Bitcoin and block-chain could transform the world

My Times column on who started bitcoin and what
it means:

Amid the hurly-burly of war, disease and politics,
you might be forgiven for not paying much attention to bitcoin, the
electronic form of money favoured by radical libertarians and drug
dealers. Yet it is possible that when the history of these days
comes to be written, bitcoin’s story will loom large. Unnoticed
except by the tech-obsessed, the technology behind bitcoin may be
slowly giving birth to a brave new world, with eventual
implications well beyond money.

So argues a new book (Bitcoin:
The Future of Money?) by the financial commentator and
comedian Dominic Frisby. He makes the case that it is just possible
that bitcoin and its rivals — known as altcoins — and the
“blockchain” technology that lies behind them have the potential to
spark a radical decentralisation of society itself. They could
change the way governments finance themselves, make banks redundant
and transform the ways companies are run. In the words of Jeff
Garzik, a bitcoin developer, bitcoin could be “the biggest thing
since the internet — a catalyst for change in all areas of our
lives”.

If he is right, then the founder of bitcoin will take his place
alongside the great inventors. So who is he? To this day he remains
carefully anonymous, and though Frisby makes a strong case for
having unmasked him, the man he has identified is scarcely more
visible than the disguise he uses. It is an alluring thought that
history could be changed anonymously.

Bitcoin went live in January 2009, on the day that the British
government announced a second bailout of the banks, an event
referred to in a segment of computer code hidden inside the first
bitcoins: it quoted a headline from The Times:
“Chancellor on brink of second bailout for banks”. That is
significant for two reasons. Satoshi Nakamoto, the pseudonym of
bitcoin’s founder, was clearly of the view that bitcoin’s purpose
was to replace a flawed system of banking and currency, and he was
also hinting that he was British and read The
Times.

Satoshi’s Britishness extends to his language, which uses
British phrases and spelling, and to the fact that his various
messages are always time-stamped in Greenwich Mean Time. In fact he
was doing his utmost not to sound like the American he is. The
timing of his postings on a bitcoin forum suggested he was either a
late riser on the US east coast or an early riser on the west
coast.

Meanwhile “cypherpunks” were a group of programmers who had come
together in Santa Cruz under the auspices of the computer pioneer
Tim May in 1992. Their aim was to undermine what they saw as
creeping government and corporate control over the nascent internet
by inventing methods of encryption that people could use. “Arise!
You have nothing to lose but your barbed wire fences,” May told
them. One of their first obsessions was a reliable form of
electronic cash, a substance that the economist Milton Friedman had
predicted would be the internet’s most important gift to
humanity.

Satoshi seems to have emerged from this group, which narrows
Frisby’s search. After analysing Satoshi’s writing style, typing
habits, computer coding skills and likely age, he eventually
concludes that the main and perhaps only person behind Satoshi is a
Californian with a degree in computer science and a doctorate in
law named Nick Szabo. Of course, Szabo has denied it on
Twitter.

Before his writing dried up around the time that bitcoin was
being created, Szabo wrote a long essay on the history of money,
called Shelling Out. In it he explored a
throwaway remark by the evolutionary biologist Richard Dawkins that
“money is a formal token of delayed reciprocal altruism”, and drew
upon other books in evolutionary psychology (including one of
mine).

What Szabo was after and what Satoshi achieved was to emulate
online the difficulty of mining precious metals. It requires vast
amounts of computing power to “mine” each bitcoin today — and
mining consists of the solving of massive mathematical puzzles by
hard computer grind. He also set out to emulate the trustworthiness
of paper money without a third party such as a bank or government
to verify it, which is the real genius of bitcoin.

Furthermore, the system is designed so it cannot produce more
than 21 million bitcoins, so debauching the currency by printing
money is impossible. The number that can be mined halves every four
years. Approximately 13 million have been mined so far, worth $6
billion today. Satoshi owns a large chunk of them and has not
cashed in lest it reveal his identity.

How does bitcoin achieve these feats? Frankly, I don’t fully
understand it (I am not sure anybody outside computer science does)
and they seem unable to translate it into simple English. But in
very broad outline, bitcoin is in effect a public ledger — a
compendium of previous transactions, stored by bitcoin users all
over the world. To participate in mining bitcoins you create a new
block in that ledger and share it with others in encrypted form.
This then makes bitcoin infallible as a register of who has
transferred value to whom: every bitcoin carries its ancestral
history in its code as verification that it is what it says it is.
No third party is involved.

A new currency is just one application of such an idea. The
blockchain’s special feature is that it cuts out the need for
somebody else to verify that something is what it says it is. This
opens the possibility of self-enforcing “smart contracts” and
“distributed autonomous organisations”, which the digital expert
Primavera de Filippi describes as networks that “once they have
been created and deployed on to the blockchain . . . no longer need
(nor heed) their creators”.

A simple and primitive example is Twister, a blockchain-based
social network with no corporate headquarters that a repressive
regime might shut down. The next step might be this: imagine in the
future summoning a taxi that is not only driverless but ownerless.
It belongs to a network that has raised funds, signed contracts and
taken delivery of vehicles autonomously, even though its
“headquarters” is distributed all over the net.

Perhaps you can now see why Satoshi Nakamoto would not want to
take credit for all this. Governments get jealous of people who
make them look irrelevant. Look what happened to Bernard von
NotHaus, who started openly selling tokens called “liberty dollars”
in 1998 to people who wanted a hedge against inflation. As the
economist Kevin Dowd recounts in a fine essay on the future of money, after nine years of
tolerating this, suddenly the US federal government arrested and
prosecuted him on the flimsiest of grounds for counterfeiting,
fraud and conspiracy. His real crime was to show the devaluing of
real dollars. No wonder Satoshi keeps his head down.