💾 Archived View for gmi.noulin.net › mobileNews › 3611.gmi captured on 2021-12-03 at 14:04:38. Gemini links have been rewritten to link to archived content
-=-=-=-=-=-=-
By Benjamin Wallace
In November 1, 2008, a man named Satoshi Nakamoto posted a research paper to an
obscure cryptography listserv describing his design for a new digital currency
that he called bitcoin. None of the list s veterans had heard of him, and what
little information could be gleaned was murky and contradictory. In an online
profile, he said he lived in Japan. His email address was from a free German
service. Google searches for his name turned up no relevant information; it was
clearly a pseudonym. But while Nakamoto himself may have been a puzzle, his
creation cracked a problem that had stumped cryptographers for decades. The
idea of digital money convenient and untraceable, liberated from the oversight
of governments and banks had been a hot topic since the birth of the Internet.
Cypherpunks, the 1990s movement of libertarian cryptographers, dedicated
themselves to the project. Yet every effort to create virtual cash had
foundered. Ecash, an anonymous system launched in the early 1990s by
cryptographer David Chaum, failed in part because it depended on the existing
infrastructures of government and credit card companies. Other proposals
followed bit gold, RPOW, b-money but none got off the ground.
One of the core challenges of designing a digital currency involves something
called the double-spending problem. If a digital dollar is just information,
free from the corporeal strictures of paper and metal, what s to prevent people
from copying and pasting it as easily as a chunk of text, spending it as many
times as they want? The conventional answer involved using a central
clearinghouse to keep a real-time ledger of all transactions ensuring that, if
someone spends his last digital dollar, he can t then spend it again. The
ledger prevents fraud, but it also requires a trusted third party to administer
it.
Bitcoin did away with the third party by publicly distributing the ledger, what
Nakamoto called the block chain. Users willing to devote CPU power to running
a special piece of software would be called miners and would form a network to
maintain the block chain collectively. In the process, they would also generate
new currency. Transactions would be broadcast to the network, and computers
running the software would compete to solve irreversible cryptographic puzzles
that contain data from several transactions. The first miner to solve each
puzzle would be awarded 50 new bitcoins, and the associated block of
transactions would be added to the chain. The difficulty of each puzzle would
increase as the number of miners increased, which would keep production to one
block of transactions roughly every 10 minutes. In addition, the size of each
block bounty would halve every 210,000 blocks first from 50 bitcoins to 25,
then from 25 to 12.5, and so on. Around the year 2140, the currency would reach
its preordained limit of 21 million bitcoins.
When Nakamoto s paper came out in 2008, trust in the ability of governments and
banks to manage the economy and the money supply was at its nadir. The US
government was throwing dollars at Wall Street and the Detroit car companies.
The Federal Reserve was introducing quantitative easing, essentially printing
money in order to stimulate the economy. The price of gold was rising. Bitcoin
required no faith in the politicians or financiers who had wrecked the economy
just in Nakamoto s elegant algorithms. Not only did bitcoin s public ledger
seem to protect against fraud, but the predetermined release of the digital
currency kept the bitcoin money supply growing at a predictable rate, immune to
printing-press-happy central bankers and Weimar Republic-style hyperinflation.
Photo: Michael Schmelling
Bitcoin's chief proselytizer, Bruce Wagner, at one of the few New York City
restaurants that accept the currency.
Photo: Michael Schmelling
Nakamoto himself mined the first 50 bitcoins which came to be called the
genesis block on January 3, 2009. For a year or so, his creation remained the
province of a tiny group of early adopters. But slowly, word of bitcoin spread
beyond the insular world of cryptography. It has won accolades from some of
digital currency s greatest minds. Wei Dai, inventor of b-money, calls it very
significant ; Nick Szabo, who created bit gold, hails bitcoin as a great
contribution to the world ; and Hal Finney, the eminent cryptographer behind
RPOW, says it s potentially world-changing. The Electronic Frontier
Foundation, an advocate for digital privacy, eventually started accepting
donations in the alternative currency.
