History of Blockchain Part 3: Wei Dai (1998)
Wei Dai is a Chinese computer engineer and University of Washington alumnus who worked for the Cryptography Research Group at Microsoft in the late 1990’s and early 2000's.
Two different cryptocurrencies have been named after him, the “Dai” coin used by the Maker organization, and the “Wei”, which is the smallest unit of the Ether currency. While at Microsoft, he was involved in the study, design and implementation of cryptographic systems. Prior to that he was a programmer at TerraSciences in Massachusetts.
In 1998 he released an informal whitepaper titled “B-money, an anonymous, distributed electronic cash system”, on his personal website WeiDai.com
Just like under Cynthia Dwork’s system, B-money requires a complex mathematical equation to be solved in order to generate the value token implemented by the system. The value of one unit of B-money created is equal to the cost of the computing time required to solve the equation. For example if the equation takes 100 hours of computing time to solve, and it takes $6000 to purchase 100 hours of computing time on the open market, then the first person to find the solution is credited with $6000 worth of b-money.
However, just as most Native Americans were not producers of wampum (skilled artisans specialized in that occupation), only a minority of participants on the B-money network would produce their own B-money.
The users who owned the most efficient computers with access to the cheapest electricity would produce the B-money, and the other users would perform different kinds of work which they specialize in valued at $6000, and then exchange that labor for a unit of B-Money. For example some users could provide internet service to the B-money producers and receive B-money as payment.
Unlike Cynthia Dwork’s “Pricing via Processing” proof-of-work system, in which she suggested that the work calculation should serve some additional purpose (such simulating the formation of protein molecules) Wei Dai determined that the solution must have no practical or intellectual value.
If the calculation wholly served some additional purpose, then the computers would be incentivized to perform the calculation entirely for that purpose only, and the b-money would be generated as a free by-product. A limitless amount could be created at no cost, and the other users would not need to perform $6000 worth of other labor in order to get the B-money.
If the calculation only partially serves an additional purpose, then the natural value naturally inherent in the calculation necessarily causes an equal reduction of the value of the B-money produced. For example if $1000 worth of protein-folding simulation is performed while generating the B-money, then each token would be worth only $5000. In effect, only the value of resources which are otherwise wasted become stored as the value of the coin.
As noted in the first article in this series, the value of a product consists not of the actual resources used to make it, but of the minimum resources required by the most efficient competitor. Over time that amount converges to the average cost across all producers. In some countries it may cost $4000 to buy the electricity required to make a token, and in other countries it may cost $8000, but every token of B-money would be worth the average amount, $6000.
Interestingly, since it is more efficient for other service providers to exchange their own specialized service for B-money instead of making their own, that means that B-money could even be used to buy back the electricity that was used to produce it from electricity providers.
B-money was designed to be instantaneously transferable to other users anywhere in the world. It was also designed to be traded for other goods and services, such as electric power. That means countries which produce electricity cheaply could store that value in a B-money token and then send that token to countries where electricity is more expensive to produce, where the token could be converted back into electricity, in effect exporting their cheap electricity to the world.
However there was still one problem: Dai’s B-money still relied on a central authority to verify transactions and prevent fraud. He didn’t have the necessary marketing budget to pitch the idea to a large number of companies to gain wide acceptance, so his idea remained just a theory on paper. All previous attempts at patenting a proprietary technology and marketing it to enough companies had also failed. Companies only co-operate with each other for profit, and digital currencies had failed to make a strong business case.
It would not be until several years later that decentralized technologies gained popularity, with the advent of peer-to-peer file sharing. To read more about that, follow me on Medium and keep your eyes peeled for the next article in this series “History of Blockchain Part 4: Bram Cohen (2001)”.