The Dissolution of Money: a Bitcoin essay

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The laboratory door slammed in the Niels Bohr Institute and the chemist walked quickly across the room. It was early on the morning of 9th April 1940 and George de Hevesy started to mix a concoction of concentrated nitric acid and hydrochloric acid. He watched as the colourless liquid turned to yellow and then a dark gold. The radio blasted a warning from the corner: “German troops landed in Denmark at 0355 this morning and have moved towards Amalienborg Palace.”

He hurriedly dipped his hands into his pocket and uncovered the two Nobel Prize gold medals. One for each of his colleagues Max von Laue and James Franck. He carefully dropped both medals into the honeyed liquid and watched. “Civilians are being urged to comply with the German soldiers”. As the noble metal began to corrode in the Aqua Regia, de Hevesey lifted the container and placed it on the shelves where it blended in with the array of other brightly coloured experiments.

In 2011 in United States of America, The Real Plato sits in front of a webcam, his dark, bedraggled hair tumbling half-way down his youthful face and secured with a green bandanna which sits above sharp, black eyes. He shifts, awkwardly arranging the camera, and begins to speak about the Darknet.

He describes a clandestine subterranean network running parallel alongside the internet where censorship is circumvented and dissidents can communicate freely. Origin and destination are cloaked and any exchange is anonymous. But dissenters are not the only bodies who wish to remain anonymous. Off-the-beaten-track is a site which openly sells illegal drugs. Welcome to The Silk Road where Bitcoin is the currency du jour.

The Real Plato has embarked on the world’s first Bitcoin road-trip in his 1999 Firebird. Starting in Hartford, Conneticut, he speaks from Denver and plans to travel 8600 miles without touching a US Dollar. The intelligent electrical engineer is keen to discuss his “proof of concept” trip and share his knowledge of Bitcoin.

“It’s basically an internet currency.” He explains simply. “You have dollar, you have Yen and now you have Bitcoins. It’s different to a Dollar in a couple of positive ways, the US Dollar is controlled by The Federal Reserve, but with Bitcoin there is no centralised Bank. The other reason I like it is there’s a limited quantity. Only 21 million Bitcoins will ever be made.”

The Real Plato bought his Bitcoins when they were worth $0.42 and at the time of speaking, they were worth $7.50. The US Dollar value of Bitcoins since inception peaked at $18, been subject to some crashes, danced around $10 for a while and is at the time of writing this around $12.

He goes on to describe the authoritarian accounting ledger that contains records of every Bitcoin transaction since January 2009, but holds no direct record of the payment origin and to whom it was paid. Bitcoins are ‘mined’ by nodes in the network using a complex proof-of-work system. The reward for mining a new Bitcoin is 50 Bitcoins.

Aside from the technological theory, one of the most talked about aspects of Bitcoin in the media and forums is the mysterious identity of the creator, Satoshi Nakamoto. The hacker community, although remaining largely anonymous to the outside world, are known to each other through pseudonyms and reputation. Achievements are lauded and meritocracy rules over nepotism in every sphere.

The previously unknown Satoshi Nakamoto released a paper in 2008 and writes in the introduction: “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” Transferring our attention to a single word in that sentence, he continues: “While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

The mining and node software for the Bitcoin network is based on mathematical proof, not trust and are built around peer-to-peer networking, digital signatures and cryptographic proof to make and verify transactions. To prove the code to be reliable, a whole host of hackers is always on hand to attempt to penetrate, infiltrate or prove it to be worthless. Dan Kaminsky attempted exactly that.

One of the world most well-known and talented ‘White-Hat’ hackers, Kaminsky discovered a never-before-seen bug in the one of the basic mechanisms underlying the internet. He took what he had found to the National Security Agency and big names like Microsoft, Google, Cisco and worked with them to find a patch. Had he been a ‘Black-Hat’ hacker, the bug would have allowed him to exploit the ‘I forgot my password’ link to reset the password on almost anyone’s account.

In a windowless room, Kaminsky works to find ways to break the system. Each time he attempted to insert his malicious code, a message was waiting for him: “Attack removed”. His beautiful bugs were thwarted at every turn.

Kaminsky had to admit defeat, and that he had a huge amount of respect for Satoshi’s code. He described ‘normal’ code that looks good from the outside, but scratch the surface and it’s very badly executed. Bitcoin, on the other hand, looks bad from the outside, but scratch the surface and it’s really very good. “It has the mark of being audited by people like us”. He conceded that whoever Satoshi was, there was undeniable knowledge of the programming language C++, peer-to-peer networks and economics.

