Tuesday, May 31, 2011

Bitcoin: Timing is Everything

By Jon Matonis

Why did a digital currency like bitcoin take so long to appear on the scene if the basic cryptographic elements were already in place?

Two writers attempt to answer this question. The first is author gwern publishing "Bitcoin is Worse is Better" on Bitcoin Weekly explaining how the most elegant solution to a problem does not always end up becoming the prevailing technology. Gwern writes that a lack of novelty is part of bitcoin's appeal because there is less danger when not introducing new parts of a cryptosystem:

"The interesting thing is that by even the most generous accounting, all the pieces were in place for at least 8 years before Satoshi's publication, which was followed more than half a year later by the first public prototype (Satoshi claims that before he write the whitepaper, he wrote a prototype). If we look at the citations in the whitepaper and others, and then order the relevant technologies by year in descending order:

  1. 2001-2005: Nick Szabo, Bit Gold
  2. 2001: SHA-256 finalized
  3. 1998: Wei Dai, B-money
  4. 1997: HashCash
  5. 1992-1993: Proof-of-work for spam ("Pricing via Processing, Or, Combating Junk Mail, Advances in Cryptology", Dwork 1993, published in CRYPTO'92)
  6. 1991: cryptographic timestamps
  7. 1980: public key cryptography. (This is Satoshi's citation date; Diffie-Hellman, the first published system, was in 1976, not 1980.)
  8. 1979: Hash tree"

Gwern then logically concludes with the viral aspect of bitcoin being the most likely feature leading to its popularization and success:
"A cryptographer would have difficulty coming up with Bitcoin because it is so ugly and there are so many elegant features he wants in it. Programmers and mathematicians often speak of ‘taste’, and how they lead one to better solutions. A cryptographer’s taste is for cryptosystems optimized for efficiency and theorems; it is not for systems optimized for virulence, for their sociological appeal ("Bitcoin, like the recent commercial phenomenon Groupon, tends to turn people into marketers because they feel they have something to gain, however small it might be in the end; I think that partly accounts for its temporary success."). Centralized systems are natural solutions because they are easy, like the integers are easy; but like the integers are but a vanishingly small subset of the reals, so too are centralized systems a tiny subset of decentralized ones. DigiCash and all the other cryptocurrency startups may have had many nifty features, may have been far more efficient, and all that jazz, but they died anyway. They had no communities, and their centralization meant that they fell with their corporate patrons. They had to win in their compressed timeframe or die out completely. But “that is not dead which can eternal lie”.

It may be that Bitcoin’s greatest virtue is not its deflation, nor its microtransactions, but its viral distributed nature; it can wait for its opportunity. 'If you sit by the bank of the river long enough, you can watch the bodies of your enemies float by.'

The second writer is Nick Szabo, creator of bit gold which is commonly known as a precursor to bitcoin. I corresponded with Nick briefly after he left Digicash but prior to his published ideas on bit gold. In addition to being a cryptographer and an accomplished writer, he has an excellent grasp of the larger economic themes surrounding a nonpolitical digital monetary unit. In a follow-up to gwern, Nick recently wrote "Bitcoin, what took ye so long?" in Unenumerated stating:

"While the security technology is very far from trivial, the "why" was by far the biggest stumbling block -- nearly everybody who heard the general idea thought it was a very bad idea. Myself, Wei Dai, and Hal Finney were the only people I know of who liked the idea (or in Dai's case his related idea) enough to pursue it to any significant extent until Nakamoto (assuming Nakamoto is not really Finney or Dai). Only Finney (RPOW) and Nakamoto were motivated enough to actually implement such a scheme.

The "why" requires coming to an accurate understanding of the nature of two difficult and almost always misunderstood topics, namely trust and the nature of money. The overlap between cryptographic experts and libertarians who might sympathize with such a "gold bug" idea is already rather small, since most cryptographic experts earn their living in academia and share its political biases. Even among this uncommon intersection as stated very few people thought it was a good idea.

There's nothing like Nakamoto's incentive-to-market scheme to change minds about these issues. :-) Thanks to RAMs full of coin with 'scheduled deflation', there are now no shortage of people willing to argue in its favor."

