’98 | Make It Rain (Bit) Gold!

Photo by Christopher Campbell

Hello there and welcome here to blockwhat?, nice that you made it here.

In today’s story we will get to know one of the hottest contenders for secretly being Satoshi Nakamoto (aka the inventor of Bitcoin), Nick Szabo, and his fascinating proposal for a decentralized digital currency system called Bit Gold. Which he came up with for the first time in 1998. Oh, and this guy also invented Smart Contracts. Pretty badass, don’t you think?

Today’s story is somewhat longer than the previous ones — the long read will be absolutely worth it though, I promise. Join me for a captivating story in five acts — lets get started!

This article is part six of our journey. If you’re new here and want to understand what’s going on, just click here.

  1. 3000 BC | Hiking Up Mount Blockchain
  2. ’82 | The Birth Of Digital Cash
  3. ’96 | Oncologist + Gold = Revolution?
  4. ’97 | Anybody interested in some hash(cash)?
  5. ’98 | Wei Dai — Who dat?
  6. ’98 | Make It Rain (Bit) Gold! (This article)
  7. ’03 | It’s Karma
  8. ’04 | Use me baby, one more time
  9. ’08 | Bit what? Bitcoin! — Hello world.
  10. ’13 | Ethereum — The World Computer

If you’re curious to explore more blockchain aspects, including the technology behind it, fascinating use cases and great resources to learn more about this mind boggling new paradigm, click right here.


Our story today revolves around this bright computer scientist and prolific cryptographer — Nick Szabo.

Source

The best way for you to understand the importance and magnitude of this man and his ideas regarding the advent of blockchain technology is the following quote by the legendary and mysterious Satoshi Nakamoto herself (or himself/themselves):

“Bitcoin is an implementation of Wei Dai’s b-money proposal […] on Cypherpunks […] in 1998 and Nick Szabo’s Bitgold proposal,” — Satoshi Nakamoto

We have covered the fascinating story of Wei Dai and gone in-depth into his b-money proposal in the last post, so if you’re interested in deepening your understanding about this interesting topic just click here.

Let’s explore why Nick Szabo and his idea about Bit Gold were so deeply influential in the invention and creation of Bitcoin. In order to properly go through with this, we will first have to take a look at the history of Szabo and the convictions that had a profound impact on him.


Act One — The Origins of Money

Source

To properly understand the importance that Szabo sees in money and the way we deal with it, it is indispensable to explore his fascinating essay The origins of money , in which he thoroughly explained the importance that money always had played in our human connections and the deepness to which it penetrated our societies all throughout history.

It’s a very interesting set of thoughts, that are backed up by famous anthropologist like David Graeber (I highly recommend you his awesome book Debt: The First 5,000 Years!). The fundamental premise is that a form of money as a mean of storing value and to facilitate exchange has always been around.

We humans have become the most fearsome predators ever seen on the world because of our extremely effective way of cooperating with each other. This ability was eventually channeled into the social institutions we know today such as trade, marriage and inheritance.

For humans, wealth transfers (one-way or mutual & voluntary or coerced) have played an important role from early on. For example, its fascinating to fathom, that humans are effectively the only animal know to inherit wealth from one generation to the other. These inheritances could be used as collateral (so big bad Bob doesn’t makes you one head shorter for not giving him what he wanted), payments for goods (that awesome new stone axe you always wanted) or food (mhm, delicious paleo food anyone?). You could also use it for paying the bride price for your marriage that is coming up.

All of these transactions (from A to B) have some transaction costs associated with them though. The mainstream economist believe that first we lived in a world where a system of trading goods purely against other goods existed (as Adam Smith famously described), this is also known as barter.

As proven by anthropologists, a world in which only a system of barter was used never really existed though. Rather, humans have always used some sort of collectibles (think pearls, bones, shells) in order to facilitate wealth transfers.

The fact that money, in one form or another, has always been ingrained in human societies, is very important to understand — it lays the foundation as to why he saw the imperative need to improve the way our money system works at the moment!

Since money is so inherently essential to our societies , a well designed money system needs to have three properties according to Szabo:

First, it had to be secure from accidental loss and theft.

Second, its value must be unforgeably costly, and therefore considered valuable.

And third, its value has to be accurately approximated by simple observations or measurements.

The one thing that always turned up all throughout history was gold. Good old gold.

Photo by Gian D. on Unsplash

There were a couple of problems with physical gold though, as Szabo also pointed out. Historically, gold lacked security. Big times.

