroom home in suburban
Jacksonville bringing two
pizzas, fully loaded with
toppings.
Laszlo
subsequently
found several takers for the
deal, which meant that for a
few weeks he ate nothing but
pizza.
His
two-year-old
daughter was in heaven as he
watched his stockpile of
Bitcoins dwindle. But he had
demonstrated that Bitcoins
could be used in the real
world.
When
he
posted
pictures from one of his feasts
Martti
Malmi
cheered:
“Congratulations laszlo, a
great milestone reached.”
LASZLO HAD PROVED that it
was possible to pay for real
things with Bitcoins, but the
technology
was
still
essentially just a volunteer
project that relied on the
goodwill of users. Perhaps the
most notable project set up
during these months was the
Bitcoin faucet, a site that
gave five free Bitcoins to
anyone who registered. The
project’s creator was Gavin
Andresen, a Massachusetts-
based programmer who had
spent $50 to get the 10,000
Bitcoins he was giving away,
and who would become an
almost mythic figure within
Bitcoin. He first heard about
the technology in May from a
small item on the website of
InfoWorld. After setting up
the
faucet,
Gavin
acknowledged that it sounded
silly to give Bitcoins away,
particularly
because
they
were not hard to generate.
But, Gavin wrote on the
forums, “I want the Bitcoin
project to succeed, and I think
it is more likely to be a
success if people can get a
handful of coins to try it out.
It can be frustrating to wait
until your node generates
some coins (and that will get
more
frustrating
in
the
future), and buying Bitcoins
is still a little bit clunky.”
Gavin, a trim forty-four-
year-old with the anodyne
looks of a suburban soccer
dad, had time for the project
because he, his two children,
and his wife—a geology
professor—had
recently
returned from his wife’s
sabbatical in Australia. Gavin
had quit his job as a
researcher at the University
of Massachusetts before they
had gone to Australia and he
was now trying to figure out
what to do next from his
home office, just off the
family mudroom.
When he first read about
Bitcoin, he had immediately
ferreted out Satoshi’s original
Bitcoin article, now known as
the Bitcoin white paper, as
well as the Bitcoin forum, all
of which he read in a few
hours. The concept appealed
to him, in part, for the same
political reasons that drew in
Martti. After growing up in a
liberal West Coast household,
Gavin had moved toward
libertarianism during his first
programming job, swayed by
a persistent coworker. These
politics gave him a natural
interest in a free-market
currency like Bitcoin.
But politics didn’t occupy
the center of Gavin’s life and,
unlike many libertarians, he
didn’t particularly think the
gold standard was a great
idea. For Gavin, one of the
primary attractions of this
technology
was
the
conceptual elegance of the
decentralized network and the
open source software, which
was updated and maintained
by all of its users instead of
one
author.
Gavin’s
programming career thus far
had
given
him
an
appreciation for decentralized
systems that had nothing to
do with any suspicion of the
government
or
corporate
America. For Gavin, the
power
of
decentralized
technology came from the
more workaday benefits of
software and networks that
didn’t rely on a single person
or company to keep them
running.
Decentralized
systems
like
the
Internet
and
Wikipedia could harness the
expertise of all their users,
unlike the AOL network or
Encyclopaedia
Britannica.
Decision making could take
longer,
but
the
ultimate
decisions would incorporate
more
information.
The
participants in decentralized
networks
also
had
an
incentive to help keep the
system up and running. If the
original author was away on
vacation or asleep when a
crisis hit, other users could
chip in. As it was frequently
put, systems were stronger
when there was no single
point
of
failure.
These
arguments were, to some
degree,
technological
analogues of the political
arguments that libertarians
made for taking power away
from central governments:
political power worked better
when it was in the hands of
lots of people rather than a
single political authority. But
the advocates for open source
software tended to put things
in less ideological terms.
Decentralized technology
was a rather natural fit for
Gavin, who had little in the
way of an ego. Despite going
to Princeton, he had been
happy serving as something
of a journeyman programmer,
working on 3-D graphics at
one
point,
and
Internet
telephony
software
at
another. For Gavin, the jobs
had always been about what
he found interesting, not what
promised the most money or
success.
To start participating in
the Bitcoin project, Gavin
quickly began e-mailing with
Satoshi to suggest his own
improvements to the code
and, in short order, became
the first person other than
Satoshi or Martti to officially
make a change to the Bitcoin
code.
More
valuable
than
Gavin’s programming chops
were
his
goodwill
and
integrity, both of which
Bitcoin desperately needed at
this point to win the trust of
new users, given that Satoshi
remained a shadowy figure.
Satoshi
had,
of
course,
designed his software to be
open source so that users
wouldn’t have to trust him.
But people were not showing
much willingness to entrust
real money to a network that
was run by a bunch of
anonymous malcontents.
Gavin attached a real and
trustworthy
face
to
the
technology. He was one of
the first people on the forum
to use his real identity, taking
the
screen
name
gavinandresen,
and
he
included, on the forum, a
small picture of himself in a
hiking backpack, giving a
slightly dorky but entirely
disarming smile. He served
on the forums as a sort of
good-natured
high
school
teacher, answering, in plain
terms, questions that came
up. He would also mediate in
the
political
fights
that
occasionally
broke
out
between those early users
with strident political beliefs.
Gavin was used to this sort of
thing.
In
Amherst,
Massachusetts, he served on
the
240-member
Town
Committee,
a
grassroots
deliberative body that he had
been elected to a number of
times. Amherst, a college
town, was famously liberal
and so Gavin had plenty of
disagreements over matters of
principle. But he had learned
to avoid fights and find
compromises—something
that was about to prove
critical
to
the
fledgling
Bitcoin community.
HEADPHONES ON AND an
oversize can of MadCroc
energy drink by his side,
Martti sat at his dorm room
desk, giddy. Slashdot, a go-to
news site for computer geeks
the world over, was going to
post an article about Martti’s
pet project. Bitcoin, largely
ignored over the last year,
was on the verge of receiving
global attention.