I agree with Nick that the "why" has changed in the last ten to fifteen years; however, my reasons are that the world generally has become more attune to centralized monetary planning and manipulation for the benefit of the banker class and money going digital has led to a decreasing amount of personal privacy and an increasing amount of transaction reversibility, a la PayPal. Money was never intended to track identity and a payment system should not be used to censor and ban certain types of 'offensive' transactions as in the highly political case of Wikileaks temporarily losing almost all methods of online donation.

My mantra has always been that free individuals should 'resist digital money unless anonymous' and the transition to a digital cash or a digital bearer token system should not diminish the amount of basic financial privacy and anonymity that exists today in the physical world of paper cash. Otherwise, it would represent a step backwards, not forward. The digital monetary attributes which achieve that desired goal ultimately may have a value that supersedes a money's 'origin of use' value.

I believe that bitcoin's major improvements over previous attempts include both the viral nature of the distributed deployment and the enhanced security of a RPOW time-stamp service to prevent double spending without a central issuer. Indeed, Nick applauds the bitcoin author for improving security in the peer-to-peer environment:

"Nakamoto improved a significant security shortcoming that my design had, namely by requiring a proof-of-work to be a node in the Byzantine-resilient peer-to-peer system to lessen the threat of an untrustworthy party controlling the majority of nodes and thus corrupting a number of important security features. Yet another feature obvious in hindsight, quite non-obvious in foresight."

For further reading:
"No One Sends Bitcoins", Ironwolf, May 24, 2011
"Causes behind the Bitcoin Price Rally", Vitalik Buterin, Bitcoin Weekly, May 14, 2011
"Bit gold", Nick Szabo, December 27, 2008
"Bit gold markets", Nick Szabo, December 27, 2008
"Trusted Third Parties Are Security Holes", Nick Szabo, 2005
"Shelling Out: The Origins of Money", Nick Szabo, 2002

9 comments:

  1. Gwern's post fails to appreciate the technical advances that BitCoin originated.

    I have been trying, off and on, to invent a decentralized digital payment system for fifteen years (since I was at DigiCash). I wasn't sure that a practical system was even *possible*, until BitCoin was actually implemented and became as popular as it has. Scientific advances often seem obvious in retrospect, and so it is with BitCoin

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  2. Oh wait, I have to revise this, as I remember trying to invent a decentralized digital payment system in about 1995, which was before I joined DigiCash. :-)

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  3. Another possible explanation for the "why now?" question is that more people around the planet are seeking alternatives to official currencies that no longer seem as safe in light of the crisis of 2008 and the ongoing economic problems in Europe. This, in fact, may be driving up demand for gold too.

    I've posted some of thoughts on the matter here:
    http://cs702.wordpress.com/

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  4. These explanations about people's motivations may indeed be the explanation, if what happened was that Satoshi Nakamoto became more motivated due to these considerations, a few years ago, and thus succeeded at inventing BitCoin. :-)

    But absent that invention, no matter how motivated people were to use a new currency, a decentralized currency would not have been among their options.

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  5. Rather than the sharp shock of a recession, followed by a swift recovery, governments have chosen the nauseous hangover of massive inflation.

    They always do. Not since the '80s of Reagan and Volcker (govt under Reagan grew at 1% adjusted for inflation) have we chosen discipline.

    Math will have to do.

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  6. In regard to the question of timing, or the "why now" phenomenon of bitcoin I would offer the following suggestion. For nearly a century the Federal Reserve Note has been understood to represent the full faith and credit of the United States. It is only recently that that same full faith and credit has been understood to be entirely based on confidence rather than asset value.

    Once it was confidence that entered the consciousness as the single pillar upholding the value, then it frees the mind to consider what other mechanism might serve that same need for confidence. In the case of Bitcoin, is it reasonable to assert that confidence in technology to provide a diminishing incidence of friction exceeds confidence in a political solution to reining in unsustainable levels of debt.

    To say it another way, who do you trust more as a security guard watching over your money, an algorithm or your elected official?

    http://tradewithdave.com/?p=6628

    Dave Harrison
    www.tradewithdave.com

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  7. The Russian version of Bitcoin called Webmoney has been around since 1997 and it's far more advanced than Bitcoin in terms of market penetration as well as security, exchange mechanisms and software:


    http://www.wmtransfer.com/

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  8. Also for further reading:
    "The Economics of Cryptocurrency", Eli Dourado, March 12, 2011 (good comments from Wei Dai)

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  9. isnt nick szabo an alterego for jon matonis,

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