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Cypherpunks and the origin of Bitcoin

Bitcoin has its roots in an anarchic computing subculture. Its originators are the Cypherpunks, computer scientists who base their belief system largely on libertarianism (Frisby, 2014). In 1992, a computer scientist working for Intel named Tim May, along with two California internet pioneers, Eric Hughes and John Gilmore, initiated a group that aimed to use the power of the internet as a counterbalance to the strict and privacy-restricting regulations of the U.S. government. The resulting mailing list through which those individuals communicated became known as the “cryptography mailing list”. Its members, the Cypherpunks, opposed the idea that online payments and communications involve the disclosure of private information that could be used by government agencies or businesses. One of their original goals was to create an anonymous electronic cash, which would protect privacy online (Frisby, 2014).

“Crypto Rebels” Wired Magazine Cover from 1993 about the “swelling movement of Cypherpunks, civil libertarians, and millionaire hackers. At stake: Whether privacy will exist in the 21st century“

Their weapons of choice: code and cryptography. Cryptography is the study of secure communication techniques to enable the transmission of private information. Code enables such techniques to be implemented. In 1993 Eric Hughes famously wrote “A Cypherpunk’s Manifesto”, an essay laying out the core beliefs of the cypherpunk movement.

“Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.

Privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary of such system. An anonymous transaction system is not a secret transaction system. An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.

We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence. It is to their advantage to speak of us, and we should expect that they will speak. To try to prevent their speech is to fight against the realities of information. Information does not just want to be free, it longs to be free. Information expands to fill the available storage space. Information is Rumor’s younger, stronger cousin; Information is fleeter of foot, has more eyes, knows more, and understands less than Rumor.

We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do.

We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.

Various Cypherpunks proposed forms of electronic money on the cryptography mailing list. In 1997, Adam Beck, a postdoctoral student from the University of Exeter, designed a digital postage scheme by the name of Hashcash. It was intended as an anti-spam tool for email. Beck’s idea was simple. Adding micro-costs for sending emails would prevent people from spamming. Beck was inspired by the physical process of sending a postcard, which requires the sender to spend money on a postage stamp. Beck created a digital stamp. A random combination of numbers (Nonce) attached to an email. Attaching such a number to an email required computational effort. The cost of finding such hashes was trivial for individual users but significant for spammers, who typically target many people at once (Bitcoin Magazine, 10 year Anniversary edition).

Despite its name, Hashcash was not designed to be used as cash, but rather for a specific use case in a postage system. Hashcash could not be spent elsewhere and was therefore not suitable as money. However, it was one of the first successful attempts to create digital scarcity. Suddenly, data, made up of a combination of numbers and backed by computer power, became valuable. Value that could be directly exchanged between people over the Internet. For a variety of reasons, Hashcash never really took off as a postage scheme. However, the Hashcash proof-of-work algorithm is still in use today, in the bitcoin mining function (Bitcoin Magazine, 10 year Anniversary edition). Functions that require computational power as input are commonly referred to as proof-of-work.

Shortly after the introduction of Hashcash, two other ideas on electronic cash systems were introduced to the mailing list: ‘b-money’ and ‘bit gold’, by Wei Dai and Nick Szabo. Both currencies were based around chains of proven work. In both systems, coins were created from proof-of-work (computational power). Nick Szabo coined the term “bit gold” for bits of data that are costly to create. He suggested that these could serve as the basis for an electronic monetary system. Fulfilling the role in the information world that gold once played in the physical world.

The two systems introduced a new idea: decentralization. To allow for the exclusion of a central authority, coin ownership was tracked through distributed ledgers. If someone were to send money from point A to point B, the transaction would be broadcast to the entire network.

But there was one major problem. Since coins were created from computational power, improving computational power would always make it easier to generate new coins, which would lead to inflation. The systems also failed to solve the problem of double spending coins in more than one transaction at the same time (Bitcoin Magazine, 10th anniversary issue)

In 2005, Hal Finney, an original member of the cryptography mailing list, introduced another electronic cash system. He called his system Reusable Proof of Work (RPOW). Finney was able to prevent coins from being spent in more than one transaction at the same time. His system allowed for a coin to be computed, used once, destroyed, then exchanged for a new one, used again, destroyed, exchanged again for a new one etc. Coins could therefore only be used for one transaction. Unfortunately, Finney could not solve the inflation problem. Increasing computational power would still allow the creation of an increasing number of coins.

In 2008, Bitcoin was introduced to the cryptography mailing list by its anonymous creator Satoschi Nakamoto. The final piece of the puzzle, the inflation problem, was successfully solved by Satoschi by introducing a fixed coin supply with a fixed issuance system. By solving the problem of inflation, Bitcoin successfully added a new feature to the internet: digital scarcity and enabled the direct exchange of value on the internet. Digital scarcity equals value because data is a source of value and scarce data is valuable. Bitcoin’s system is built on the “shoulders of giants”; It combines most of the previous ideas on decentralised electronic payment systems.

Initially, the public and many in the financial world rejected Bitcoin due to the failure of most companies that intended to establish similar systems in the 1980s, 90s and early 2000s. In 1983, American computer programmer David Chaum published the idea of ​​an anonymous cryptographic electronic payment system, now known as Chaumian eCash. Chaum found a way to allow people to sign data without knowing the details of the data: blind signatures. Building on this breakthrough in cryptography, Chaum developed his own payment system that allowed people to withdraw and deposit some form of electronic money: eCash. Chaum’s company “DigiCash” went live in the mid-1990s and controlled the eCash system. In addition, banks were needed to support “DigiCash”. Whenever a user wanted to take out eCash from DigiCash, they had to do it through a cooperating bank. Several banks started trials with Chaum’s eCash, including Deutsche Bank. Within its own network, DigiCash offered eCash users the opportunity to send money to each other anonymously. Whenever a user wanted to cash out via a cooperating bank, an identity had to be revealed. However, the company never became a success story and had to close. DigiCash went bankrupt in the late 1990s (Bitcoin Magazine, 10th Year Anniversary).

Other Internet companies continued to focus on decentralization. One of the first widespread use cases were file sharing platforms. Above all the music-oriented online service Napster, founded by Sean Parker and Shawn Fanning. The company started in 1999 as a peer-to-peer file sharing service that allowed users to send audio files directly to other users of the platform. The company failed to pay the creators of content shared through its platform and was forced to shut down in 2001 after losing a string of copyright lawsuits. It was later acquired and relaunched, but never regained its former success. Indeed, there is a danger with centralization: a single point of failure. Satoschi understood the importance of privacy, as he explained in one of his blog posts “Governments are good at cutting off the heads of centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own” (Satoschi Nakamoto, 2008). This has resulted in no one knowing who Satoshi Nakamoto is. It should be emphasized that like Homer, Satoschi Nakamoto could be synonymous for a number of people, no one knows who he really is. He, she, or they knew that he, she, or they would jeopardise Bitcoin’s success. It would have been possible for governments to pressure Satoshi to “turn off bitcoin”. Bitcoin works differently than most decentralised system before it, it is not under the control of a single company or individual. It is a self-regulating distributed network.

The challenge in creating a distributed electronic payment system is that money requires consensus, high levels of security, authentication, and confidentiality. Accounts that receive and send money must offer security to their users. Money issued by the government is perceived as trustworthy because there is a degree of trust in its institutions. Bitcoin is trusted by its users because its value is protected by the rules engraved in the protocol and monitored by its participants.

Continue reading: Why Privacy matters

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