The small band of early bitcoiners all shared the communitarian spirit of an
open source software project. Gavin Andresen, a coder in New England, bought
10,000 bitcoins for $50 and created a site called the Bitcoin Faucet, where he
gave them away for the hell of it. Laszlo Hanyecz, a Florida programmer,
conducted what bitcoiners think of as the first real-world bitcoin transaction,
paying 10,000 bitcoins to get two pizzas delivered from Papa John s. (He sent
the bitcoins to a volunteer in England, who then called in a credit card order
transatlantically.) A farmer in Massachusetts named David Forster began
accepting bitcoins as payment for alpaca socks.
When they weren t busy mining, the faithful tried to solve the mystery of the
man they called simply Satoshi. On a bitcoin IRC channel, someone noted
portentously that in Japanese Satoshi means wise. Someone else wondered
whether the name might be a sly portmanteau of four tech companies: SAmsung,
TOSHIba, NAKAmichi, and MOTOrola. It seemed doubtful that Nakamoto was even
Japanese. His English had the flawless, idiomatic ring of a native speaker.
Perhaps, it was suggested, Nakamoto wasn t one man but a mysterious group with
an inscrutable purpose a team at Google, maybe, or the National Security
Agency. I exchanged some emails with whoever Satoshi supposedly is, says
Hanyecz, who was on bitcoin s core developer team for a time. I always got the
impression it almost wasn t a real person. I d get replies maybe every two
weeks, as if someone would check it once in a while. Bitcoin seems awfully well
designed for one person to crank out.
Nakamoto revealed little about himself, limiting his online utterances to
technical discussion of his source code. On December 5, 2010, after bitcoiners
started to call for Wikileaks to accept bitcoin donations, the normally terse
and all-business Nakamoto weighed in with uncharacteristic vehemence. No, don
t bring it on, he wrote in a post to the bitcoin forum. The project needs
to grow gradually so the software can be strengthened along the way. I make
this appeal to Wikileaks not to try to use bitcoin. Bitcoin is a small beta
community in its infancy. You would not stand to get more than pocket change,
and the heat you would bring would likely destroy us at this stage.
Then, as unexpectedly as he had appeared, Nakamoto vanished. At 6:22 pm GMT on
December 12, seven days after his Wikileaks plea, Nakamoto posted his final
message to the bitcoin forum, concerning some minutiae in the latest version of
the software. His email responses became more erratic, then stopped altogether.
Andresen, who had taken over the role of lead developer, was now apparently one
of just a few people with whom he was still communicating. On April 26,
Andresen told fellow coders: Satoshi did suggest this morning that I (we)
should try to de-emphasize the whole mysterious founder thing when talking
publicly about bitcoin. Then Nakamoto stopped replying even to Andresen s
emails. Bitcoiners wondered plaintively why he had left them. But by then his
creation had taken on a life of its own.
Bitcoin 101
Bitcoin 101
How They re Made
Bitcoin s economy consists of a network of its users computers. At preset
intervals, an algorithm releases new bitcoins into the network: 50 every 10
minutes, with the pace halving in increments until around 2140. The automated
pace is meant to ensure regular growth of the monetary supply without
interference by third parties, like a central bank, which can lead to
hyperinflation.
How They re Mined
To prevent fraud, the bitcoin software maintains a pseudonymous public ledger
of every transaction. Some bitcoiners computers validate transactions by
cracking cryptographic puzzles, and the first to solve each puzzle receives 50
new bitcoins. Bitcoins can be stored in a variety of places from a wallet on
a desktop computer to a centralized service in the cloud.
How They re Spent
Once users download the bitcoin app to their machine, spending the currency is
as easy as sending an email. The range of merchants that accept it is small but
growing; look for the telltale Bitcoin 101symbol at the cash register. And
entrepreneurial bitcoiners are working to make it much easier to use the
currency, building everything from point-of-service machines to PayPal
alternatives.
Illustrations: Martin Venezky
Bitcoin enthusiasts are almost evangelists, Bruce Wagner says. They see the
beauty of the technology. It s a huge movement. It s almost like a religion. On
the forum, you ll see the spirit. It s not just me, me, me. It s what s for the
betterment of bitcoin.