The campaign to get
Bitcoin real press coverage
had begun a few weeks
earlier, not long after Martti
finished
his
three-month
internship at Siemens. A new
version of Bitcoin, version
0.3, was being prepared for
release by Satoshi, and the
regulars on the forum saw a
perfect opportunity to get the
word out. Martti agreed with
a handful of other users that
Slashdot would be the best
place to do this.
“Slashdot
with
its
millions of tech-savvy readers
would be awesome, perhaps
the best imaginable!” Martti
wrote on the forum. “I just
hope the server can stand
getting ‘slashdotted.’”
A small crew went back
and forth about the right
language to submit to the
Slashdot editors. Satoshi got
his hackles up when someone
suggested Bitcoin be sold as
“outside the reach of any
government.”
“I am definitely not
making any such taunt or
assertion,” Satoshi wrote.
He quickly apologized for
being a wet blanket: “Writing
a description for this thing for
general audiences is bloody
hard. There’s nothing to
relate it to.”
After Martti suggested his
own
changes,
the
final
version
made
the
more
modest assertion that “the
community is hopeful the
currency will remain outside
the
reach
of
any
government.”
When the item went
online, shortly after midnight
in
Helsinki,
it
wasn’t
anything more than the single
paragraph the Bitcoin team
had submitted.
“How’s
this
for
a
disruptive technology?” it
began. “Bitcoin is a peer-to-
peer, network-based digital
currency with no central
bank, and no transaction
fees.”
Despite the modesty of
the item, the Internet chat
channel
that
Martti
had
established for the Bitcoin
community quickly lit up.
NewLibertyStandard wrote:
“FRONT PAGE!!!”
Regulars
like
Laszlo
made a point of being on the
Bitcoin chat channel, to
answer questions and serve as
a tour guide of sorts for any
newbies who checked in after
reading the story. In his dorm
room,
Martti
posted
a
message on Facebook: “If I
was a smoker, I would have
smoked two packs already.”
Martti watched as the
counters, which tracked the
number of users on the forum
and the chat channel, ticked
steadily upward. Messages
crowded his forum in-box;
and the Bitcoin website,
running on servers that could
not handle more than one
hundred viewers at a time,
began to slow. Within an
hour, the limit was reached
and the whole site went
down. Martti scrambled to
scale up the site’s capacity
with the company that rented
him space. But this, and the
derogatory comments that
showed up under the Slashdot
item, did not dampen his
enthusiasm. This was what
he’d been waiting for for
months.
CHAPTER 5
July 12, 2010
When he awoke late, the
morning after the Slashdot
posting, Martti Malmi saw
that the attention was not a
hit-and-run
phenomenon.
People weren’t just taking a
look at the site and moving
on.
They
were
also
downloading and running the
Bitcoin software. The number
of downloads would jump
from around three thousand
in June to over twenty
thousand in July. The day
after the Slashdot piece
appeared, Gavin Andresen’s
Bitcoin faucet gave away
5,000
Bitcoins
and
was
running empty. As he begged
for donations, he marveled at
the strength of the network:
Over the last two days
of Bitcoin being
“slashdotted” I
haven’t heard of ANY
problems with Bitcoin
transactions getting
lost, or of the network
crashing due to the
load, or any problem
at all with the core
functionality.
But while the Bitcoin
software itself was working
well, new users quickly ran
up against the limitations of
the Bitcoin ecosystem. Those
who immediately wanted to
acquire more Bitcoins than
were available from Gavin’s
faucet were left with only a
few meager options, one of
them a creaky, unreliable
service that Martti had set up
a few months earlier.
Jed McCaleb was one of
the people who encountered
this weakness. A native of
Arkansas, Jed had been raised
by his single mother, who
made a living as a journalist.
From a young age, Jed had
been something of a math and
science prodigy, and this
allowed him to make it to
Berkeley for college. Jed,
though, had trouble sticking
with things, and he soon
dropped out of Berkeley and
moved to New York. There
he and a partner set up what
became one of the main
successors to Napster. His
software, eDonkey, made it
possible for individuals to
trade large files like movies
and it proved so successful
that the Recording Industry
Association of America sued
Jed and his business partner.
They eventually paid $30
million to settle the case and
shut eDonkey down, but they
also earned a few million
along the way.
Despite being a soft-
spoken introvert, Jed had a
cool way about him that
helped him make friends and
girlfriends. When one of his
romantic flings ended up
pregnant, he and the woman,
MiSoon, decided somewhat
spontaneously to keep the
baby and make a go of it.
They used some of Jed’s
earnings to buy an estate with
a pool an hour or so north of
New York City, just as they
were expecting a second
baby.
In
the
sprawling,
mostly empty house, Jed
threw himself into an online
game he had created called
The Far Wilds, which had
attracted
only
a
few
aficionados. He spent endless
hours
in
a
first-floor
bedroom, which he had
turned into a den. Books
about
neuroscience
and
artificial intelligence piled up
around him—as did old food,
attracting bugs that MiSoon
initially tried to get rid of, but
later came to accept as one of
the side effects of Jed’s
brilliant mind.
When Jed came across the
Slashdot post about Bitcoin
he
was
immediately
intrigued. It seemed to fulfill
many of the ideals behind
Napster
and
eDonkey—
taking power from authorities
and giving it to individuals.
But when Jed tried to buy
some actual Bitcoins, he ran
into the limitations of the few
existing sites that sold them.
MiSoon was nursing their
newborn
son
when
she
wandered into Jed’s study
one night and encountered his
frustration.
“There’s this really cool
thing called Bitcoin—it’s like
this nerd, libertarian thing,”
Jed told MiSoon, in his
hushed, intense voice. “But
it’s so lame. I can’t buy any
at night.”
Jed said he wanted to
build a site himself where he
could buy coins at any hour.
When MiSoon arose the next
morning, it was done. With
some experience in amateur
foreign-currency trading, Jed
knew the basics of what an
exchange required. But he
had never actually set up a
website
before,
having
previously worked more on
the sophisticated back-end
software. His new Bitcoin
exchange was something of a
fun experiment.
