Towards a Trust-Minimized World: An Interview with Cryptocurrency Pioneer Nick Szabo
“Fiat currency is an experiment” -Nick Szabo
It’s difficult to imagine a more influential and respected figure in the cryptocurrency community than Nick Szabo. One of the early pioneers in the field, Szabo is credited with inventing the smart contract and coming up with the basic idea of what a cryptocurrency should look like (which he called “Bit Gold”). Though Bit Gold never came to functional fruition, his proposal would eventually be adopted and improved upon by the pseudonymous Satoshi Nakamoto in the form of the Bitcoin we know and love today.
Indeed, several people in the cryptocurrency community have attempted to ‘out’ Szabo as the true identity Nakamoto himself, a charge which he has firmly and repeatedly denied. To his credit, the likely catalyst for the Szabo/Satoshi hypotheses is the sheer depth and breadth of knowledge he possesses on the subjects of cryptography and economics — something very few can truly rival.
But Szabo’s influence goes well beyond his technical and theoretical expertise. He’s also one of the more prominent voices in the cryptocurrency and broader cypherpunk movements with regard to their fundamental philosophical foundations. As the son of a Hungarian refugee who fought in the Hungarian Revolution of 1956, Szabo was raised with a healthy distrust of governments and centralized economies. His ideas on law and the abuses of state power, the importance and mechanics of security, and the history and nature of money and economic systems have been especially influential.
Perhaps his central conceptual focus, however, is the idea of trust-minimization, the notion that, as societies scale and expand and come into increasing contact with one another, we need mechanisms that minimize the need for trust in strangers, so that you can be confident in conducting business, for example, that you won’t be subject to abuse, or that if you are, you have access to legal redress. For Szabo, trust-minimization is the fundamental idea behind security in general — even putting locks on your doors, he explains, is a form of trust minimization.
Watch our interview with Szabo below, or scroll down for the TL;DR and full transcript:
For the too-busy crowd, here’s a quick rundown of the interview’s highlights and primary insights:
- He explains his lack of trust in fiat currency systems. For Szabo, fiat is merely another economic experiment, one that’s been going on for less than 50 years.
- He also explains how fiat is increasingly a permissioned system: more and more people are excluded from using US Dollars because they look suspicious, even though their activities may be perfectly normal and legal.
- He explains how his family history and his study of cryptography and the history of money came together into his idea for Bit Gold.
- He describes money as an important technology for human social evolution.
- He talks about the desire to replace as many government functions as possible with trust-minimized systems to prevent abuse of authority.
- He talks about how we are evolved to live in group sizes of 150 or less, and how we have a natural instinct to rebel against many trust-minimized functions that are necessary for societal scaling, such as lawyers and police, because they can also abuse their roles. He compares this, in the world of communications, to advertisers and salespeople, i.e. when figures in those roles violate our moral instincts, such as honesty. He worries that people could have a similar knee-jerk reaction to bitcoin and cryptocurrencies.
- He weighs in on some of the technical debates about Bitcoin forks, etc, and compares Bitcoin’s limited block size to the idea of limiting how many people can come into your restaurant at one time in order to prevent chaos.
- He says it may be a long time before some of the more utopian ideas of smart contracts start to pay off.
- He talks about the predictions he made and thoughts he had about the future of cryptocurrency when he first invented the idea of Bit Gold. He was prescient in including a layer 2 scaling solution in his design. He predicted mining hardware optimization from the basic physics of computing. But he says it was impossible to envision the level of buzz and hype that exploded in 2017.
Read the full transcript of our interview below:
What are your main concerns about fiat currency?
The fiat currency system is a system with a spotty history. The current, what you might call “experiment” with fiat is a bit less than 50 years old now; it started at the end of Bretton Woods in the 1970s.
There had been a whole bunch of previous experiments with fiat currency, most of which ended in disaster, like John Law’s system, the oldest version recorded in history being the Chinese experiments with fiat currency. In World War I, going off the gold standard there ended in hyperinflation in Germany and Austria and Hungary, and some other places.
So, it has a very spotty history; it often ends in hyperinflation. Currently we have a hyperinflation event going on in Venezuela, where it’s 6,000–6,500% a year and currently climbing, which means you get a paycheck and you’d better spend it really quickly because in a few days it’s going to be worth half of what it was when you got paid.
So, there are a great deal of risks and problems with the fiat currency system, another one being that it’s not trust minimized. You’re trusting basically a bunch of strangers with your life savings if you put it in that.
Can you talk a bit about the evolution from gold to fiat?