It s a July morning. Wagner, whose boyish energy and Pantone-black hair belie
his 50 years, is sitting in his office at OnlyOneTV, an Internet television
startup in Manhattan. Over just a few months, he has become bitcoin s chief
proselytizer. He hosts The Bitcoin Show, a program on OnlyOneTV in which he
plugs the nascent currency and interviews notables from the bitcoin world. He
also runs a bitcoin meetup group and is gearing up to host bitcoin s first
world conference in August. I got obsessed and didn t eat or sleep for five
days, he says, recalling the moment he discovered bitcoin. It was bitcoin,
bitcoin, bitcoin, like I was on crystal meth!
Wagner is not given to understatement. While bitcoin is the most exciting
technology since the Internet, he says, eBay is a giant bloodsucking
corporation and free speech a popular myth. He is similarly excitable when
predicting the future of bitcoin. I knew it wasn t a stock and wouldn t go up
and down, he explains. This was something that was going to go up, up, up.
For a while, he was right. Through 2009 and early 2010, bitcoins had no value
at all, and for the first six months after they started trading in April 2010,
the value of one bitcoin stayed below 14 cents. Then, as the currency gained
viral traction in summer 2010, rising demand for a limited supply caused the
price on online exchanges to start moving. By early November, it surged to 36
cents before settling down to around 29 cents. In February 2011, it rose again
and was mentioned on Slashdot for achieving dollar parity ; it hit $1.06
before settling in at roughly 87 cents.
In the spring, catalyzed in part by a much-linked Forbes story on the new
crypto currency, the price exploded. From early April to the end of May, the
going rate for a bitcoin rose from 86 cents to $8.89. Then, after Gawker
published a story on June 1 about the currency s popularity among online drug
dealers, it more than tripled in a week, soaring to about $27. The market value
of all bitcoins in circulation was approaching $130 million. A Tennessean
dubbed KnightMB, who held 371,000 bitcoins, became worth more than $10 million,
the richest man in the bitcoin realm. The value of those 10,000 bitcoins
Hanyecz used to buy pizza had risen to $272,329. I don t feel bad about it,
he says. The pizza was really good.
Perhaps bitcoin s creator wasn t one man but a mysterious group a team at
Google, maybe, or the NSA.
Bitcoin was drawing the kind of attention normally reserved for overhyped
Silicon Valley IPOs and Apple product launches. On his Internet talk show,
journo-entrepreneur Jason Calacanis called it a fundamental shift and one of
the most interesting things I ve seen in 20 years in the technology business.
Prominent venture capitalist Fred Wilson heralded societal upheaval as the
Next Big Thing on the Internet, and the four examples he gave were Wikileaks,
PlayStation hacking, the Arab Spring, and bitcoin. Andresen, the coder,
accepted an invitation from the CIA to come to Langley, Virginia, to speak
about the currency. Rick Falkvinge, founder of the Swedish Pirate Party (whose
central policy plank includes the abolition of the patent system), announced
that he was putting his life savings into bitcoins.
The future of bitcoin seemed to shimmer with possibility. Mark Suppes, an
inventor building a fusion reactor in a Brooklyn loft from eBay-sourced parts,
got an old ATM and began retrofitting it to dispense cash for bitcoins. On the
so-called secret Internet (the invisible grid of sites reachable by computers
using Tor anonymizing software), the black-and-gray-market site Silk Road
anointed the bitcoin the coin of the realm; you could use bitcoins to buy
everything from Purple Haze pot to Fentanyl lollipops to a kit for converting a
rifle into a machine gun. A young bitcoiner, The Real Plato, brought On the
Road into the new millennium by video-blogging a cross-country car trip during
which he spent only bitcoins. Numismatic enthusiasts among the currency s
faithful began dreaming of collectible bitcoins, wondering what price such
rarities as the genesis block might fetch.