He and MiSoon discussed
possible names for the site.
He mentioned an old domain
name that he owned and was
not using—mtgox.com. Jed
had bought the site in 2007,
for use as an online exchange
to buy and sell the cards used
in the role-playing game
Magic:
The
Gathering—
hence
the
acronym
for
Magic: The Gathering Online
Exchange. It had operated for
just a few months before Jed
shut it down and the site had
been vacant since.
“Yeah, you should use
that,”
MiSoon
replied.
“That’s kind of weird and
easy to remember. Why not if
you
already
have
it
registered?”
Seven days after the
Slashdot post, Jed casually
advertised his new site on the
Bitcoin forum:
Hi Everyone,
I just put up a new
Bitcoin exchange.
Please let me know
what you think.
Mt. Gox was a significant
departure from the exchanges
that already existed, primarily
because Jed offered to take
money from customers into
his
PayPal
account
and
thereby risk violating the
PayPal prohibition on buying
and selling currencies. This
meant that Jed could receive
funds from almost anywhere
in the world. What’s more,
customers didn’t have to send
Jed money each time they
wanted to do a trade. Instead,
they could hold money—both
dollars and Bitcoins—in Jed’s
account and then trade in
either direction at any time as
long as they had sufficient
funds,
much
as
in
a
traditional brokerage account.
These advances made it
significantly more convenient
to buy and sell Bitcoins, but
also brought new dangers that
threatened to betray some of
the
currency’s
basic
principles.
Satoshi
had
designed Bitcoin to eliminate
the need for trusted central
authorities. It was supposed
to be a new money that
people could hold on their
own, without a bank, secured
with a private key that only
the user knew. Mt. Gox
customers would be moving
back to the old model in
which a single institution—
Jed’s
company—held
everyone’s money. If Jed
offered
good
security
measures, this might prove
safer than holding coins on a
home computer. But Jed was
not a security expert, and if
he did somehow lose the
private
keys
to
the
exchange’s digital wallets, his
customers had little recourse.
Unlike
the
banks
that
Bitcoiners had bashed, Mt.
Gox had no deposit insurance
and no regulators overseeing
the safety and soundness of
Jed’s operation. The choice
was between security and
principles on one hand and
convenience on the other.
When a forum member
asked
why
they
should
choose Mt. Gox over the
alternatives, Jed responded in
his characteristically modest
but confident way.
“It is always online,
automated, the site is faster
and on dedicated hosting and
I think the interface is nicer.”
Even Jed, though, was
surprised at how quickly
people trusted his setup and
sent money to his PayPal
account. During his first day
in business, July 18, twenty
Bitcoins were traded at five
cents each on Mt. Gox—an
inauspicious opening. But
within the first week he had
his first hundred-dollar day of
trading, and by the end of the
month Mt. Gox had overtaken
Martti’s service and the other
existing exchange in trading
volume to become the largest
Bitcoin business around.
These weeks marked a
subtle but dramatic transition
for Bitcoin. Until this point,
there had been occasional
transactions,
but
mostly
between aficionados making
them out of a desire to help
the
network.
After
the
Slashdot story, the difficulty
of mining new Bitcoins
ramped up quickly with the
surge in the number of people
racing to win coins. Satoshi
had determined that as more
computers
joined
the
network, the mining of new
Bitcoins would become more
difficult, ensuring that it
would always be roughly ten
minutes between releases of
new coins. The week after the
Slashdot story, the difficulty
of mining new Bitcoins
jumped 300 percent. Gavin
Andresen, who had initially
started mining Bitcoins to
help the network, now found
it all but impossible to win
new coins with his four-year-
old Mac laptop.
Suddenly, if a person
wanted Bitcoins, he or she
had to buy them. And people
were showing a willingness
to do just that and part with
real
money
for
these
unproved slots on a digital
spreadsheet. The growing
popularity of Bitcoin was
hard to miss. One new forum
member wrote:
What I like about
Bitcoin is that it is a
community with a
solution that we are
actually trying. I don’t
know many people in
real life that are even
close to as radical in
their thinking as I
(and many others on
these forums) am.
Surprisingly,
however, I am able to
talk with my real life
friends about Bitcoin
much longer than my
normal rants about
“what should be,”
because Bitcoin
actually exists.
IN LATE JULY Martti launched
the
first
foreign-language
forum, in Russian, and within
a few weeks it had hundreds
of postings. The English
forum grew much faster. In
one month, the forum had
gained more new members—
370—than
it
had
since
coming online in November
2009.
Craving
more
conversation, the expanding
herd of dedicated Bitcoin
followers found their way to
the chat channel Martti had
set up. Now, the Bitcoin
channel on Internet relay
chat, or IRC, became a sort of
twenty-four-hour
global
coffeehouse where the new
users could gather and marvel
at this experiment they were
all taking part in.
Around
midnight
on
September 26, one new
Bitcoiner wrote: “gosh I can’t
sleep ! I keep thinking about
this great stuff. To me Bitcoin
is the ‘cyberspace gold.’ I’m
just amazed.”
The
next
afternoon
another new user spoke of
spending ten hours reading
everything he could find
about the network.
“I did the same thing
when I first heard about
Bitcoin,” Gavin wrote back.
The appeal of Bitcoin
varied from person to person,
but most were in love with
the basic idea of a digital cash
that each user could control
and move around the world
with nothing more than a
private key. The users, at this
point, were mostly young
men
whose
lives
were
untethered to anything other
than their laptops, in constant
communication with people
on the other side of the world.
For them, moving money
around the globe with a paper
check or an old-fashioned
wire transfer seemed absurdly
backward.
Satoshi chimed in on the
forums to note that the
Bitcoin
software
was
designed to do more than just
move coins. The software
also had the capability to
attach specific instructions to
each coin so that the coins
could behave in a particular
way, according to the users’
wishes. A coin on the
blockchain
could,
for
example, be programmed to
move from one address to
another only if it was signed
off on by three or four
different
private
keys,
enabling its use in the types
of legal transactions that
currently
required
cumbersome and expensive
middlemen.
