by Nick Giambruno, International Man:
Last week, I wrote about how the Cypherpunks helped break the government’s monopoly on cryptography. (In case you missed it, click here).
It laid the philosophical and technological foundation for Bitcoin.
A free-market, non-state digital money had long been the Cypherpunks’ ultimate goal.
They—and others—made numerous attempts, but none of them worked.
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These failures would not be in vain. They provided crucial lessons and building blocks that would lead to the birth of Bitcoin.
Here are some noteworthy examples:
In the early 1990s, Cypherpunk David Chaum tried to take public-key encryption and apply it to digital money with DigiCash. After struggling with adoption and regulatory problems, the company behind DigiCash went bankrupt.
E-gold was launched in 1996. It was an innovative attempt to create a gold-backed digital currency. However, the US government shut it down and indicted the business owners on money laundering charges and operating an unlicensed money transmitting business.
In 1997, Cypherpunk Adam Back created Hashcash, a proof-of-work system designed to combat email spam. The idea is to impose a computational cost on certain activities to deter malicious behavior. While Hashcash didn’t gain widespread traction, its core proof-of-work concept became a fundamental component of Bitcoin.
In 1998, Cypherpunk Nick Szabo proposed Bit Gold as a digital currency that relied on cryptographic proof instead of trust in a central authority. “Unforgeable costliness” is one of Bit Gold’s foundational principles. Provable costliness refers to the idea that a certain amount of computational work—or cost—must be verifiably expended to create a new unit of the digital asset. Bit Gold was never launched and remained a theoretical proposal.
Also, in 1998, Cypherpunk Wei Dai proposed B-Money, a digital money system. However, it remained theoretical and was not implemented.
A common theme in all of these attempts at creating a non-state digital money was that they all relied on some kind of central authority in one way or another. Those central authorities were existential points of failure.
Satoshi Nakamoto—Bitcoin’s anonymous Cypherpunk creator—recognized this problem when he wrote:
“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”
If non-state digital money were to succeed, it would need to solve the problem of relying on a central authority.
This is what is known as the Byzantine Generals Problem. It was a longstanding problem in computer science.
In short, it’s the problem of getting different people—who may be hostile to each other—to come to a consensus about something without a centralized trusted arbitrator of truth.
Here’s a helpful way to think of it.
Imagine you are in charge of a medieval army storming a walled city.
The attackers and defenders are equal in strength.
The attackers can only win if all the generals successfully coordinate their attack. If even one fails to coordinate, the entire attack will fail.
Complicating matters is that there might be some spies among your generals who deliberately pass on false information to sabotage the attack.
The problem is, how do you get them all to coordinate the attack successfully?
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