As the price rose and mining became more popular, the increased competition
meant decreasing profits. An arms race commenced. Miners looking for horsepower
supplemented their computers with more powerful graphics cards, until they
became nearly impossible to find. Where the first miners had used their
existing machines, the new wave, looking to mine bitcoins 24 hours a day,
bought racks of cheap computers with high-speed GPUs cooled by noisy fans. The
boom gave rise to mining-rig porn, as miners posted photos of their setups. As
in any gold rush, people recounted tales of uncertain veracity. An Alaskan
named Darrin reported that a bear had broken into his garage but thankfully
ignored his rig. Another miner s electric bill ran so high, it was said, that
police raided his house, suspecting that he was growing pot.
Amid the euphoria, there were troubling signs. Bitcoin had begun in the
public-interested spirit of open source peer-to-peer software and libertarian
political philosophy, with references to the Austrian school of economics. But
real money was at stake now, and the dramatic price rise had attracted a
different element, people who saw the bitcoin as a commodity in which to
speculate. At the same time, media attention was bringing exactly the kind of
heat that Nakamoto had feared. US senator Charles Schumer held a press
conference, appealing to the DEA and Justice Department to shut down Silk Road,
which he called the most brazen attempt to peddle drugs online that we have
ever seen and describing bitcoin as an online form of money-laundering.
Meanwhile, a cult of Satoshi was developing. Someone started selling I AM
SATOSHI NAKAMOTO T-shirts. Disciples lobbied to name the smallest fractional
denomination of a bitcoin a satoshi. There was Satoshi-themed fan fiction and
manga art. And bitcoiners continued to ponder his mystery. Some speculated that
he had died. A few postulated that he was actually Wikileaks founder Julian
Assange. Many more were convinced that he was Gavin Andresen. Still others
believed that he must be one of the older crypto-currency advocates Finney or
Szabo or Dai. Szabo himself suggested it could be Finney or Dai. Stefan Thomas,
a Swiss coder and active community member, graphed the time stamps for each of
Nakamoto s 500-plus bitcoin forum posts; the resulting chart showed a steep
decline to almost no posts between the hours of 5 am and 11 am Greenwich Mean
Time. Because this pattern held true even on Saturdays and Sundays, it
suggested that the lull was occurring when Nakamoto was asleep, rather than at
work. (The hours of 5 am to 11 am GMT are midnight to 6 am Eastern Standard
Time.) Other clues suggested that Nakamoto was British: A newspaper headline he
had encoded in the genesis block came from the UK-published Times of London,
and both his forum posts and his comments in the bitcoin source code used such
Brit spellings as optimise and colour.
Play Dough
Key moments in the short and volatile
life of bitcoin.
Even the purest technology has to live in an impure world. Both the code and
the idea of bitcoin may have been impregnable, but bitcoins themselves unique
strings of numbers that constitute units of the currency are discrete pieces of
information that have to be stored somewhere. By default, bitcoin kept users
currency in a digital wallet on their desktop, and when bitcoins were worth
very little, easy to mine, and possessed only by techies, that was sufficient.
But once they started to become valuable, a PC felt inadequate. Some users
protected their bitcoins by creating multiple backups, encrypting and storing
them on thumb drives, on forensically scrubbed virgin computers without
Internet connections, in the cloud, and on printouts stored in safe-deposit
boxes. But even some sophisticated early adopters had trouble keeping their
bitcoins safe. Stefan Thomas had three copies of his wallet yet inadvertently
managed to erase two of them and lose his password for the third. In a stroke,
he lost about 7,000 bitcoins, at the time worth about $140,000. I spent a week
trying to recover it, he says. It was pretty painful. Most people who have
cash to protect put it in a bank, an institution about which the more zealous
bitcoiners were deeply leery. Instead, for this new currency, a primitive and
unregulated financial-services industry began to develop. Fly-by-night online
wallet services promised to safeguard clients digital assets. Exchanges
allowed anyone to trade bitcoins for dollars or other currencies. Bitcoin
itself might have been decentralized, but users were now blindly entrusting
increasing amounts of currency to third parties that even the most radical
libertarian would be hard-pressed to claim were more secure than federally
insured institutions. Most were Internet storefronts, run by who knows who from
who knows where.