“The design supports a
tremendous
variety
of
possible transaction types that
I designed years ago,” Satoshi
wrote. “Escrow transactions,
bonded contracts, third party
arbitration,
multiparty
signature, etc. If Bitcoin
catches on in a big way, these
are things we’ll want to
explore in the future, but they
all had to be designed at the
beginning to make sure they
would be possible later.”
Satoshi had advertised
Bitcoin as a trustless system
that didn’t require its users to
rely on any central authority.
But like all forms of money,
Bitcoin did rely on its users’
trusting
the
ideas
and
integrity
of
the
system
supporting it—in this case,
code and math—and the
small elite of cosmopolitan
coders was more than willing
to do that. These new
converts,
in
turn,
were
providing
not
just
enthusiasm, but also fresh
sets of eyes to examine the
code
with
a
level
of
programming experience that
had been scarce up to this
point.
In late July Gavin and
Satoshi got an e-mail from
one such user, a programmer
from Germany going by the
screen name ArtForz, who
had
found
a
previously
undiscovered weakness in the
code
that
governed
transactions on the network.
The flaw made it possible to
spend Bitcoins in someone
else’s wallet.
Gavin
and
Satoshi
immediately realized this was
not just a bug but a fatal flaw
that could doom the entire
project. If someone else could
spend your coins the whole
system was all but useless.
Satoshi
quickly
put
together a fix—the flaw was
not
actually
difficult
to
correct. But in the meantime,
Gavin and Satoshi agreed to
keep the flaw secret until they
got everyone on the network
using new, repaired code, for
fear that someone would take
advantage of it.
“For now, don’t call it the
‘1 RETURN’ bug to anyone
who doesn’t already know
about it,” Satoshi wrote to
Gavin.
Because
the
patched
software
“has
a
dozen
changes in it,” Satoshi wrote,
“it won’t necessarily be
obvious
what
the
worst
vulnerability was. That may
give people a head start to
upgrading if any attackers are
looking for the vulnerability
in the changes.”
That ArtForz had not
taken advantage of the bug
himself was a minor miracle.
But it was also what the
incentives in the Bitcoin
system were designed to
encourage. ArtForz had been
mining coins himself—using
the GPU technology that
Laszlo had first pioneered—
and
he
knew
that
if
confidence in the system was
undercut his coins would be
worthless.
The
market
incentives were working as
they were supposed to work.
This turn of events also
confirmed
Gavin’s
confidence in the power of
decentralized
systems.
ArtForz was a part of the
network, and as such, he
didn’t just passively use the
network. He and Gavin, and
all the others, were helping to
build this thing.
A FEW MONTHS earlier the big
concern plaguing the Bitcoin
forum was how to attract new
users, but now the problem
was how to deal with the
influx of new users, their
potentially
malicious
behavior, and their competing
interests.
These problems became
particularly pronounced after
Bitcoin’s next big jump into
the spotlight. In November,
WikiLeaks, the organization
founded
by
a
regular
participant
in
the
old
Cypherpunk
movement,
Julian Assange, released a
vast trove of confidential
American
diplomatic
documents
that
revealed
previously secret operations
around the world. The large
credit card companies and
PayPal
came
under
immediate political pressure
to cut off donations to
WikiLeaks, which they did in
early December, in what
became
known
as
the
WikiLeaks blockade.
This move pointed to the
potentially troubling nexus
between the financial industry
and
the
government.
If
politicians didn’t like the
ideas of a particular group,
government officials could
ask banks and credit card
networks
to
deny
the
unpopular group access to the
financial
system,
often
without requiring any judicial
approval.
The
financial
industry seemed to provide
politicians with an extralegal
way to crack down on
dissent.
The WikiLeaks blockade
went to the core of some of
the
concerns
that
had
motivated
the
original
Cypherpunks.
Bitcoin,
in
turn, seemed to have the
potential to counteract the
problem. Each person on the
network controlled his or her
coins with his or her private
key. There was no central
organization that could freeze
a person’s Bitcoin address or
stop coins from being sent
from a particular address.
A few days after the
WikiLeaks blockade began,
PCWorld wrote a widely
circulated story that noted the
obvious utility of Bitcoin in
the situation: “Nobody can
stop the Bitcoin system or
censor it, short of turning off
the
entire
Internet.
If
WikiLeaks
had
requested
Bitcoins then they would
have received their donations
without a second thought.”
It wasn’t clear if Bitcoin
could actually be used in this
particular
instance,
but
whatever
the
practical
possibilities, the blockade
was helping elevate the
debate around Bitcoin beyond
the rather narrow issues of
privacy
and
government
money-printing that had been
dominant in the early days.
Here
was
a
broader
philosophical issue that could
attract a wider audience, and
the forums were full of new
members who had been
drawn in by the attention.
One new user, a young man
in England named Amir
Taaki,
proposed
making
Bitcoin
donations
to
WikiLeaks. Amir argued this
could raise Bitcoin’s profile
at the same time that it could
help WikiLeaks raise money.
This kicked off a vigorous
debate on the forum. A
number
of
programmers
worried that the Bitcoin
network was not ready for all
the traffic—and government
scrutiny—that might come if
it started to be used for
controversial donations.
“It
is
extraordinarily
unwise to make Bitcoin such
a highly visible target, at such
an early stage in this project.
There could be a lot of
‘collateral damage’ in the
Bitcoin community while you
make your principled stand,”
one programmer wrote.
Satoshi eventually ended
the debate. When someone on
the forum wrote, “Bring it
on,”
Satoshi
responded
forcefully:
No, don’t “bring it
on.”
The project needs
to grow gradually so
the software can be
strengthened along the
way.
I make this appeal
to WikiLeaks not to
try to use Bitcoin.
