Anthony Pompliano- “Bitcoin: Origins And Cultural Significance”

This is from Pomp’s Substack page. This post covers bitcoins creation and the technologies and innovations that led up to its creation.

“The birth of Bitcoin marked a paradigm shift in the finance world — with philosophical, technological, and economic implications that continue to expand.”

Enjoy and be well, Everyone.


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“BITCOIN: ORIGINS AND CULTURAL SIGNIFICANCE”

“To investors,

Today we have a guest post from Cameron and Tyler Winklevoss, who have been investors in Bitcoin and Ethereum for quite awhile. They are also the founders of Gemini, one of the leading cryptocurrency exchanges in the United States.

Summary

Bitcoin has grown from a small movement of computer scientists, Cypherpunks, and cryptographers into an increasingly mainstream phenomenon. It has started to force a redesign of the world’s financial system and its philosophical, technological, and economic ramifications continue to expand. This article provides an overview of Bitcoin’s historical and cultural significance. If you’d like to read up on other aspects of Bitcoin, be sure to check out our other articles, including Bitcoin: Fundamental Technical Structure and Bitcoin: Network Security.

Bitcoin’s Predecessors 

Bitcoin is the world’s first cryptocurrency and blockchain as we have come to now know these terms. Bitcoin (capital “B”) refers to the peer-to-peer Bitcoin network that maintains a decentralized public ledger called the “blockchain,” which records the ownership of all bitcoin (lowercase “b”), the native digital asset token of the Bitcoin network. In addition to creating trustless, digital money, Bitcoin has ushered in a movement to decentralize existing, centralized financial services. Bitcoin was not, however, the first attempt at creating digital money. It was built upon the shoulders of giants that came before it and it’s hard to imagine that it would have been successful if not for the lessons learned and ideas proposed in these earlier attempts. 

The notion of scarcity with respect to digital money was famously envisioned by Nick Szabo when he proposed Bit Gold in 1998, which he later wrote about in his blog. Szabo is a computer scientist and early member of the Cypherpunks, a group of technologists dedicated to promoting privacy through encryption and electronic money. The Cypherpunks formed in the 1980s and communicated regularly on the Cypherpunks mailing list on a range of topics related to cryptography, economics, and censorship. Eric Hughes, a mathematician and one of the founders of the Cypherpunk movement along with Timothy C. May and John Gilmore, published A Cypherpunk’s Manifesto in 1993 that captures its ethos.

In the late 1990s Szabo noticed that “precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation.” So he set out to create a protocol “whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties.” Enter Bit Gold. In an effort to impose “cost” around the creation of property on a distributed public registry, a computer (Alice) would have to spend resources solving a proof of work (PoW) puzzle that would generate a PoW chain — the more resources spent, the longer the chain — the longer the chain, the greater the theoretical value of Alice’s newly created property. This was a digital analogy to the work (i.e., energy) required to mine gold in the real world.

If Alice’s PoW chain was verified and accepted by the majority of the computers on the network (i.e., nodes) — a process known as reaching consensus — her non-fungible chain would be added to the distributed public registry and she would be given Bit Gold in exchange for it. The registry solved the double-spending problem — the risk that a user could spend the same Bit Gold twice — since any node could easily confirm cryptographically what Bit Gold Alice owned on the registry. But the Bit Gold consensus mechanism fell short due to the fact that it would be inexpensive for a bad actor to create a large number of nodes (known as “sybills”) and tamper with the property registry (known as a “Sybil attack”). If Bit Gold were to protect against this by limiting the number of nodes that were able to participate in managing the property registry, the network would become more centralized and the permitted nodes would have an inordinate amount of power. 

B-Money was another precursor to Bitcoin that arose around the same time as Bit Gold. It was proposed by Wei Dai, a computer engineer, Cypherpunk, and cryptographer and is referenced in the Bitcoin whitepaper. B-Money conceptualized an “anonymous, distributed electronic cash system.” And while it was never developed beyond the whitepaper stage, it included a number of concepts, such as a distributed ledger, the digital signing of transactions, and the creation of money via PoW (like Bit Gold) that eventually made their way into Bitcoin and the multitude of other cryptocurrencies that Bitcoin has subsequently inspired.

The idea of building cost (or digital scarcity) into a system using proof of work was first conceptualized by Cynthia Dwork and Moni Naor in 1993 as a way to protect Internet services from abuse such as spam. In 1997, an English Cypherpunk named Dr. Adam Back implemented this concept into his project Hashcash, a service aimed at limiting spam and denial of service attacks. Sending mass emails to unsuspecting users was (and still is) inexpensive. So Dr. Back set out to increase the cost of sending an email, whereby the cost would be de minimis for honest users, yet prohibitive for abusive users. Hashcash requires a sender to generate a Hashcash token by solving a PoW puzzle. This token (akin to a postage stamp) is sent with an email to its intended recipient. If the token is valid, the email will be delivered; if it’s invalid, the email will bounce. For a regular user, the cost to generate a Hashcash token would be negligible, but for a spammer, generating Hashcash tokens in bulk would be prohibitively expensive. 