Sure enough, as the price headed upward, disturbing events began to bedevil the
bitcoiners. In mid-June, someone calling himself Allinvain reported that 25,000
bitcoins worth more than $500,000 had been stolen from his computer. (To this
day, nobody knows whether this claim is true.) About a week later, a hacker
pulled off an ingenious attack on a Tokyo-based exchange site called Mt. Gox,
which handled 90 percent of all bitcoin exchange transactions. Mt. Gox
restricted account withdrawals to $1,000 worth of bitcoins per day (at the time
of the attack, roughly 35 bitcoins). After he broke into Mt. Gox s system, the
hacker simulated a massive sell-off, driving the exchange rate to zero and
letting him withdraw potentially tens of thousands of other people s bitcoins.
As it happened, market forces conspired to thwart the scheme. The price
plummeted, but as speculators flocked to take advantage of the fire sale, they
quickly drove it back up, limiting the thief s haul to only around 2,000
bitcoins. The exchange ceased operations for a week and rolled back the
postcrash transactions, but the damage had been done; the bitcoin never got
back above $17. Within a month, Mt. Gox had lost 10 percent of its market share
to a Chile-based upstart named TradeHill. Most significantly, the incident had
shaken the confidence of the community and inspired loads of bad press.
In the public s imagination, overnight the bitcoin went from being the currency
of tomorrow to a dystopian joke. The Electronic Frontier Foundation quietly
stopped accepting bitcoin donations. Two Irish scholars specializing in network
analysis demonstrated that bitcoin wasn t nearly as anonymous as many had
assumed: They were able to identify the handles of a number of people who had
donated bitcoins to Wikileaks. (The organization announced in June 2011 that it
was accepting such donations.) Nontechnical newcomers to the currency,
expecting it to be easy to use, were disappointed to find that an extraordinary
amount of effort was required to obtain, hold, and spend bitcoins. For a time,
one of the easier ways to buy them was to first use Paypal to buy Linden
dollars, the virtual currency in Second Life, then trade them within that
make-believe universe for bitcoins. As the tone of media coverage shifted from
gee-whiz to skeptical, attention that had once been thrilling became a source
of resentment.
Photo: Michael Schmelling
Illustration: Martin Venezky
More disasters followed. Poland-based Bitomat, the third-largest exchange,
revealed that it had oops accidentally overwritten its entire wallet. Security
researchers detected a proliferation of viruses aimed at bitcoin users: Some
were designed to steal wallets full of existing bitcoins; others commandeered
processing power to mine fresh coins. By summer, the oldest wallet service,
MyBitcoin, stopped responding to emails. It had always been fishy registered in
the West Indies and run by someone named Tom Williams, who never posted in the
forums. But after a month of unbroken silence, Wagner, the New York City
bitcoin evangelist, finally stated what many had already been thinking: Whoever
was running MyBitcoin had apparently gone AWOL with everyone s money. Wagner
himself revealed that he had been keeping all 25,000 or so of his bitcoins on
MyBitcoin and had recommended to friends and relatives that they use it, too.
He also aided a vigilante effort that publicly named several suspects.
MyBitcoin s supposed owner resurfaced, claiming his site had been hacked. Then
Wagner became the target of a countercampaign that publicized a successful
lawsuit against him for mortgage fraud, costing him much of his reputation
within the community. People have the mistaken impression that virtual
currency means you can trust a random person over the Internet, says Jeff
Garzik, a member of bitcoin s core developer group.
And nobody had been as trusted as Nakamoto himself, who remained mysteriously
silent as the world he created threatened to implode. Some bitcoiners began to
suspect that he was working for the CIA or Federal Reserve. Others worried that
bitcoin had been a Ponzi scheme, with Nakamoto its Bernie Madoff mining
bitcoins when they were worthless, then waiting for their value to rise. The
most dedicated bitcoin loyalists maintained their faith, not just in Nakamoto,
but in the system he had built. And yet, unmistakably, beneath the paranoia and
infighting lurked something more vulnerable, an almost theodical
disappointment. What bitcoiners really seemed to be asking was, why had
Nakamoto created this world only to abandon it?