Bitcoin is a small beta
community in its
infancy. You would
not stand to get more
than pocket change,
and the heat you
would bring would
likely destroy us at
this stage.
This
was
enough
to
convince Amir.
“I’ve done a U-turn on
my earlier view and agree.
Let’s protect and care for
Bitcoin until she leaves her
nursery onto the economic
killing fields.”
This was one of an ever-
diminishing
number
of
communications from Satoshi
during the fall of 2010.
Messages from both Satoshi
and
Martti
had
been
increasingly rare. In Martti’s
case, after a year of working
on Bitcoin free, he needed a
regular source of income. In
September, two months after
the Slashdot story, he took a
full-time job with a firm that
analyzed social-media data.
On top of having a full
schedule, Martti also saw that
he was no longer needed.
Gavin and a few others were
taking over many of the day-
to-day tasks that Martti had
previously handled. And the
chat channels were crawling
with people ready to help out.
Satoshi’s gradual fading
was less explicit. He still
posted occasionally to the
forums when there were
specific questions, but he
never appeared on the chat
channel
and
increasingly
shifted to infrequent private
communications with Gavin
and
just
a
few
other
developers. In December,
Satoshi asked Gavin if he
would mind having his e-mail
address posted on the Bitcoin
website, as a point of contact.
After his own name went up,
Gavin noticed that Satoshi’s
e-mail came down.
When the last public
forum
post
came
from
Satoshi, on December 12,
2010, there was nothing
marking
it
as
such.
Announcing the latest version
of the software, version
0.3.19, the post was markedly
different in tone from those
early messages, selling the
world-beating potential of
Bitcoin. The main sentiment
now was a warning that
Bitcoin was still extremely
susceptible
to
denial-of-
service
attacks,
which
overwhelm a system with
message traffic.
“There are still more
ways to attack than I can
count,” Satoshi wrote in the
brief note.
This came just days after
Hal Finney checked back in
for the first time since early
2009. His disease, ALS, had
progressed quickly and he
was now largely confined to
the family living room, in a
special setup his family had
concocted so that he could
continue
working
on
a
computer.
Hal made an unassuming
return to the community with
some relatively dry comments
about patterns in the price of
Bitcoin and the possibility of
using Bitcoin’s blockchain as
a new kind of database. He
was as enthusiastic as ever
about the network.
“I’d like to hear some
specific criticisms of the
code. To me it looks like an
impressive job, although I’d
wish for more comments,” he
wrote on the forum. “This is
some powerful machinery.”
This provoked Satoshi’s
second-to-last post: “That
means a lot coming from you,
Hal. Thanks.”
This exchange set off a
discussion among people who
had never heard Hal’s name
before.
“Who is Hal on the
forum?” one user wrote.
“Satoshi seemed to know of
him.”
The question quickly gave
way to the bigger mystery:
Who is Satoshi?
“Is he a real person? ;-)” a
forum user asked.
“Hmm, there are almost
no
results
for
Satoshi
unrelated to Bitcoin,” another
user wrote after some quick
research.
This set off the first stages
of a hunt for Satoshi that
would continue for years.
People on the chat channel
began debating the available
details about Satoshi and their
significance. It was noted that
Satoshi occasionally used
British spellings and words
like “bloody.” There was also
a fragment from a British
news story written into the
first block of Bitcoins created
by Satoshi’s computer.
A Bitcoin user in Japan
noted that Satoshi was a
common name in Japan, but
he argued that Satoshi was
unlikely to be Japanese given
that Satoshi had never used
Japanese words and had
always written his name with
the family name last, contrary
to Japanese tradition.
“Maybe this is a gambit to
trick us to think he’s not
Japanese,”
another
user
wrote.
“I like the pseudonym
theory the best. It’s so much
cooler for someone to have a
secret identity than just a
boring
name,”
someone
wrote.
“Jesus, this is a great
story. I’m amazed the NY
Times hasn’t picked up on it
yet,” another poster chimed
in.
In the early days, Martti
had never asked Satoshi any
personal questions but had
assumed
that
Satoshi
Nakamoto was probably not a
real name. Martti’s access to
the Bitcoin websites allowed
him to see that Satoshi was
joining the sites through a Tor
network that obscured his
geographic location and IP
address.
Gavin had asked Satoshi
some personal details in his
first e-mail, but Satoshi
ignored the questions and
Gavin never pressed for
more.
One regular forum user
asked Satoshi: “Suppose, god
forbid, you were no longer
able to program or were
unavailable due to unknown
circumstances. Do you have a
procedure in mind to continue
Bitcoin in your absence?”
Satoshi didn’t answer, but
others on the forum noted that
because Bitcoin’s software
was open source, available to
all
the
users,
Satoshi’s
involvement
shouldn’t
matter: “As long as the source
code remains open, that is
sufficient. If there is a need,
and enough interest, the
community
will
provide.
Trust in the community :)”
one developer wrote.
Satoshi was, in many
ways, just as powerless, or
powerful, as every other user
on the network. All the coins
were
on
the
communal
blockchain, but only the
person with the private key
corresponding to each address
on the blockchain could use
the coins in that address.
Satoshi could try to change
the software in some way that
would give him more control,
but doing so wouldn’t gain
traction unless a majority of
the network adopted the
changes.
Still, Gavin, who was
now perhaps the most central
figure in Bitcoin, knew that
the platonic ideal of open
source
software
was
somewhat more complicated
underneath the surface. While
anyone
could
propose
changes to the protocol, he
and
Satoshi
were
still
essentially the only people
who could sign off on
changes—and this gave them
an unusual amount of power
in the system. What’s more,
while Satoshi had written a
program
designed
to
eliminate the need for trust,
users of the technology still
had to have faith that it would
work as intended. On the
forum, Gavin wrote: “Trust is
Bitcoin’s biggest barrier to
success. I don’t think there is
anything we can do to speed
up the process of getting
people to trust that Bitcoin is
solid; it takes time to build
trust.”
