In The Ashes of Financial Ruin: Cypherpunks and the Birth of Bitcoin

Posted by James Underhill on

September 29, 2008.

It was a clear morning in New York City.

However, the weather didn’t reflect the mood. By the end of the day the Dow Jones Industrial Average plummeted 778 points, representing the largest point drop in history. It prompted one of the most profound global recessions in recent times.

Is it a coincidence that only a few weeks later in October, Satoshi Nakamoto released the now famous whitepaper: Bitcoin: A Peer-to-Peer Electronic Cash SystemWhen we reflect on 2008 it seems likely that the crash, triggered by the housing bubble, was the impetus for creating a trust-less financial system; however, a group of fringe mathematicians, including the now infamous Satoshi and Julian Assange, pioneered several nascent electronic payment systems in the ‘90s.

Originally started from a mailing list (arguably the earliest for of social media) the Cypherpunk movement rose in parallel with the growth of the early Internet during the dot com boom of the 90s. While they were an informal group of scientists, engineers and inventors there were several ideas that bonded the cypherpunks as noted in Eric Hughes, A Cypherpunk’s Manifesto:

  1. Privacy is necessary for an open society in the electronic age
  2. We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy
  3. We must defend our own privacy if we expect to have any
  4. Cypherpunks write code. We know that someone has to write software to defend privacy, and ... we're going to write it

As information flowed freely on the web they began to deploy encryption techniques, originally designed by the military, for the use of protecting information online. It didn’t take long for other uses of encryption and cryptography to take form.

A three part story of the tech that paved the way for Bitcoin:

   1) eCash (DigiCash) - David Chaum

David Chaum was one of the first and most prominent inventors of digital cash. In 1982 he invented eCash which allowed users to store ‘money’ locally on a computer which could be cryptographically ‘signed’ by a bank. David later founded DigiCash to help expand eCash. While there was some initial success partnering with Mark Twain Bank in Saint Louis, DigiCash ultimately went bankrupt based on strong competition from credit cards and difficulty getting widespread adoption.

   2) HashCash - Adam Back

One of my favorite early crypto technologies is HashCash. It’s so interesting because it’s not a currency. HashCash is one of the pioneers of “Proof of Work” technology - the same tech the Bitcoin blockchain employs to prevent hackers from controlling the network. Proof of work is effectively a method of payment in its own right. It requires you to allocate a certain amount of compute (CPU) resources in order to get something. The original use case is brilliant: filtering email spam. It requires the sender to allocate a small amount of compute resource in order to send a message - the theory is that spammers who likely need to send tons of messages will not be willing or able to allocate the resources to effectively send all their mail. This is the algorithm that’s used in mining bitcoin!

    3) Bit Gold - Nick Szabo

While never implemented, it’s believed that Bit Gold is the closest precursor to Bitcoin. It’s also notable that in Satoshi’s whitepaper, many other crypto and encryption projects are cited; however, Bit Gold is conspicuously absent leading many to believe that Szabo could be Satoshi.

In the Bit Gold architecture a user would dedicate compute resources to solving cryptographic problems. Completed problems would be sent to a public registry and assigned the public key of the solver. These ‘solutions’ then become a part of the next problem to solve creating a … chain. Sound familiar? It’s reminiscent of the Bitcoin blockchain.

While Bitcoin was the first protocol to solve for the main problems that prevent a truly decentralized payment system, Satoshi definitely had a lot of work to draw from. It’s likely that after the dust settled from the housing burst in September it prompted many of the early Bitcoin collaborators to figure out solutions to the remaining issues in the existing systems. However, the ideas and methodologies for developing decentralized banking are decades old.