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The Dawn of Bitcoin

In 2008, a design was finally released for a practical digital currency that did not rely on the brittle dependency of a centralized third party: Satoshi published his white paper on Bitcoin.

The key factor distinguishing Bitcoin from its predecessors was that Bitcoin was not a company (or a product of a company) but merely a set of rules, a protocol, that dictated how digital transactions should be handled by a network of computers. Anybody could read the rules and follow them, but no individual could "own" or change them.[1] Because Bitcoin had no central point of failure, it didn't need a government's permission to exist: There was no Bitcoin company to shut down or central organizer to incarcerate. Essentially, the Bitcoin protocol was just the clever use of mathematics to transmit value between people.

In the 1990s, many digital cash companies were playing a game of legalistic chess with governments, trying to make moves to carve out a legal niche for their products without running afoul of anti-money laundering laws. However, without exception, they all lost at this game. For good or ill, Bitcoin "solved" this problem by simply upending the chessboard: In a system without a central mediator, it wasn't possible to charge a specific person with money laundering.

Additionally, with Bitcoin, no single party could simply decide to shut down the system. As long as there was one person in the world who continued to run Bitcoin-mining software, the whole system would keep running. This represented a clear break from past digital currencies, and so a buzz surrounding the technology began building as soon as the first Bitcoin client became available in 2009.

Given the past history of money-laundering charges against digital currency providers, it is perhaps not surprising that Satoshi decided to remain anonymous. Even though he had no control over the operation of the Bitcoin network by design, a risk would always be present that someone could charge him (falsely) with "operating Bitcoin." Cleverly, he sidestepped this risk by declining to reveal his identity.

Bitcoin's First Four Years

Written under the pseudonym Satoshi Nakamoto and distributed on a cryptography mailing list in October 2008, a paper titled "Bitcoin: A peer-to-peer electronic cash system" was the first public mention of Bitcoin. This eight-page document outlined the basic design of Bitcoin but did not delve into any of the implementation details. In online discussions that followed, Satoshi claimed that he[2] had been working on Bitcoin's design since 2007. Shortly after publishing the paper, Satoshi released the first version of a program that implemented the idea, dubbed Bitcoin-Qt 0.1, and invited others to download and try running it. The first block in the blockchain, often referred to as the genesis block, was added by Satoshi on January 3, 2009. When he added the block to the blockchain, he inserted a short message, which all miners can do. In the genesis block, Satoshi wrote, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." This was the January 3, 2009, headline on the front page of The Times, a British newspaper. By including this message in the genesis block, Satoshi proved that he couldn't have added it to the blockchain before that date. Some think that the message choice also revealed a bit about Satoshi's motivations for creating Bitcoin.

Because the code was open source, anyone could download, review, or modify it. Soon a small band of volunteers joined Satoshi in contributing new features and fixing bugs (however, the fundamental design never changed). Many cryptographers and programmers began to participate in Bitcoin's development, including notable computer scientists like Hal Finney, who were longtime contributors to digital currency research (among other topics).[3] Although Satoshi communicated frequently via forum posts and emails with early Bitcoin users and developers, he never revealed personal details about himself. One of the main contributors, Gavin Andresen, earned Satoshi's trust over time and gradually took control as the unofficial lead developer of the Bitcoin project. On December 12, 2010, Satoshi posted a comment about the latest update to the Bitcoin software (now v0.3.19):

There's more work to do on DoS [denial of service], but I'm doing a quick build of what I have so far in case it's needed, before venturing into more complex ideas.

He was never heard from again.[4] To this day, nobody knows Satoshi's true identity, although countless people have published theories on who he might be, often naming either notable cryptographers or brilliant reclusive mathematicians. Not surprisingly, everyone who has been fingered as the inventor of Bitcoin has denied it.

In Bitcoin's first year, anyone could generate several hundred bitcoins a day by mining on an ordinary laptop computer. At that time, however, it wasn't obvious that bitcoins had any value. Even some of the early enthusiasts who appreciated Bitcoin as an important intellectual achievement didn't believe their bitcoins were worth keeping after being mined. Many deleted their wallets when they were done playing with the software. From 2009 to early 2010, it was not meaningful to speak of the "price" of a bit-coin. Nobody had traded anything of value for one (at least publicly), so Bitcoin remained a mere mathematical parlor trick.

But in early 2010, small-scale currency exchanges opened, and bitcoins began trading for less than a penny each. An important moment occurred on May 18, 2010, when a forum user, laszlo, offered to send 10,000 bitcoins to anyone who would order two large pizzas for him (see Figure 6-1). This is considered the first recorded exchange of goods for bitcoins. At the time, many felt that laszlo was getting the better end of the deal. But when bit-coins reached parity with the US dollar on February 9, 2011, the joke was on laszlo; he had spent what had become $10,000 worth of bitcoins on some pizzas.

Bitcoins continued to increase in value, and on April 3, 2013, a Porsche in Texas was sold for 300 bitcoins at the rate of about $130 per bitcoin. Less than a year later, another sports car, the 2014 Lamborghini Gallardo valued at a little over $200,000, was purchased for 216 bitcoins, corresponding to about $925 per bitcoin (Figure 6-1).

By the end of 2013, more than a hundred million dollar's worth of goods had been exchanged. Thousands of small merchants and a dozen or so major retailers and online businesses had begun accepting bitcoins as payment. The bitcoin exchange rate that year went as high as $1,000 per BTC, which was a 500,000-fold increase from when the pizzas were purchased in mid-2010. Major Bitcoin currency exchanges were seeing trading volumes of $500 million per month.

Although these Bitcoin adoption numbers were remarkable in their own right, Bitcoin also impacted the world at large in less quantifiable ways. Let's explore the influence Bitcoin has had next.

Photographs of the pizzas purchased by laszlo for 10,000 bitcoins in May 2010 (left) and the 2014 Lamborghini Gallardo purchased for 216 bitcoins in December 2013

Figure 6-1: Photographs of the pizzas purchased by laszlo for 10,000 bitcoins in May 2010 (left) and the 2014 Lamborghini Gallardo purchased for 216 bitcoins in December 2013

  • [1] Yuri Takhteyev, a researcher at the University of Toronto, compared Bitcoin to hockey: "Hockey is just a collection of rules that describe a particular sport. Nobody owns the rules of hockey, and if anybody wants to change the rules, they can do so as long as they don't mind playing by themselves. It is possible for the rules of hockey to change, but only if everyone agrees to the new rules. Bitcoin is the same way." (research.utoronto.ca/ what-is-bitcoin/)
  • [2] We actually don't know whether Satoshi Nakamoto is a man, a woman, or a group of people.
  • [3] Hal Finney developed a reusable proof-of-work system that overlaps significantly with Bitcoin's proof-of-work used in mining.
  • [4] On March 6, 2014, a user account belonging to Satoshi Nakamoto posted on the P2Pfoundation forum to clarify that he was not Dorian Satoshi Nakamoto, a man who at the time was being harassed by journalists because they mistakenly believed he was the inventor of Bitcoin.
 
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