At this point, though, the
primary cause for distrust was
not the lack of information
about
Satoshi.
Satoshi’s
anonymity,
if
anything,
seemed to increase the level
of faith in the system. The
anonymity
suggested
that
Bitcoin was not created by a
person seeking personal fame
or success. What’s more,
Satoshi’s absence allowed
people to project their own
vision onto Bitcoin.
Those who could cause
problems, though, were the
very
people
who
were
making Bitcoin grow. The
network was expanding, but
the people among its growing
ranks would also pose the
greatest threat to Bitcoin and
the trust it needed.
CHAPTER 6
September 2010
The Sony Vaio laptop that
was the nerve center of the
biggest
business
in
the
Bitcoin world in the fall of
2010—Mt. Gox—sat on a
square wooden table, under a
roof made out of dried palm
leaves. An oblong swimming
pool was just feet away.
The founder of Mt. Gox,
Jed McCaleb, had moved to
Nosara, a Costa Rican beach
town, less than two months
after starting the exchange.
Lonely in their isolated New
York estate, he and MiSoon
didn’t want to spend another
winter cooped up with their
two small children. In Nosara
they found a house near the
beach, with a Montessori
school for the children, an
opportunity for Jed to finally
perfect his surfing, and a hut
in the backyard where he
could work.
But the booming new
business was not cooperating
with their plans for a quiet
tropical life. Just ten days in,
he had seen his first day with
1,000 Bitcoins traded and
about ten days after that he
saw his first day with over
10,000
Bitcoins
traded,
meaning that over $1,000
changed hands that day. Jed
was making 0.5 percent from
each side of every trade, a
nice reward for something
that required little work. But
the flow of money in and out,
particularly from PayPal, was
causing headaches.
Jed suffered from an issue
common in any business that
takes credit cards or PayPal.
All the traditional payment
networks allow customers to
dispute charges and can take
money back from merchants,
like
Jed,
even
after
transactions go through. This
was one of the issues that
Cypherpunks had wanted to
address in creating digital
cash—owing to the anger
about how much power the
system
of
so-called
chargebacks gave to the
credit card companies of the
world. Bitcoin itself did not
allow charges to be reversed,
but if Jed sold Bitcoins via
PayPal to someone who then
disputed the PayPal payment,
Jed could lose the PayPal
money and not be able to get
the Bitcoins back. Within a
month, Jed acknowledged he
was defenseless against this.
“I’m
just
eating
the
charge which sucks so please,
please don’t do this,” he
pleaded on the forum.
After
this
post,
the
problem got worse, not better.
Jed tried to resolve disputes
before they escalated, even if
it meant losing money, so he
didn’t
have
his
PayPal
account shut down altogether.
But one morning he opened
up his laptop and found that
PayPal had done just that,
leaving him without an easy
way to get money from
customers.
Meanwhile,
people who had money stuck
in
Jed’s
frozen
PayPal
account complained about the
difficulty of getting it back.
“I do this in my spare
time for free so don’t get all
uppity,” Jed wrote to his
critics.
This was clearly not what
Jed signed up for when he
opened Mt. Gox. He had
never intended for it to
become a full-time job. He
was motivated by working on
interesting challenges, and
Mt.
Gox
was
instead
becoming a series of boring
and stressful problems. Like
many people interested in big
challenges and bold solutions,
Jed got bored by the details of
seeing those solutions to their
end—something that would
come back to haunt the
community later.
On the hunt for someone
who could help relieve him of
the burden of work on Mt.
Gox, Jed began chatting
online with a user named
MagicalTux, whom Jed soon
came to know as Mark
Karpeles. Mark was almost
always online because it was
one of the only places where
he felt comfortable in the
world. A chubby twenty-four-
year-old, Mark had been
raised in France alternately
by
his
mother
and
grandmother, who didn’t get
along and continually moved
him between schools. At age
ten, Mark was sent to a
Catholic boarding school in
the Champagne region of
France—a school he looked
back on with fear and
anxiety. Even as a youngster,
Mark
had
tremendous
difficulty
with
human
interaction, while the logic of
the computer had spoken to
him naturally. He would ace
his math classes—and could
assemble and disassemble his
calculators—but he struggled
with
literature
and
the
humanities, and eventually
dropped out of school, not
long before he was arrested
for some of his hacking
activities. Since then, he’d
had a peripatetic lifestyle,
looking for a place where he
could feel at home. He first
tried Israel, thinking it might
help him get closer to his
Catholicism, but he soon felt
as lonely as ever, and the
servers he was running kept
getting disrupted by rocket
fire from Gaza. Back in
France, he got a job as a
programmer but soon fell out
with his boss. During this
period, he would make rather
melancholy
posts
to
a
generally unread blog in
which
he
discussed
his
situation.
“To tell the truth, I always
felt a sort of emptiness in my
existence, somewhat as if I
wasn’t really in the right
place, or as if I was missing
something I needed in order
to really live, and not just
survive,” he wrote in 2006.
Mark finally got a chance
to visit Japan, which he had
been drawn to since reading a
series of Manga comics his
mother had given him. When
he arrived the first time and
checked into his capsule
hotel, the part of him that had
always been afraid in France
was put to rest by the
stoicism and politeness of
Japanese culture. It didn’t
hurt that the girls in Japan
seemed to actually respect the
fact
that
he
was
a
programmer.
By the time he met Jed
online, Mark had lived in
Tokyo for more than a year
and set up his own web-
hosting company that rented
out server space. He learned
about Bitcoin from a French
customer in Peru who wanted
an easier way to pay the bills
Mark sent him. As Mark
dived into Bitcoin in late
2010, he discovered that it
had already attracted an
unusually
cohesive
and
friendly online community,
the sort of social setting in
which
he
could
feel
comfortable.
He
would
engage in endless chats at all
hours about everything from
obscure Japanese payments
systems to the identity of
Satoshi, who Mark was
confident was not Japanese.
