I thought I understood BitCoin, until now

I don’t do book reviews, but I am happy to make an exception for this one. It all started when I was contacted by the Aaron van Wirdum, the author: he wanted to do some fact checking for “a new book about BitCoin and digital money”.

It resulted in an interesting phone call. He wanted to know a few things about David Chaum and his company DigiCash. Since I did my Ph. D. under his supervision (from ’88 to ’92), and I also worked for DigiCash for a short while after that, I could help him of course.

A few months later Aaron sent me the final result:

Front cover of Aaron's book

Well, if I get a free book, I can just as well read it, right? The Dutch are famous for being cheapskates and I didn’t want to disappoint.

Of course, I wanted to know if I occurred in the story myself. There’s a reference to “a group of students from TU/e” on page 105, and yes, I was one of these. Also, there are many, many events described in the book that I can personally remember just because I happened to be at the right place at the right time.

This brings me to the first thing I noticed: this book is incredibly well researched. The story is very detailed, and all the details are correct as far as I can check; I’ll assume this is true for the rest of the story as well.

What the book is about

When BitCoin was new in 2011, I heard about it in the Security now podcast and I was amazed about the clever combination of cryptographic ideas that worked together like clockwork to create something as close to digital currency as technically possible. I immediately started doing research, making sure I understood the underlying cryptography and the way security and privacy was implemented (because that’s what I do). I even wrote a program to analyze the block chain, and had a lot of fun browsing through the payments, literally following the money. (Unfortunately, that program is no longer useful since it assumes the blockchain fits in your computer memory.) I gave a presentation about a few places, including the DNB (Dutch National Bank). During that meeting I got questions from the audience that taught me there was a lot more to learn about BitCoin, like:

• What do you think the effect on the economy will be?
• Why would someone want to own BitCoins?
• How much of a threat is this to the current banks and currencies?
• How is privacy guaranteed?

I couldn’t answer these questions at the time, but the answers are all in the book. The short answer to the questions is: it’s complicated.

Aaron van Wirdum goes much deeper than just the cryptography that makes BitCoin work. He tells the story of the ideas behind a digital currency, the viewpoints of several groups of people on what digital currency means, and many kinds of digital money that came before it (each with their own limitations).

The story of the book starts all the way back with the ideas on economy and politics of Friedrich Hayek. BitCoin doesn’t only rely on cryptographic methods that needed to be developed, but also on ideas on economics. For example, the fact that there is a finite amount of BitCoin is very important for its popularity (since it prevents inflation), something that is not the case for many other digital currencies (and certainly not for physical ones).

My Ph D period

I also started to realize that during my stay at CWI with David Chaum (as a student fresh out of college), I was lucky enough to be in the middle of a revolution in cryptography. While doing my Ph.D., I had many discussions with him on different versions electronic cash. I met many people that are mentioned in the book that way.

I remember discussions about one important privacy decision he made: make privacy unconditional for the buyer, but not the seller. Many privacy advocates prefer privacy for both parties. David didn’t want that, which made his money easier to accept for banks, allowing things like prevention of money laundering, taxation and persecution of fraudsters a possibility. Aaron’s book gives many details on this discussion and on the viewpoints of both sides. Looking at the current proposals for CBDC (central bank digital currency), I notice the discussion is still not over today; I wonder how this will end.

I did indeed work for DigiCash, but only for a short period: my wife noticed that the company’s ethos (work until 10 PM and eat pizza at your desk) was not for me, and she was right.

(O yes, I was also there at the CWI when the first transatlantic Internet connection was established, and again I did not realize what that meant until about a decade later. And I was taught about quantum key exchange by Gilles Brassard, decades before it was popular.)

That period did teach me a lot about the need for privacy in payments, as you can see from the front page of my thesis:

Front cover of my Ph. D. (artwork by Tobias Baanders)

Comments on the book

To show to you readers that I actually read the book, here are a few side comments (Aaron, don’t worry, these are all minor):

• The restrictions on hash bits used by “hashcash” are just a variant of the “puzzles” that Ralph Merkle envisioned decades earlier; this is not noted in the book.
• The book contains the observations by Nick Szabo that “trusted third parties (such as CAs), are security holes even if completely honest”. To my surprise, there’s no mention of the best example of this in the literature, that even happened in the Netherlands: the Diginotar disaster.
• The Byzantine generals problem is explained in detail in the book, but not the fact (from cryptography theory) that it is fundamentally unsolvable in a finite amount of time. This would be useful for readers in order to understand better how different cryptocurrencies handle this. (BitCoin handles this by gradually settling a g transaction).
• There is a tiny cryptographic detail of the working of the Diffie-Hellman protocol that is not exactly correct. This will not disturb anyone, except for cryptographers (that have no need for this explanation anyway).
• My Ph. D. dissertation, that I wrote under David Chaum’s supervision, is not in the references 😛.
• The current situation, where there are only a few giant mining pools that in a way act as mint, and a few trading sites that act as banks, is not mentioned. This has resulted in limiting privacy (because the network that exchanges transactions is small), and also in less democracy (because the mining network operators determine the code base).
• The indicator waste of electricity as a result of the “proof of work” is barely mentioned. To my frustration, I just read that the newest transistor technology, the GAAFET, is mainly used by BitCoin miners.

Final thought

I am impressed. I learned a lot reading this book, and it is humbling to see how much I didn’t know even though I thought I understood BitCoin. The journey through economy, monetary politics, cypherpunks, and state security is a wild ride. Because everything happened almost simultaneously, the author chose a movie-like style, switching locations wherever the story needs it. This allows the reader to see how all the different aspects of digital money came together.

It keeps going through my mind that with all the mentioning of names of people that are motivated and/or capable of designing BitCoin, the real name of the elusive Santoshi Nakamoto is quite likely to be in this book. Wouldn’t that be exciting?

Interestingly, the book ends at the moment BitCoin saw the light. After all, every form of current “crypto” money can be considered a descendent of it.

But that was already fifteen years ago, and a lot of exciting things have happened since. I wonder what Aaron had to say about this. I am waiting for volume II.