Anybody remembers the Spanish looting the Atzects? But we don’t even have to look back that far, a quick look at the United States also shows some rather shady history. In 1933, Theodore Roosevelt signed an executive order, forcing Americans to surrender part of the gold that they had held.

For Szabo it was clear what was needed — a more secure, digital and trustless manner to transfer value.


Act Two — Third Parties

Photo by Andrew Gook

In a very interesting turn of events, it turned out that Nick Szabo had spent some time working alongside David Chaum at DigiCash. As you might remember from this article, DigiCash was the first company to successfully create a working digital currency system — even though they later failed spectacularly.

Szabo saw a major flaw in the way DigiCash and its digital currency eCash were operating. While being at the forefront of anonymous transactions, DigiCash still held a very centralized and ubiquitous position — as he was working there, he found it way too easy to play around with users accounts.

That position of DigiCash as a needed and fundamental part of the digital currency system demonstrated to him what was at the core of the flawed money system worldwide.

So called trusted third parties.

A third party is any entity, that is needed for performing a certain service and takes part of a process. For example if you want to pay for this fancy new unicorn bike with a credit card.

Photo by Boudewijn Huysmans

The money doesn’t go directly from your account to the stores account. It is routed through Visa’s network and sometimes even more intermediaries, who of course all want to make some money.

But don’t take my word for it, just read what Visa’s CEO Al Kelly said on CNBC on october 25th.

“We want to be in the middle, Jim, of every payment flow in the world regardless of how it happens or what the currency is behind it!”

Szabo wrote all his thoughts surrounding third parties into a paper that was eventually published in 2001, named “Trusted Third Parties Are Security Holes”.

For him first and foremost it was about commercial security. What that basically entails is a matter of solving the practical problems of business relationships such as privacy, integrity, protecting property, or detecting a breach of contract.

What companies like Visa do is connecting untrusting strangers into a common trust network.

But these organizations have problems, flaws and weaknesses. Let’s take credit card companies as an example: they routinely have problems with fraud, identity theft and especially in the last couple of years also digital security.

Now a very interesting aspect of the aforementioned transaction costs comes into play — trust. Trust is fundamentally a subjective judgement and requires a mental effort, since we need to spend time thinking if we trust a certain company or institution to do what they are expected to do without any problems.

Money itself couldn’t exist the way it does today without third parties that we need to trust — banks. But with this trust come a lot of flaws and problems along.

Nick Szabo thought that he had found a solution though.


Act Three — Bit Gold

Photo by chuttersnap

Nick Szabo wanted to fix the inherent problem he saw in the monetary system by getting rid of all the third parties.

So in 1998, he sent out his first proposal for a concept called Bit Gold to a small group of fellow cypherpunks that included Wei Dai and Hal Finney (we will hear more about him in a future article). Throughout the years he kept working on his idea and eventually he published a fully fledged in-depth description of his idea in 2005.

With the unique characteristics of gold in his mind, Szabo wanted to create something that was both scarce and digital, without this scarcity depending on any third party trust. In short, he wanted to create digital gold.

Bit gold was an attempt to replicate the economic properties of gold (gold’s unforgeable value) while improving its security properties.

In order to make is digital money scheme work, he used a combination of different concepts and ideas. At the core was Adam Back’s proof of work that was powering Back’s proposed hashcash (you can read that fascinating story here), a process which brought a real world resource into the whole game — energy (for which you have to pay if you want to use it).

At the core of this process is something called hashing — I won’t go into too much detail here, but if you’re interested in learning more about this, just read the article mentioned above about Adam Back and his idea hashcash.

For now you simply need to understand that it takes a lot of guessing for your computer to find a desired value (or actually in this case, a value that falls underneath a certain threshold). Basically its your computer using a trial and error strategy to find a number that works for a specific “task” or “puzzle”.

Let’s imagine that you want to take part in this fancy new currency system called Bit Gold.

Before you can claim a fancy new piece of digital gold for yourself, you first need to put some work into find it (just like in the real world). Your computer does this by solving a computational problem. By doing that, he consumes electricity. That you eventually need to pay for. This proves that you put it in some work though!

Once you’ve found a valid solution (a valid hash), this solutions goes to another computer (every time a different one) who then timestamps it — literally. You’ll shortly see why that’s important.

After the solution that you’ve found (basically simply a string of numbers) has been timestamped it gets recorded in a so called distributed property title registry. Fancy term for a ledger that keeps track of who owns what — the important part here is that it is distributed, which means that you don’t rely on one trusted third party! The hash you found is now undergoing a soothing public key encryption treatment (remember how that works?)

