Today’s newsletter is a little longer than usual but it is addressing what is probably the most profound change in society in hundreds of years. No matter where you are in the world, be sure to listen to my radio show tonite for Gary Miller, legendary producer whose credits include George Michael, David Bowie, Donna Summer, Kylie Minogue , Cliff Richard , Katy Perry , Lionel Richie , Simply Red and now spearheads “Rock Against Trafficking”.
Throughout history, humans have encrypted messages to hide them from unwanted readers; Julius Caesar used a simple form of letter substitution to communicate with his generals nearly 2000 years ago.
Today, thanks to the rise in digital communications, cryptography is everywhere, not least in banking systems, protecting the billions of electronic transactions that flow around the planet every day. Fiat money is a belief system backed by nothing more than state infrastructure which assured centralized power.
Money has been tending towards the virtual for some time, from the first ATMs and cards in the 1960’s, to the spread of digital networks and connections between retailers and banks in the 1980’s.
For those concerned with privacy it was a worrying development. Digital money, significantly, has none of the advantages of cash; it can’t be stored and exchanged outside of the system of banks and third parties, such as credit card companies, which can regulate and impede its flow. To a cryptographer who wants to separate themselves from overbearing powers, this is enslavement. So, what would digital cash actually look like?
The first quality of digital cash is that it needs to be totally private, so no one other than the spender and receiver should have any knowledge of the transaction. Because no physical assets, such as notes or coins, are being exchanged, it should also be secure. The receiver should be able to verify they were paid and the spender that they have paid – a two-way receipt. This gives digital cash all the privacy of physical cash, with the added benefit of the participants being able to prove that a transaction has actually taken place.
Tim May, a former chief scientist at Intel, wrote in 1988, “The State will of course try to slow or halt the spread of this technology, citing national security concerns, use of the technology by drug dealers and tax evaders and fears of societal disintegration… But this will not halt the spread of cryptologic methods which will fundamentally alter the nature of corporations and of government interference in economic transactions.”
One hurdle was that physical cash can only be spent once. Virtual currencies face the problem that while encryption can guarantee that this specific piece of data is a form of money belonging to this specific person, it can’t say whether that data has been copied or is in circulation elsewhere. A central register to check each transaction was essential.
The solution appeared in October 2008, with a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The previously unknown Satoshi Nakamoto, proposed the “blockchain”: a distributed ledger, or record of transactions, which would be maintained by everyone participating in the system. It’s called the blockchain because groups of transactions are gathered together into “blocks” as they occur, and as each block is turned out it is added to the “chain” of all transactions. That’s it. It’s simply a list of things that happened. If everyone can see every transaction, then there is no need to hand over control to banks or governments, and if everyone follows the encryption practices there is no way to know who is spending the money.
In order to extend the blockchain, in other words to write in the ledger, the computer doing the writing has to solve a particularly complex mathematical problem. The fact that it’s relatively easy for everyone else’s computers to check if this problem really has been solved makes it practically impossible for anyone to create a fake version of the ledger.
In a particularly clever twist, participants are incentivized to help maintain the ledger by receiving a small amount of bitcoins when they do solve the mathematical problem. This is where the notional value of Bitcoin comes from: someone has to put in an amount of time and energy to produce it, which is why this process is known as “mining”. Over time, more and more coins are produced, to an eventual total of 21 million some time in or around 2140.
The crypto-economy is currently valued in excess three hundred billion dollars, with 2650 different types of digital currency and tokens in existence, all of which are derived from Satoshi Nakamoto’s original white paper. A Deloitte report this year stated that 86 per cent of global business leaders anticipate blockchain technology achieving mainstream adoption in the near future. Governments such as Dubai’s are talking about moving all official documents to blockchain platforms to increase bureaucratic efficiency,
Facebook has launched its own blockchain-based digital currency, Libra, the value of which is tied to a number of national currencies in order to protect against fluctuations in value.
Why did Bitcoin succeed where previous cryptocurrencies had failed? Satoshi’s paper had the good fortune to appear at a particular time. Encoded into the very first block on the Bitcoin chain is a time stamp. It’s simple proof that no valid coins were mined before that date.
In the traditional banking model, the flow of money is anonymized by the third party administering the transactions hiding what they know from everyone else. On the blockchain, where all transactions are public, the anonymity happens between the identity and the transaction; everyone can see the money moving, but nobody knows whose money it is.
When Satoshi Nakamoto disappeared into the ether, the developers left on the blockchain, unspent, the bitcoins they’d mined in the early days of the project – over a million of them, valued at $4bn in late 2018. Only someone who holds Satoshi’s private keys can access them. There is no “real” Satoshi. There is only a set of assets and a key. “Satoshi Nakamoto” is creator, product and proof of Bitcoin, all wrapped up in one – a $4bn pledge that the system works. Once again, the creation of money is the creation of a myth.
The Bitcoin Exchange is just a stock market for stoners