Who Is Satoshi Nakamoto?
Last week, I wrote about how the Cypherpunks helped break the government’s monopoly on cryptography. (In case you missed it, click here).
It laid the philosophical and technological foundation for Bitcoin.
A free-market, non-state digital money had long been the Cypherpunks’ ultimate goal.
They—and others—made numerous attempts, but none of them worked.
These failures would not be in vain. They provided crucial lessons and building blocks that would lead to the birth of Bitcoin.
Here are some noteworthy examples:
In the early 1990s, Cypherpunk David Chaum tried to take public-key encryption and apply it to digital money with DigiCash. After struggling with adoption and regulatory problems, the company behind DigiCash went bankrupt.
E-gold was launched in 1996. It was an innovative attempt to create a gold-backed digital currency. However, the US government shut it down and indicted the business owners on money laundering charges and operating an unlicensed money transmitting business.
In 1997, Cypherpunk Adam Back created Hashcash, a proof-of-work system designed to combat email spam. The idea is to impose a computational cost on certain activities to deter malicious behavior. While Hashcash didn’t gain widespread traction, its core proof-of-work concept became a fundamental component of Bitcoin.
In 1998, Cypherpunk Nick Szabo proposed Bit Gold as a digital currency that relied on cryptographic proof instead of trust in a central authority. “Unforgeable costliness” is one of Bit Gold’s foundational principles. Provable costliness refers to the idea that a certain amount of computational work—or cost—must be verifiably expended to create a new unit of the digital asset. Bit Gold was never launched and remained a theoretical proposal.
Also, in 1998, Cypherpunk Wei Dai proposed B-Money, a digital money system. However, it remained theoretical and was not implemented.
A common theme in all of these attempts at creating a non-state digital money was that they all relied on some kind of central authority in one way or another. Those central authorities were existential points of failure.
Satoshi Nakamoto—Bitcoin’s anonymous Cypherpunk creator—recognized this problem when he wrote:
“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”
If non-state digital money were to succeed, it would need to solve the problem of relying on a central authority.
This is what is known as the Byzantine Generals Problem. It was a longstanding problem in computer science.
In short, it’s the problem of getting different people—who may be hostile to each other—to come to a consensus about something without a centralized trusted arbitrator of truth.
Here’s a helpful way to think of it.
Imagine you are in charge of a medieval army storming a walled city.
The attackers and defenders are equal in strength.
The attackers can only win if all the generals successfully coordinate their attack. If even one fails to coordinate, the entire attack will fail.
Complicating matters is that there might be some spies among your generals who deliberately pass on false information to sabotage the attack.
The problem is, how do you get them all to coordinate the attack successfully?
Before Bitcoin, obtaining consensus required a central authority.
Think of a traditional bank that you use.
The bank is needed to keep an internal ledger of accounts and balances, including your balance and transaction history.
It would be impossible to keep accurate records without a trusted centralized entity determining what is true for everyone in this situation.
Now imagine an innovation that removes the need for the centralized entity (the bank) to keep an accurate record of all the accounts, balances, and transactions.
It allows everyone to be their own sovereign bank without needing trusted third parties.
That’s Bitcoin.
By combining the concepts and lessons of DigiCash, E-gold, Hashcash, Bit Gold, and B-Money with public-key cryptography and adding his own ingenious input, Satoshi Nakamoto solved the Byzantine Generals Problem.
In doing so, Satoshi created the world’s first functional, decentralized, non-state digital money. It was a historic breakthrough, a revolutionary improvement in money and human freedom.
On October 31, 2008, Satoshi Nakamoto published the Bitcoin white paper on the Cypherpunk email list. He cited the work of Adam Back, Nick Szabo, Wei Dai, and others.
It instantly grabbed their attention. Satoshi had finally achieved their longstanding goal.
That’s why most original Bitcoin advocates and developers, like Hal Finney, were Cypherpunks.
Here’s the bottom line.
Despite what many believe, Bitcoin was not an obscure experiment with a lucky break or a random accident that fell out of the sky. It emerged from the Cypherpunk community and its like-minded predecessors.
Bitcoin was the culminating success decades in the making from some of the world’s most brilliant computer scientists, mathematicians, cryptographers, and freedom-oriented tech enthusiasts.
The graphic below illustrates this fascinating yet relatively unknown history (click to enlarge).
Satoshi Nakamoto
Satoshi disappeared in 2011.
As a result, he made Bitcoin leaderless and without a figurehead. It was essential to ensure that Bitcoin remained decentralized and could continue to grow without him.
While the true identity of Satoshi Nakamoto is uncertain to this day, we know he came from the Cypherpunks and that Bitcoin was the culmination of their efforts for many years.
We also know from his writings that Satoshi was passionate about and deeply understood monetary history.
Here is one of his most profound quotes on the problems he was trying to solve with Bitcoin:
“The root problem with conventional currency is all the trust that’s required to make it work.
The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.
We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Satoshi chose his birthday on an internet forum as April 5, 1975. Some have speculated there is a deeper meaning to this date.
April 5 is a significant date in US monetary history. It’s the anniversary of Executive Order 6102, which, in 1933, outlawed gold ownership for American citizens until its repeal was made effective in 1975.
When you put the two together, you get April 5, 1975.
It could be a coincidence, or Satoshi signaling his desire to ensure such flagrant monetary authoritarianism doesn’t happen again.
Further, when Satoshi launched Bitcoin in January 2009, he embedded a newspaper headline from that week in the first block on the Bitcoin blockchain: “Chancellor on brink of second bailout for banks.”
At the time, the world was in the middle of the largest financial crisis in generations. Governments were engaging in an orgy of currency debasement and cronyism with the bank bailouts.
Satoshi created Bitcoin as a solution to this rotten system, which is why he included that headline in the first block on Bitcoin’s blockchain.
It’s important to remember that Bitcoin is not merely a new way to make payments—like a competitor to PayPal or Venmo—or a new app for your phone. It’s something much more profound; It’s a superior alternative to central banks.
In short, Bitcoin has the potential to separate money from the state and give monetary sovereignty to the individual by rendering central banks obsolete—along with their confetti currencies.
That’s no small accomplishment.
It’s a historical development that profoundly alters the status quo between the rulers and the ruled.
The implications of Bitcoin could shatter existing paradigms and be as disruptive as the invention of gunpowder, the printing press, and the internet.
That’s why I have little doubt Bitcoin will continue to be one of the biggest financial trends of the decade.
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