Once this is all done, a new race for finding more Bit Gold starts — this new puzzle is using the string that you’ve found earlier as a starting point.

As other people start to find solutions to the mathematical puzzles that are regularly put out, this chain of proof of work hashes (the string of numbers that you’ve found) is growing. Anybody who finds the respective hash owns it — just like with gold in the real world.


So much about the process that’s going on underneath the hood of Bit Gold. Szabo realized that there was a problem though. Since the computers were getting faster and more powerful each year, the puzzle would eventually be easier and easier to solve.

Imagine going from this:

Photo by Markus Spiske

To that :

Photo by Jonny Caspari

He proposed a solution for this by using the timestemps mentioned above. Under this solution older hashes would become more valuable as time went on, because the system new that the newer hasher were easier to create.

In order to provide a way to make all these different hashes usable Szabo proposed to establish a sort of institution named Bit Gold Bank. This bank would bundle certain hashes and thus create a comparability between hashes found at different times.

If you’ve been an avid reader of this blog, this whole story surely brings back thoughts about eGold. If not, feel free to real all about Douglas Jackson, the guy who started the first commercially successful digital currency backed by gold in 1996!


Act Four — Smart Contracts

Photo by freestocks.org

As if successfully proposing a revolutionary new digital currency system hasn’t been enough, Nick Szabo is also the father of smart contracts.

Contracts have always been at the heart of our economy. As a foundation of society, contracts have evolved and developed throughout history — yet, Szabo acknowledged that we needed a new type of contract for the digital age.

He envisioned a new form of contracts, so called Smart Contracts . While traditional contracts are inactive and rather reactive, his newly envisioned contracts would be way more agile.

One of his favorite comparisons was a vending machine.

Photo by Daniel Tseng

The “smart” contract of a vending machine is as follows: Taking in account the potential loss of value (for example if someone destroys the vending machine), the machine takes in coins and dispenses change & product fairly.

His proposed digital smart contracts go far beyond that though. For Szabo, they would eventually come to fulfill four basic principles of contracts:

Observability, aka the prove of performance — this is what is commonly known as accounting.

Verifiability, which can be compared to auditing.

Privity — basically “it’s none of your business”.

And last but not least, enforceability, the system that makes sure that the contractual agreements are executed as discussed.c

In order to grasp the sheer potential that Szabo placed into his idea of smart contracts, it is best to just read this quote by him from the late 90s.

“In general, digital security protocols, especially advanced cryptography, allow radically enhanced or utterly new kinds of security that were impossible and unthinkable, and indeed seem quite magical, from the perspective of traditional law and paper security.”

Act Five — Satoshi Nakamoto?

Photo by KE ATLAS

This last part of the story is somewhat more speculative.

Is Nick Szabo actually Satoshi Nakamoto?

There are a lot of coincidences and clues that they might be one and the same person.

For example, in 2008, Szabo wanted to implement his proposal and was looking for programming help. While his proposal Bit Gold was never realized, one week later the whitepaper for Bitcoin was released.

Szabo later changed date of his request to actual code something for Bit Gold and made the article appear as though it was written after Bitcoin’s release.

There are also many similarities in the phrasing of words and sentences, as researchers have found out.

To be honest, there were few other people who had the skills in history, economics, cryptography and computer science to create something as complex as Bitcoin.

Just read what Szabo himself had to say about the people pursuing the dream of creating a decentralized digital currency:

“Myself, Wei Dai and Hal Finney were the only people I know of who liked the idea (or in Dai’s case his related idea) enough to pursue it to any significant extent until Nakamoto (assuming Nakamoto is not really Finney or Dai).”

Yet, everytime asked, he vehemently denies being Satoshi:

“As I’ve stated many times before, all this speculation is flattering, but wrong — I am not Satoshi,”

If you’ve reached this point in the post, I am proud of you and very grateful for all the attention that you’ve given to indulge yourself in this fascinating piece of recent history. Thank you!

I thoroughly hope that you’ve enjoyed this story and that you walk away with a more nuanced understanding about this major milestone in the history of digital (crypto)currencies!

As always, please let me know if you have any questions, feedback or clarifications — I’d love to hear them(:

Yours truly

Till

PS: if you’re looking for helpful and great resources to learn more about blockchain’s paradigm shifting technological potential, check out these awesome resources.