Chapter 2 in a series "How to Think About Blockchains"
On 31st October, 2008, a pseudonymous person calling themself Satoshi Nakamoto posted a nine page document to a cryptography mailing list. It described a new "peer to peer electronic cash system" called Bitcoin. So the myth begins. It's not a very difficult read (go ahead - I'll wait), and describes how Satoshi solved the "double spend problem". It doesn't mention the word blockchain, but that brief document contains the seeds for some transformational stuff. Let's unpack it a bit.
Peer to peer
Firstly, the problem of paying peer to peer over the internet was something that had been out there for a while. Satoshi was the one to solve it. "Digital cash" is telling: the idea is to create something that works digitally peer to peer with the same confidence we have when handing over cash. Bitcoin was conceived as a payment mechanism. The fact that it doesn't yet work that well for payments is not very interesting. What counts is that the pieces required to create the payment process have many other applications.
For me to transfer value (make a payment) to you used to require that we both trust a third party. That third party might be the credit card people, the bank people, or the printing people who made money that is hard to counterfeit. The trust was necessary because there was no digital thing I could send you that represented value transfer, other than a promise that reflected our common relationship with a third party. If it was a bank EFT, then you trust your bank, I trust mine, they trust each other, and the value gets there. Same with credit cards. With cash, you trust that it's hard to copy, and it looks authentic.
Digital objects
What Satoshi did with bitcoin - and this is the important part for our purposes - was to create a mechanism for transferring a digital object from one entity to another. That's the double spend problem: you need to be sure that if I have sent it to you, then I can't send it to someone else. The way Bitcoin does this is by establishing a chain of ownership of all the bitcoin, and making it extremely difficult and prohibitively expensive to change that chain. The proof is online, and you can verify the details for yourself. How it works, technically, involves a network of validators ("miners"), a shared record of data, and some clever cryptography. If you want a straightforward technical explanation of how this works, then I recommend BillyBitco.in.
From this ability to have a unique and transactable digital object, you can draw a line to all other blockchain applications. The digital objects can be fungible, like bitcoins, or non fungible. They can be natively digital, or they can represent some traditional asset. The blockchain itself can include computational capability - this is what Ethereum pioneered, with smart contracts and virtual machines. The key thing is that two people, or two machines, can now transfer value without reference to a centralised entity. This creates an internet that we can trust, because now there is money involved, and because we have a tamper proof record.
Money or philosophy?
The reactions to Bitcoin are clouded by two things: that it is money, and that it is philosophical as well as technical. The first is easier to understand, and leads into the second: reinventing money was bound to upset and excite people, in roughly equal measure. It's all very well creating disruptive technical innovation, but if you are going to mess with money, then you need to be ready for them to come for you. This is probably the main reason that Satoshi remains anonymous to this day - he/she foresaw this, and planned accordingly. The second, philosophical angle is arguably the most interesting thing of all. If we don't need an authority to validate our money, then can we be independent of the nation states' incentive mechanisms and from money as a means of control? If blockchains can be used to break down our identity into other forms that are transparently verifiable - and they can - then can we be independent of the current issuers of identity, also the nation state? This rabbit hole is a fascinating one to explore because it causes us to reexamine our positions from birth as inheritors of a random and unearned legacy or birthright. Satoshi's focus seems to have been on the link between governments and the financial system. The first Bitcoin transaction has embedded in it a Times headline: "Chancellor on brink of second bailout for banks". Allied with what Bitcoin represents, this suggests that Satoshi had a certain frustration with the status quo.
The money discussion follows in the next chapter, but looking back at the thinking models, we can see how they can be applied here. What you think of Bitcoin probably depends on who you are, and what model you apply. If you take the money analogy, then you start from the digital cash perspective. What happens when all money is on blockchains, machines have wallets, and the web has value built in? From that starting point, you can see a future for financial services, perhaps built with Bitcoin as the digital gold underpinning all finance.
If you start from viewing Bitcoin as a disruptive technology, your perspective may be different. Blockchain starts as something that does transfer of value very securely and in a new way, but doesn't really threaten the incumbents. Then it adds programmability, gets used in new ways, is applied to different contexts, and the technology starts to make its mark. The cases where crypto is better than the old forms of money already exist; we can expect this list to grow over time as the technology spreads, and the features improve. Perhaps that is a good segue into where money is going, which will be chapter 3.
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