“I’m a coder and already
worked with tons of japanese
people here, and the way the
code
is
made
is
also
completely different from
anything I ever saw in japan
(but not so different from
more western stuff),” Mark
wrote one night on the chat
channel.
Online, Mark had a brash
cockiness
that
he
never
showed in real life—so brash,
in
fact,
that
it
was
occasionally off-putting. But
he lived alone with his cat,
Tibanne, and was always
available and willing to help
out. He volunteered to help
Martti Malmi host the Bitcoin
website on his servers. And
when
Martti
offered
to
connect
Jed
with
his
European bank, so Mt. Gox
could begin accepting euros,
Mark helped Jed set up the
back end. The work gave Jed
confidence
in
Mark’s
abilities.
As the price of Bitcoin
rose to nearly 30 cents per
coin by the end of December
2010—thanks, in no small
part, to the attention from
WikiLeaks—Jed
called
a
lawyer in New York to ask
about
the
regulatory
implications of running a
business like Mt. Gox. The
lawyer said it was unclear
how the government would
view Bitcoin. In the forums,
there were lengthy debates
about whether Bitcoin would
be considered money, which
would be subject to bank
regulators, or some sort of
commodity,
which
would
come
under
different
government
oversight.
Whatever the outcome, the
lawyer told Jed that he would
probably have to eventually
register
as
a
money-
transmission business, which
would
involve
extensive
applications and lots of legal
bills.
Jed turned to Mark for
advice, seeking his thoughts
on a four-page document Jed
had put together to send to
potential
investors.
The
document underscored how
far Mt. Gox had risen in its
short life. The business was
worth $2 million by Jed’s
estimate:
“Mt.
Gox
is
generating revenue with very
low running costs and huge
potential
upside,”
the
document said. Jed told Mark
he was thinking of raising
about $200,000, mostly to
hire a lawyer to help deal
with the regulatory situation.
But as the headaches
continued to pile up, Jed got
more antsy. In January, a Mt.
Gox
user
named
Baron
managed to hack into Mt.
Gox
accounts
and
steal
around $45,000 worth of
Bitcoins and another type of
digital currency that Jed had
been using to transfer money
around.
When
Baron
deposited $45,000 back into
Mt. Gox to buy more
Bitcoins, Jed froze Baron’s
money.
The
incident
reinforced Jed’s belief that
Mt. Gox was a prime target
for hackers and that he had
neither the time nor the
security expertise to protect it
adequately.
Jed
wrote
to
Mark:
“Please
keep
all
this
confidential. I don’t want to
start a panic, and I’m not sure
I’ll do it yet, but I’m thinking
I might try to sell Mt. Gox.”
When Mark picked up the
conversation on the Internet
relay chat (IRC), Jed asked if
Mark would be interested in
purchasing the site and made
him an offer that was hard to
refuse. Mark would not have
to pay anything up front. All
he would have to give up was
50 percent of the company’s
revenues for the first six
months. Jed would continue
to hold 12 percent of the
company, but Mark could
have the rest. Jed’s fraction of
the company was designed to
be small enough to protect
him from legal liability if Mt.
Gox ran into problems in the
future.
Jed
and
Mark
were
outwardly
very
different
people. Mark was a large,
awkward Frenchman, while
Jed was a slight, suave
American. But both of them
were loners who tended to
skeptically watch the world
from afar and live mostly in
their own heads. Each was
the only child of a single
mother who had given him
self-confidence while also
making him skeptical about
traditional
sources
of
authority—a mixture of traits
that made for a good match
with Bitcoin at this point.
As the deal between the
two men progressed, the
strange legal limbo in which
Bitcoin existed colored every
step. Neither Mark nor Jed
used a lawyer. Instead they
drew up contracts themselves
and sent them back and forth.
After they had both signed
these contracts, Mark wrote
up
a
less-than-official-
looking certificate that said
that Jed officially owned
forty shares of Mt. Gox,
though it did not say how
many total shares existed.
Jed didn’t labor over the
deal because, even with all
the growth Mt. Gox had
experienced, the business still
had fewer than three thousand
customers, and was on track
to bring in only around
$100,000 in revenue for the
year.
Mark took ownership of
Mt.
Gox
using
the
corporation that also held his
web-hosting
business,
Tibanne Ltd.—named after
his orange-and-white tabby
cat.
By the time Mark and Jed
finished their deal, the price
of Bitcoin had shot above $1,
attracting a new wave of
media
attention.
It
also
attracted another big hacking
attack. At this point, of the 21
million Bitcoins that would
ever be released, one-fourth
were now out in the world,
worth around $5 million at
the $1 exchange rate. What’s
more, the number of daily
transactions was creeping
steadily upward.
The cause of this surge
was due, in no small part, to
the rise of another business
that was to pose an even
graver test to the foundation
of trust that Bitcoin was
trying to build.
THE POSSIBILITIES FOR using
Bitcoin in the real world had
not progressed much since
NewLibertyStandard’s offer
of SpongeBob SquarePants
stickers. Mark Karpeles was
still taking Bitcoin for his
web-hosting services and a
farmer in Massachusetts was
selling alpaca socks. But the
range of products available
for Bitcoin expanded in a
dramatic way a few days
before the price of Bitcoin
shot from around 50 cents to
above $1 for the first time,
when an unassuming post on
the Bitcoin forum heralded
the next wave of Bitcoin
commerce.
“Has anyone seen Silk
Road yet? It’s kind of like an
anonymous amazon.com. I
don’t think they have heroin
on there, but they are selling
other stuff.”
The posting was made by
someone who went by the
screenname altoid. In real
life, he was Ross Ulbricht, a
6-foot-2 surfer-cum-scientist
who had been planning Silk
Road for months when he put
his innocent-sounding post on
the forum.
For Ross, a fun-loving,
well-educated
twenty-six-
year-old, the creation of Silk
Road had begun in earnest in
July 2010 when he had sold a
cheap house in Pennsylvania
that he’d acquired while he
was a graduate student there.