Hashcash demonstrated that digital scarcity could be created in the face of abundance, and in doing so, opened the eyes of at least two Cypherpunks. Soon thereafter, Szabo via Bit Gold and Dai via B-money would apply the concept of digital scarcity towards the creation of money. A PoW puzzle represents energy, which, if directed towards minting coins, would confer the energy value of such efforts onto the very coins being minted.

In 2004, Hal Finney, also a Cypherpunk, tried to improve upon Bit Gold and create a cryptocurrency system that he called reusable proof of work (RPoW). Finney’s RPoW system reduced some of the complexity in the Bit Gold proposal and similarly used Hashcash’s PoW to mint new tokens. However, the system traded decentralization for simplicity by relying on a centralized server to protect against the double-spending problem. It would be another five years before Bitcoin would weave all of the various developments of Szabo, Dai, Back, and Finney together into viable, trustless, and fully-decentralized digital money. 

Enter Bitcoin

The Bitcoin white paper was published in 2008 and the network launched in January of 2009 upon the mining of the “Genesis Block” — the first block of the Bitcoin blockchain. Bitcoin successfully created a digital currency that operates in a fully-decentralized, trustless manner that allows users to send monetary value to each other through the Internet without the need for trusted, financial intermediaries. 

This was made possible by a major breakthrough in its consensus mechanism — a solution that used Hashcash PoW to address the concerns that Bit Gold was unable to fully protect against. More specifically, the Bitcoin mining mechanism obviates the need to fix the number of nodes in advance and incentivizes miners to play by the rules. It works like this: Instead of relying on a majority of nodes (known as “miners”) to reach consensus, Bitcoin relies on the majority of hashrate — the network’s processing power — to reach consensus. Acquiring a majority of the network’s hashrate is expensive, making it costly for a miner to tamper with the ledger. Moreover, in doing so, a dishonest miner would forgo the handsome bounties of newly minted bitcoin (known as the “block reward”) that are awarded approximately every 10 minutes to the “winning” miner who correctly solves the PoW puzzle. Therefore, it is assumed that a rational, economically-motivated miner will commit her processing power toward securing the integrity of the blockchain instead of trying to manipulate it and cheat the system.

As such, Hashcash’s PoW concept plays a critical role in both the minting of new bitcoin (digital scarcity) and the securing of the Bitcoin network (expensive to attack, block reward opportunity cost). This simple, yet elegant incentive structure has turned digital money, a movement once made up predominantly of computer scientists and cryptographers, into an increasingly mainstream phenomenon. 

The Mystery of Satoshi Nakamoto

The identity of Satoshi Nakamoto, Bitcoin’s founder, is perhaps the most intriguing mystery of the past decade. Ever since the Bitcoin whitepaper was published, there has been widespread speculation and investigation as to Nakamoto’s true name. Some even speculate that Nakamoto may not be an individual, but rather a group of people acting as a collective. At various points in time, each of the early digital currency pioneers mentioned earlier have been alleged to be Nakamoto, however, each of them emphatically deny this. 

Satoshi went to great lengths to remain anonymous — likely fearing what hostile actions governments might take, at least early on. Nakamoto’s messages on cryptography forums, websites, and development platforms left no clues as to who he, she, or they really are and around mid-2010, Nakamoto’s contributions to Bitcoin Network development stopped. In 2011, Satoshi sent a mysterious message saying, “[I’ve] moved on to other things,” before vanishing from the Internet and never being heard from again. To date, no conclusive evidence has surfaced to properly identify the person or persons behind the pseudonym,or “nym” in the parlance of the Cypherpunks, Satoshi Nakamoto. As of the time of publishing, Nakamoto remains at large. 

While there has been much focus placed on Satoshi’s identity and whereabouts, people in the Bitcoin community (often referred to as “Bitcoiners”) believe that not knowing Satoshi’s true identity is one of Bitcoin’s greatest strengths. There is no Founder or leader — no single point of failure — just math and lines of code that speak for themselves. This fits squarely into the ethos of a trustless, decentralized money. 

Bitcoin’s Cultural Significance

Bitcoin was developed in the backdrop of the financial crisis of 2007-2008, which was brought about by the irresponsible risk-taking and lending practices of banks around the world. Despite their reckless behavior, many banks received government bailouts, which led to widespread protests and overall lack of confidence in the global financial system.

Bitcoin emerged as an alternative to the “inherent weaknesses of the trust based model.” It is no coincidence that Nakamoto inscribed the following message in Bitcoin’s Genesis Block: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks. This message is widely regarded as not only a timestamp but a call to arms.

Bitcoin makes decentralization possible, which is to say its center of gravity is the empowerment of the individual. Its very nature takes control away from the few and gives it back to the many. Within this decade, Bitcoin’s blueprint and ethos will redesign the Internet, the financial system, and money in a way that fosters greater independence, choice and opportunity for all. Just like the invention of the printing press, the personal computer, and the early Internet before it. And that’s a big deal.

You can follow Cameron and Tyler on Twitter or check out Gemini by clicking here.

Hope everyone has a great day.

-Pomp”


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Categories: bitcoin, Commentary and Opinions, History Lesson, Pomp, Winklevoss

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