Gold is a very old and important part of human history. If you look at where gold and silver and copper were first used, they first appear in the archaeological record in the form of beads, the oldest copper and the oldest gold in particular. So, copper for example did not appear first as weapons, and it did not appear first as tools — it appears first in the form of beads. If you look at shell beads, those go back even further in the archaeological record — 100,000 years or more. So, something like primitive money, some common ancestor of primitive money and jewelry was very important in human evolution for a very long time, many millennia.
Coinage is more recent but still ancient, much more ancient, compared to fiat. Coinage appears in China and in Asia Minor, which is now Turkey, and soon spread to Greece in about 700 BCE, so that is about 2700 or more years old. And so during the vast majority of that era there was gold or silver used as the standard means of payment, sometimes IOUs and that, but much more commonly the metal itself. So in more recent times that evolved into IOUs and then they stopped making the payments on the IOUs very recently and it switched into a fiat system.
And how do you see the move from fiat to cryptocurrency? Do you think it’s really so revolutionary?
Yes, I believe so because fiat currency as I pointed out is an experiment that in the current instantiation, people consider it very authoritative. Legally speaking, to be an official money under US law, for example, to be able to write a check, it has to be in official government currency, which in our current historical era is a fiat currency. So you can’t write it in what was traditionally used as money, such as gold, and you can’t write a check in cryptocurrency either, because neither of those are official government currencies.
Can you tell us a bit about your path and how you originally came to be interested in this space?
My path goes a long way back, my father fought in the 1956 Hungarian revolution against the Soviet Union, and he along with many other people from communist societies that I’ve encountered have plenty of horror stories to tell about the oppression, the killing of people, the stealing of their property and so forth. So, if you had just been born and raised the the US, you might not have known as much about the potential for government to be abused.
So, to my mind if you can substitute — there’s many important functions government does — if you can substitute less violent and less abusable ways to perform those functions, that’s a big win.
Many consider your work with bit gold to be a direct predecessor to the development of Bitcoin. Can you talk a bit about that work and some of the novel aspects of bit gold?
There are several threads to that. First of all I studied computer science, I was a computer science major, so I had a good understanding of things like cryptography and Byzantine agreement and so forth, which are fairly recent in the historical terms I’ve just been talking about — innovations for doing computer security better in a more trust-minimized way.
So, that combined with my study of the origins and history of money led me to the idea of trust-minimization and that you’d want to apply computer science to create a better form, because money is a technology. It’s a technology that has many objective characteristics, many design functions that make it very improbably like other things. Some people like to say it’s an arbitrary, random social thing — it’s certainly not if you look at how primitive money worked, how gold worked, it has very specific characteristics that make it good money.
And so I wanted to take those and implement those in cyberspace. The answer at that time was something I guess most similar, in security terms, to what Stellar and Ripple are now, but combined with a Merkle tree to hold a transaction history. So that was bit gold, and Satoshi came along and improved a number of aspects of it, made it even more trust-minimized, and actually wrote software, so that brings the story to where we are today.
Why is trust minimization such an important thing?
Well, it is because it sort of condenses what you’re trying to do most broadly in security. If you don’t trust everyone who lives driving distance from your house, then you put locks on your door. That’s trust-minimization. So, instead of thinking of security in terms of specific things like locking your door, encrypting messages, and so forth, you can think of it broadly as trust-minimization.
So, when you’re designing a currency, for example, there are several sources of abuse: one is somebody can steal your money from you, the other is that the person issuing it can inflate it like has happened so frequently during the history of fiat currency. So we want to reduce all those potentials for abuse in any dimension. That’s the philosophy of trust-minimization.
Some people have a negative reaction to the term trust-minimization. Why do you think that is?
We’re kind of evolved — our moral instincts are evolved — for long-term relationships in small villages. [Robin] Dunbar and his associates did a study of monkey troops and you can correlate the ratio of certain parts of the brain to maximum group size. Humans have a significantly, not substantially, larger group size than other primates. Ours is about 150 if you take it back through this model into what it predicts as far as our group size is.
But we’ve come up with all sorts of social institutions to expand, for social scalability, our social reach and our economy to get the benefits of division of labor, for example. As Adam Smith pointed out, division of labor expands with the scope of the market.
So to expand that market, we have all sorts of institutions and professions, for example law and lawyers. Lawyers are a profession that helps trust-minimize our interactions with strangers, because if they abuse us, ultimately in many circumstances we can go to the law for redress. That helps people behave more properly. Police officers and security guards also support that, and soldiers ultimately if the abuse is coming from your neighboring state. Those are the things we use to trust-minimize but in many cases we don’t like those.