If Nakamoto has forsaken his adherents, though, they are not prepared to let
his creation die. Even as the currency s value has continued to drop, they are
still investing in the fragile economy. Wagner has advocated for it to be used
by people involved in the Occupy Wall Street movement. While the gold-rush
phase of mining has ended, with some miners dumping their souped-up mining rigs
People are getting sick of the high electric bills, the heat, and the loud
fans, Garzik says the more serious members of the community have turned to
infrastructure. Mt. Gox is developing point-of-sale hardware. Other
entrepreneurs are working on PayPal-like online merchant services. Two guys in
Colorado have launched BitcoinDeals, an etailer offering over 1,000,000 items.
The underworld s use of the bitcoin has matured, too: Silk Road is now just
one of many Tor-enabled back alleys, including sites like Black Market
Reloaded, where self-proclaimed hit men peddle contract killings and
assassinations.
You could say it s following Gartner s Hype Cycle, London-based core
developer Amir Taaki says, referring to a theoretical
technology-adoption-and-maturation curve that begins with a technology
trigger, ascends to a peak of inflated expectations, collapses into a
trough of disillusionment, and then climbs a slope of enlightenment until
reaching a plateau of productivity. By this theory, bitcoin is clambering out
of the trough, as people learn to value the infallible code and discard the
human drama and wild fluctuations that surround it.
But that distinction is ultimately irrelevant. The underlying vulnerabilities
that led to bitcoin s troubles its dependence on unregulated, centralized
exchanges and online wallets persist. Indeed, the bulk of mining is now
concentrated in a handful of huge mining pools, which theoretically could
hijack the entire network if they worked in concert.
Beyond the most hardcore users, skepticism has only increased. Nobel
Prize-winning economist Paul Krugman wrote that the currency s tendency to
fluctuate has encouraged hoarding. Stefan Brands, a former ecash consultant and
digital currency pioneer, calls bitcoin clever and is loath to bash it but
believes it s fundamentally structured like a pyramid scheme that rewards
early adopters. I think the big problems are ultimately the trust issues, he
says. There s nothing there to back it up. I know the counterargument, that
that s true of fiat money, too, but that s completely wrong. There s a whole
trust fabric that s been established through legal mechanisms.
It would be interesting to know what Nakamoto thinks of all this, but he s not
talking. He didn t respond to emails, and the people who might know who he is
say they don t. Andresen flatly denies he is Nakamoto. I don t know his real
name, he says. I m hoping one day he decides not to be anonymous anymore, but
I expect not. Szabo also denies that he is Nakamoto, and so does Dai. Finney,
who has blogged eloquently about being diagnosed with amyotrophic lateral
sclerosis, sent his denial in an email: Under my current circumstances, facing
limited life expectancy, I would have little to lose by shedding anonymity. But
it was not I. Both The New Yorker and Fast Company have launched
investigations but ended up with little more than speculation.
The signal in the noise, the figure that emerges from the carpet of clues,
suggests an academic with somewhat outdated programming training. (Nakamoto s
style of notation was popular in the late 80s and early 90s, Taaki notes.
Maybe he s around 50, plus or minus 10 years. ) Some conjecturers are confident
in their precision. He has at best a master s, says a digital-currency
expert. It seems quite obvious it s one of the developers. Maybe Gavin, just
looking at his background.
I suspect Satoshi is a small team at a financial institution, whitehat hacker
Dan Kaminsky says. I just get that feeling. He s a quant who may have worked
with some of his friends.
But Garzik, the developer, says that the most dedicated bitcoiners have stopped
trying to hunt down Nakamoto. We really don t care, he says. It s not the
individuals behind the code who matter, but the code itself. And while people
have stolen and cheated and abandoned the bitcoiners, the code has remained
true.
Benjamin Wallace (benwallace@me.com) wrote about scareware in issue 19.10.