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