On another, I guess different protocol layer, we have communications between strangers. We have advertisers, marketers, salespeople, and business development, for example. And again we look at those with sometimes ethical — just like we do with lawyers — our moral instincts sometimes kind of rebel against that because they are enabling and helping the social scalability — being able to do business with more and more people, and more different kinds of people around the globe — but at the same time they’re exploiting that to some extent. They are violating our moral instincts as far as honesty and other things that we are evolved to react negatively to.
So what excites you the most about Bitcoin and cryptocurrency in general?
The idea of having a more trust-minimized payment system, and settlement system — really at its core it’s a global settlement system. From the ground up, you’re not trusting anybody to manage the money supply, you’re not trusting a group of strangers to manage the money supply, it’s fairly simply defined in the software. And it’s trust-minimized meaning it’s ultimately socially scalable to the ultimate global scale, so somebody in Albania can pay somebody in Zimbabwe money without asking permission of anybody else in New York city or any other financial center. So that really excites me that we have something that combines the trust-minimization properties of gold that made it really good in some ways with better security than gold, because if you do your key-management properly it’s harder to steal than a box full of gold, but with global digital settlement so that you can transfer wealth all around the world.
And on the other side of the coin, what are your main concerns?
That a lot of people react negatively to it just like they react negatively to lawyers and so forth.
It’s fulfilling and going to fulfill even more important social functions that previous monetary systems have not been able to fulfill very well.
One of the things Bitcoin does really well is that it’s permissionless. One of the negatives of the fiat system I haven’t mentioned yet is that it’s becoming more and more localized and compartmentalized and Balkanized. And the reason for that is kind of increasing attempts to use the monetary system — and this is basically made possible by the digital era in computers and computerizing, in the naïve way that’s been done, the fiat monetary system into these centralized controllable entities. They make it very tempting for other people to come in and try to control that, to try to stop things that look suspicious basically, but there are tons of innocent things that look suspicious.
So increasingly people are cut off from using dollars; there’s tons of people on this planet now that aren’t allowed to use digital dollars because they “look suspicious”. And the world of traditional finance is becoming increasingly compartmentalized.
So, more and more, cryptocurrency is the only trend away from that that is fully globalized and you don’t have to ask for permission of anybody. People can’t steal your money and block your access to the financial system under cryptocurrency.
How do you feel about the Bitcoin Cash fork?
Well there’s all sorts of strange politics behind that. There’s mining politics involving a technique now called ASIC boost. Now, even back in 1998, I wrote an article about how proof of work is typically subject to hardware optimizations, so people who can design the best hardware are going to win, that the normal CPU tends to be at a disadvantage. And that’s particularly true with the Hashcash algorithm that Bitcoin uses.
So it is the case that people are going to come up with these secret advantages and try to exploit them, which is fine as long as you expect that. But in this case, it also played into the politics because the developers and most of the community wanted some innovations to increase throughput without jeopardizing security — these were Segwit.
And on top of Segwit there’s a layer two called Lightning that’s really exciting that’s coming out this year. But unfortunately for the miners and the people manufacturing these mining chips, it prevented them from using this secret advantage. So that’s one of the elements of the politics behind the BCash fork.
And then the other element of the politics is kind of the popular naïve debate about the block size, like ‘oh this is some artificial barrier to scaling’. Actually it’s a very important security parameter, just like how you limit the number of people who can come into your restaurant in various ways. You know, you have to put limits on how fast people can use your business, otherwise you just get swamped and it’s chaos. That’s the function the block size serves and it’s a very important function.
Are you bullish on the use of smart contracts going forward?
Yes, I am. There’s some utopian things that go along with it that may take a long time or never come to fruition but in terms of well-defined contracts like financial contracts, it’s got great potential. And indeed the second layer thing that I mentioned, Lighting, uses smart contract techniques to allow faster, off-blockchain payments.
Did you expect cryptocurrency to become so big so quickly?
No, necessarily a lot of my conjecture was very abstract. Like, I wanted to make it computationally scalable so it had the potential to grow big, so for example that’s why I had a layer 2 in my design. Not nearly as good as the layer 2 they have now but I had one because I realized the limits of the computational scalability of your basic blockchain.
So there were some abstract things like that that I got right, and envisioning for example that hardware optimization would happen in mining because that follows from the computer science and the physics of how computers are designed.
But in terms of the social, what the big buzz would be, and all the marketing hype and stuff — that human stuff — is impossible to predict or envision I think.