Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money

by Nathaniel Popper

This, then, is not a normal startup story, about a lone genius molding the world in his image and making gobs of money. It is, instead, a tale of a group invention that tapped into many of the prevailing currents of our time: the anger at the government and Wall Street; the battles between Silicon Valley and the financial industry; and the hopes we have placed in technology to save us from our own human frailty, as well as the fear that the power of technology can generate.

Good money has generally been durable (imagine a dollar bill printed on tissue paper), portable (imagine a quarter that weighed twenty pounds), divisible (imagine if we had only hundred-dollar bills and no coins), uniform (imagine if all dollar bills looked different), and scarce (imagine bills that could be copied by anyone).

The essential quality of successful money, through time, was not who issued it—or even how portable or durable it was—but rather the number of people willing to use

Rather than relying on a central bank or company to issue and keep track of the money—as the existing financial system and Chaum’s DigiCash did—this system was set up so that every Bitcoin transaction, and the holdings of every user, would be tracked and recorded by the computers of all the people using the digital money, on a communally maintained database that would come to be known as the blockchain.

According to the paper, each user of the system could have one or more public Bitcoin addresses—sort of like bank account numbers—and a private key for each address. The coins attached to a given address could be spent only by a person with the private key corresponding to the address. The private key was slightly different from a traditional password, which has to be kept by some central authority to check that the user is entering the correct password. In Bitcoin, Satoshi harnessed the wonders of public-key cryptography to make it possible for a user—let’s call her Alice again—to sign off on a transaction, and prove she has the private key, without anyone else ever needing to see or know her private key.*

the information about Alice’s transaction was recorded in a list of all recent transactions, referred to as a block, on the blockchain.

The exact method used to add blocks to the blockchain was perhaps the most complicated part of the system.

At the simplest level, it involved a sort of computational race between all computers on the network, modeled after the contest that Adam Back had invented for hashcash.

The computer that won the race was responsible for inscribing the most recent block of transa...

Equally important, the winner also received a bundle ...

the only way new Bitcoins could be brought ...

The reward of new coins helped encourage Bitcoin users to set their computers to partake in the communal ...

Alterations to the Bitcoin software, which would run on the computer of every user, would also be decided by means of this democratic model.

Any user could make a change to the open source Bitcoin software, but the changes would generally be effective only when a majority of the computers on the network adopted the altered version of the software. If a lone computer began running a different version of the Bitcoin software it would essentially be ignored by the other computers and would no longer be part of the Bitcoin network.

• Alice initiates a transfer of Bitcoins from her account by signing off with her private key and broadcasting the transaction to other users.

• The other users of the network make sure Alice’s Bitcoin address has sufficient funds and then add Alice’s transaction to a list of other

recent transactions, known ...

• Computers take part in a computational race to have their list of transactions, or bloc...

• The computer that has its block added to the blockchain is also granted a...

• Computers on the network start compiling a new list of unconfirmed recent transactio...

bundle of Bi...

simple but never previously possible: a financial network that could create and move money without a central authority.

no one other than the holder of a private key could spend or take the money associated with a particular Bitcoin address.

People who joined the Bitcoin network were, quite literally, both customers and owners of both the bank and the mint.

The software also mandated that the winner of each block would get fifty coins for the first four years, twenty-five coins for the next four years, and half as much again every four years until 21 million coins were released into the world, at which point new coin generation would stop.

the first transaction took place when Satoshi sent Hal ten coins to make sure that this part of the system was working smoothly.

In the very first recorded transaction of Bitcoin for United States dollars, Martti sent NewLibertyStandard 5,050 Bitcoins to use for seeding the new exchange. In return, Martti got $5.02 by PayPal.

NewLibertyStandard came up with his own method for determining its value—the rough cost of electricity needed to generate a coin,

“You don’t have to try to vote your way into changing the world,” he would tell anyone who listened. “If Bitcoin works, then it will change the entire world in a decade, without asking for anyone’s permission.”

Many libertarians and anarchists argued that the good in humans, or in the market, could do the job of regulators, ensuring that bad companies did not

survive.

But the Bitcoin experience suggested that the penalties meted out by the market are often imposed only after the bad deeds were d...

The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money.

we use it in jewelry because it’s very expensive. It’s not expensive because we use it in jewelry.”

It should be a lot easier to send a cent than to see video and audio.”

The blockchain technology made that previously impossible task possible. But it was much more than that, Wences emphasized. It was the next step in the evolution of money. He tried to explain his recent discoveries about the ledger as the foundation of all money. With Bitcoins, unlike pesos or dollars, everyone using them knew exactly how many existed, and they were not tied to one country. Unlike gold, which was universal but difficult to acquire and hold, Bitcoins could be bought, held, and transferred by anyone with an Internet connection, with the click of a mouse.

“Bitcoin is the first time in five thousand years that...

better than gold,” he said. “And it’s not a little bit better, it’s significantly better. It’s much more scarce. More divisible, more durable. It’s much mo...

Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.

this new form of money—and the ledger on which it ran—could allow for new kinds of stock exchanges and other things that hadn’t even been thought of yet. “When you are offering free, radically reduced transactions costs, and when you are offering the ability for programmable money that can put a lot of additional functionality on money, then you are talking about a market size of everybody in the world,” Liew said.

“I think whatever Jamie does or doesn’t do will be as relevant as what the postmaster general did or didn’t do about e-mail.”

The only way to stabilise the system is to rid it of the “cheating incentive”—that being the incentive that encourages the “prisoner” to take the high-risk selfish strategy.

Erik had come to be viewed as one of the few people

who managed to remain ideologically engaged without letting ideology totally overwhelm their business instincts.