Tim May was the founder of the Cypherpunks and the Crypto-Anaquia Movement. In order to attract more followers to his cause, he created and shared, in the late 1980s, in cryptography and hacking conferences, the Crypto-Anarchic Manifesto. In it, May presented encryption as the solution to maintain privacy in a world that was beginning to go digital. “Informatics is on the verge of allowing individuals or groups to communicate and interact in an anonymous way.”
Although the technology to make this happen has existed for more than a decade at the time, the next few years and the increase in computing power accessible to anyone would make it possible to implement these ideas. The application of this social and economic revolution "would change the nature of government regulations, the ability to enforce taxes and control economic interactions and even change the nature of trust and reputation. ”May believed that the disruption that cryptological methods could make to the economic transactions of governments and companies would be comparable to the structural changes in the power chain caused by the invention of the press”. And it predicted that, combined with information technology and the internet, cryptography would create markets for anything that could be put into words or images, whether those products were good or bad. At the end of the manifesto listed the core concerns of crypto anarchy: encryption, anonymous networks, collapse of governments and digital money.
Nick Szabo had joined the Cypherpunks for sharing these ideas. Contributed assiduously to the Mailing List and developed some tools to make this vision a reality. Inspired by the liberal economist Friedrich Hayek, Szabo realized that the basis of a human society is largely based on a set of basic principles such as property or contracts, traditionally imposed and regulated by the state. Now, if the goal was to eliminate the state, an alternative would have to be created that could recreate this online. That is how it came to the creation for which it is best known: smart contracts. These protocols would establish and verify the performance of a contract without the need for an external intervener. In Szabo's view, placing trust in others was a security breach.
Digital Money
But Szabo would also create his version of another key tool for the Cypherpunks - digital money. Szabo studied this topic in depth and wrote an essay on the importance and characteristics of money in less developed societies. In his essay, “Shelling Out: the Origins of Money”, he realized that humans in various cultures tended to collect collectible, scarce, transportable and identifiable objects, often to make jewelery. These objects led human beings to cooperate with each other using them as money to make exchanges, purchases and sales. During his research he realized what characteristics would have to take the form of digital money that he set out to create in order to be successful.
Szabo was a pioneer in online commerce and served in the field as a consultant. One of the companies he worked for was David Chaum's DigiCash, which had created the first form of digital money - eCash. Here he discovered yet another important feature that he wanted to instill in his solution. DigiCash was a centralized company and Szabo realized that both he and others within the company could change balance sheets in each person's accounts at their leisure. The solution would have to be decentralized.
By this time, Szabo had realized that the characteristics that his digital money would have to have would be very similar to precious metals like gold. So I wanted to create digital gold. Created Bit Gold.
Bit Gold
In 1998, Szabo created his version of digital money, but he would only describe it publicly in 2005. He drank inspiration from previous forms of digital money.
From Adam Back's Hashcash, he took advantage of the Proof-of-Work system to create digital scarcity. Through it, physical resources, in this case computational power, would have to be spent to create a currency.
From Wei Dai's b-money, with whom Szabo exchanged emails regularly, he removed the idea of distributing the database that kept the records of who owned which coins by several voluntary "servers".
The increase in the computational capacity of the available systems presented a problem for Bit Gold, since it could create a super-inflation that made it too numerous to be valuable. To solve this problem Szabo decided that the created hashes would have to be marked with their creation date. The older the date, the more valuable that hash would be. This created a barrier to fungibility (any two equal items must be the same - two 1 euro coins are worth the same). The solution to overcome this obstacle would be to create a second layer that would function as a bank, one that would be transparent with public records. These banks would aggregate a number of hashes that would have the same value regardless of the date of creation, and like eCash, would issue private and anonymous digital notes.
Bit Gold thus created a proposal for a “gold standard” of the digital age.
In 2008, Szabo tried for the first time to join a team to implement a Bit Gold test. There were no answers. However, his solution for digital money was an inspiration for the creation of Bitcoin. Satoshi Nakamoto wrote that his invention was “an implementation of Wei Dai's b-money proposals […] in the Cypherpunks […] in 1998 and Nick Szabo's Bitgold”, however, he did not mention Nick Szabo and his Bit Gold in white Bitcoin paper. Some see this as an important signal to indicate that Nick Szabo is actually Satoshi Nakamoto. However, there are relevant differences, especially in the monetary model that uses Bitcoin - Bitcoin inflation is defined from the beginning and will not be altered by the increase in the computational capacity of its users. Instead, the difficulty in creating blocks is adjusted according to the total power of the network to maintain this fixed rate of money issuance. Nick Szabo himself acknowledges: "I can't decide if it's a feature or a bug but it makes it simpler."
This article closes the Bitcoin Prehistory series, where we studied the pre-Bitcoin solutions to the digital money problem.