What’s wrong with our money?
Angelo Morgan-Somers explains Bitcoin and what makes it so significant
The world in the 2000s was unstable. The supply of US dollars was increasing. Mortgage-backed securities became the backbone of the economy, and, well … 2008 showed us how that went.
By early 2009, headlines from newspapers such as The Times’s from 3 January, ‘Chancellor on brink of second bailout for banks’, were a broken record. Later that day, an anonymous programmer added that headline to the first ever entry of the Bitcoin ledger: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’. At the time of writing, 709,270 entries have been added since that date, one every 10 minutes.
So how does this whole blockchain thing work, and what the hell is Bitcoin?
Evolution starts with a cell
Computers and information technology began with the abacus over 3,000 years ago. It was a great advance but still required the user to do most of the legwork. It wasn’t until humans learned to manipulate electrical currents that things became interesting. Similarly, the first form of record-keeping technology emerged when a stone met the wall of a cave. Eventually, we ran out of writing space in the caves and mashed some plants and bark into super-thin slices to write on instead. Today we call this paper.
Still, the human population grew, and paper became increasingly problematic. So, the descendants of the abacus and the rock had a happy marriage to create the computerised database. Great, now we can record an infinite amount of data and ‘do maths to it’ too. Then came the new kid on the block, the computer network, who was very attractive and often went by the stage name ‘Internet’. Internet married the computerised database (with the help of a little couples therapy from cryptography) to create Bitcoin. That’s what Bitcoin is. Thank you for reading, *roll credits*. Okay, the liberties I took in artistic licence may have cost me some accuracy there, so let me redeem myself.
Genesis
The accolade of Bitcoin’s invention is handed to the mysteriously aliased Satoshi Nakamoto, but this is useless because we have no idea who they are, or even if they are only one person. Although Bitcoin’s genesis block was only created in 2009, and Satoshi only began appearing on chatrooms and internet forums a year prior, the idea of Bitcoin had already been long in the making.
Computers were becoming very popular during the 1980s, and some forward-thinking people were already predicting the potential threats to come in the following years, specifically concerning privacy.
In 1992, worried that the internet could become a battleground for freedom and privacy, American mathematician and computer programmer, Eric Hughes released A Cypherpunk Manifesto and founded the Cypherpunk email list, kickstarting the Cypherpunk movement.
The Cypherpunks were a niche group of computer geeks who believed that the internet would someday pose a threat to privacy and freedom. They were already contemplating the notion of a borderless digital cash system decades before you made your first email account, so I think it’s safe to say that they were ahead of their time. However, they didn’t just contemplate; they built. Yet there were many problems to overcome before they could invent a truly digital currency, the most prolific being the double-spend problem.
You can’t have your money and spend it too
Bitcoin was not the first attempt at digital money. There were multiple attempts prior, nearly 20 years before the words ‘bit’ and ‘coin’ ever found a happy home. All such attempts were stifled by one major roadblock: the double-spend problem.
This is one of the core issues that prevented ‘money’ and ‘digital’ from inhabiting the same sentence before the 1980s. It goes something like this: physical money is good because if I give you my coin, the transaction is recorded, and the act of transacting prohibits me from spending that coin again unless I were to steal it back from you. This is what I mean when I refer to money as record-keeping technology; a transaction is recorded and finalised by its very occurrence.
However, this is a slight issue when you are designing a digital cash system. ‘Digit-al’ is precisely that: digits of information on a storage drive. Therefore, without having a central authority to decide what the truth is, nothing stops you from simply copy-pasting those digits and spending the duplicates, enabling you to have your money and spend it too. This would be a disastrous monetary network.
You can see how this was a seemingly insurmountable problem … until our friend Satoshi Nakamoto decided to emerge from the shadows.
Bitcoin’s parents
David Chaum was perhaps the first to make a serious attempt at creating digital money. In 1982, already a pioneer in the field of anonymous digital communications, Chaum released the whitepaper for an algorithm he called ‘eCash’. This was the first serious attempt at creating truly digital money.
In summary, it worked by using serial numbers assigned to each token. This signature would then be verified by a ‘bank’ to check whether a user had already spent the token. However, the role of the bank added a centralisation problem, and Chaum’s company, DigiCash, filed for bankruptcy in 1998 after the rise of PayPal and less privacy-centric digital payments solutions.
Many other attempts occurred during this time, most notably the invention of e-gold, which amassed transfer volumes exceeding two billion dollars yearly. E-gold’s solution was similarly centralised: gold backed the e-gold token’s value. It’s worth noting that somebody was responsible for the safety of all that gold. Before Bitcoin, the failings of digital money solutions can be summarised as a vulnerability to something called a Sybil attack.
Sybil cynicism
Digital money advocates, and pioneers of the pre-Bitcoin era, set their sights on solving the double-spend and distributed-consensus problem, only to be met with another, equally menacing problem: the Sybil attack. To solve the double-spend problem, you need a network capable of reaching consensus, and the most intuitive form of distributed consensus is a democracy. If it works for elections, a majority vote should also work for digital cash transactions, right?
Well, yes … and no.
The issue here is that (unlike state-run elections) anonymous networks don’t know the identities of their users. Without identification, there is no telling whether any cluster of accounts on the network are owned by multiple people or just one individual. Giving each account an equal share of voting rights could mean giving one person majority voting power over the network if they create enough accounts.
Progress wasn’t easy; with every problem that was solved there were ten new issues, and digital money was seemingly impossible to ‘invent’. Until along came an anonymous person who solved the anonymity problem. In fact, he didn’t just solve the anonymity problem … he solved all the problems.
‘I appreciate your questions. I actually did this
kind of backwards. I had to write all the code
before I could convince myself that I could solve
every problem, then I wrote the paper.’
— Satoshi Nakamoto, November 2008
Then there was the blockchain.
So, what exactly was so revolutionary about Bitcoin? It introduced blockchain: a method for reaching decentralised consensus on a distributed ledger that’s transparent, open-source, immutable and immune to the double-spend problem, all while being entirely operated and governed by its anonymous users. How blockchain manages all this will blow your socks off. But you’ll need to read the rest of the book for that.
Book excerpt from Do Bitcoin: The future of money. And what you need to know. Text copyright © 2022 Angelo Morgan-Somers. Published by Do Books, 6th October 2022. Order from your local retailer or: Do Books (includes ebook) | Bookshop.org | Amazon.co.uk
To find out more about Do Books, visit our website or sign up to our newsletter.