With the $30,000 from the
sale, Ross rented a cabin
about an hour from his home
in Austin, Texas. He also
purchased
petri
dishes,
humidifiers,
and
thermometers,
along
with
peat, verm, gypsum, and a
copy of The Construction and
Operation
of
Clandestine
Drug Laboratories, by Jack
B. Nimble.
The
psychedelic
mushroom lab he set up in the
cabin was not created with
the intent of enabling Ross to
become a petty drug dealer.
He had much grander visions
of his life than that. From the
time he sold the house in
Pennsylvania, he knew he
wanted to set up a new kind
of online market, where
people could buy all the
things that aren’t available on
ordinary online markets.
This
unusual
and
dangerous business concept
was the product of the
idiosyncratic
mixture
of
influences that had shaped
Ross’s mind. His parents had
been hippies of sorts, taking
him on vacations to Costa
Rica, where his father taught
him to surf. His curiosity
about and penchant for the
outdoors had later helped turn
him into a seeker, looking for
ways to free his mind and
achieve
oneness
through
Eastern
philosophy
and
designer drugs. Ross came
from Texas, and his search
for freedom led him to some
of the thinkers on the border
between libertarian thought
and anarchism—the same
philosophers
who
had
influenced
many
of
the
Cypherpunks—and he came
to believe that the ultimate
hurdle to personal freedom
was government. At Penn
State, he had the unique
distinction of being a member
of
both
the
campus
libertarians and the West
African drumming ensemble.
He
would
describe
his
ideological
awakening
in
spiritual terms.
“Everywhere I looked I
saw the State, and the
horrible withering effects it
had on the human spirit,”
Ross would say. “It was
horribly
depressing.
Like
waking from a restless dream
to find yourself in a cage with
no way out.”
In Austin, Ross did not
tell anyone about the new
marketplace he was working
on, but he did give some
indication of what he was
after on his LinkedIn page,
where he wrote, in broad
terms, that he was “creating
an economic simulation to
give
people
a
firsthand
experience of what it would
be like to live in a world
without the systemic use of
force.”
Initially, he called the
project Underground Brokers,
but soon enough he settled on
a more enticing name: Silk
Road.
The
mushrooms
growing in the cabin were
going to be just the first
product, so something would
be available for purchase
when the site opened—and he
soon had big black trash bags
full of them.
In building Silk Road, the
drugs were the easy part. The
harder part was finding a way
to sell the drugs online,
outside the watchful gaze of
the authorities. The first
necessary
tool
he’d
discovered
was
software,
known as Tor, which allowed
people
to
obscure
their
location and identity when
surfing the Web. It also
allowed for websites to be set
up behind a similar curtain of
anonymity. While Tor had
been created by United States
Naval Intelligence, to give
dissidents and spies a way to
communicate, it was based on
ideas that had been developed
by David Chaum and other
cryptographers.
Most
Tor
websites could be visited only
by people using a Tor web
browser. The web address
that Ross posted on the
Bitcoin forum for Silk Road
—
http://tydgccykixpbu6uz.onion
—gave it away as a Tor site.
The second important tool
that Ross had discovered was
Bitcoin. With Tor alone, a
customer wanting to buy
Ross’s
mushrooms
could
have
visited
Silk
Road
without being tracked. But
assuming the customer didn’t
want to pay by sending cash
through the mail, all the other
alternatives for making digital
payments were easily tracked
—as the Cypherpunks well
knew. Ross saw that Bitcoin
solved this problem. If a
buyer paid for drugs with
Bitcoin,
the
Bitcoin
blockchain
ledger
would
record coins moving, but the
Bitcoin addresses on either
end—a series of letters and
numbers—would not include
the names of the people
involved in the transaction.
Now the only identifying
information about the buyer
was the postal address where
he or she asked to receive the
drugs. And this was easy to
game
by
providing
anonymous post office boxes.
Within the Bitcoin world,
there had been a common
assumption
that
people
looking to buy illegal or
unsavory goods were likely to
be among the first to have an
incentive to use Bitcoin. In
one early conversation about
where Bitcoin might catch on,
Satoshi had argued for online
porn, where users “either
don’t want the spouse to see
it on the bill or don’t trust
giving their number to ‘porn
guys.’”
Ross had made his first
post about Silk Road in the
middle of a long-lasting
thread on the Bitcoin forum,
entitled “A Heroin Store,”
which had been discussing
the possibility of such a
marketplace.
Martti
had
chimed in a few months
earlier, helpfully trying to
think of ways to make it
work. For him, the sticking
point was how to get both
sides of the transaction to
trust each other enough to
part with their Bitcoins and
drugs.
The fact that Ross had
figured out how to put all the
pieces together was a minor
miracle. Ross had studied
physics
in
college
and
materials science in graduate
school at Penn State. But he
was
only
an
amateur
programmer and he had to
learn the nuances of Tor and
Bitcoin software as he went
along, stumbling at many
points. His ability to pull it
off was a testament to his
work ethic and business
acumen.
In
response
to
Martti’s concern, he created
an
escrow
service—
essentially himself—to hold
the Bitcoins of a customer
until the drugs arrived in
good
condition,
so
the
customer had some recourse
if the pills or powder didn’t
show up as expected. On the
programming
front,
Ross
managed to sweet-talk an old
college friend, who was a
more
experienced
ТЕЛЕГРАМКанал с обзорами, анонсами новинок и книжными подборками
Книжный Вестник
Бот для удобного поиска книг (если не нашлось на сайте)
Поиск книг
Свежие любовные романы в удобных форматах
Любовные романы
О психологии, саморазвитии и личностном росте
Саморазвитие
Детективы и триллеры, все новинки
Детективы
Фантастика и фэнтези, все новинки
Фантастика
Отборные классические книги
Классика
ВКОНТАКТЕБиблиотека с любовными романами, которая наверняка придётся по вкусу женской части аудитории
Любовные романы
Библиотека с фантастикой и фэнтези, а также смежных жанров
Фантастика
Самые популярные книги в формате фб2
Топ фб2
книги