Satoshi had claimed on forums to be a 36-year-old Japanese man, and posted frequently in 2009 and 2010, but has since disappeared without trace. The hacker community believes the information he imparted about his identity to be an elegant piece of misdirection. The forum is littered with speculative scenarios about Satoshi’s identity and current whereabouts. Satoshi was killed because of Bitcoins; Satoshi is a group of people, not just one; and one user poignantly writes: “He was Edmond Dantés… and he was my father. And my mother… my brother… my friend. He was you… and me. He was all of us.”

Not satisfied with the additional cipher, the Bitcoins members decided to search the publically available information on Satoshi. A good place to start, suggests a ‘n00b’, is who bought bitcoin.org? The answer comes right back: the website is registered to a company called Anonymousspeech LLC with the registered address in Tokyo. That would have been too easy. The forum buzzes with scorn for such a straightforward question and defence for the anti-hero. Would a gifted programmer such as Satoshi really fall at the first hurdle and register a website in his or her own name?

The hackers took the forums and analysed the language and timing that made up every one of his posts. The 80,000 words was almost always written in flawless, colloquial English, adopting spellings such as ‘colour’ and ‘favour’; the shortened version of Mathematics was singular, an ‘apartment’ was a ‘flat’ and even an undisputed genius like Satoshi finds things ‘bloody hard’ on occasion. A time-analysis was also done on his posts. It was discovered that most of them were done between the hours of 6pm and 11pm GMT. Prime time for the end of UK business hours.

The first blockchain, known as the ‘genesis block’ had a line of text lodged into the data: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. Which not only fuels the fire of belief that Satoshi is English, but fuels the fire of the cryptographic libertarian’s dismay at the failure of the financial system.

Bitcoin is the embodiment of anarchism; whether Satoshi’s sentiment originated during the financial crash, or whether that was a catalyst for a burning rage to free oneself from the shackles of government, Satoshi wanted to create an absolute in cooperative economics – a consensual currency. The Bitcoin network is a consensual system where the true history and state of transactions is decided by a majority of nodes. The integrity of the system relies on no one entity controlling more than half the nodes, otherwise that entity could successfully double-spend a coin.

In 1933, President Franklin D. Roosevelt made it illegal for American citizens to own gold . In 1971 President Richard Nixon decoupled the convertibility of gold to the US dollar thus ending the Bretton Woods system of currency. The US Dollar is a fiat currency.

US senator Charles Schumer has described Bitcoin as “an online form of money-laundering”, but Lewis Solomon, a professor emiritus at George Washington law school argues that Bitcoin is a grey area, legally speaking, he is still unsure whether Bitcoin is to be treated as a currency, a commodity or even a security. A short look back in history and one can see many examples of alternative currencies being shut down and their creators prosecuted, as with e-gold in 2009 where the directors were prosecuted and fined $3.7 million.

The decentralised nature of Bitcoin spreads the accountability throughout the community: the 44 exchanges; the software used to make or accept payments; the businesses that accept them and, of course, the people who spend them. But that the creation of Bitcoin is attributed to Satoshi makes for a fascinating target for a treasure hunt.

Joshua Davis writing for The New Yorker in October 2011 embarked on a crusade of curiosity to unmask Satoshi. Davis found himself at the Crypto 2011 conference surreptitiously asking about Satoshi. He was pointed in the direction of a young English man called Michael Clear. Clear was a 23-year-old graduate from Trinity College, Dublin and named as top computer science graduate in 2008. Straight out of University, he was hired to work at Allied-Irish bank to improve the coding of the currency-trading software. He had also co-authored a paper on peer-to-peer technology. Three ticks.

Clear, the ‘early-Zeppelin Robert Plant’ look-a-like who preferred to keep a low-profile, was bemused by the humbling accusations and offered to take a look at the code for Davis. He described the person(s) Satoshi as someone with a “not insignificant knowledge of applied cryptography”, but outlined his worries. He was concerned that the early adopters of Bitcoin were gaining a disproportionately large share of the Bitcoins. Also, the onus very heavily lies on the user to download security software on their own and secure their own digital wallet. He felt that Bitcoin software should automatically provide that for the user.

A bank, being the central authority in any payment, receipt of payment or generation of capital, has their best interests at heart when securing online payments on account of a distaste for paying out for fraudulent banking activity. Bitcoin, conversely, views security from more of a Libertarian stance as there is no central authority to be held to account for an electronic wallet-snatch.

There have been attacks on a larger scale than the proverbial pick-pocketing. The largest Bitcoins exchange, Bitfloor, shut down in September this year when hackers walked away with 24,000 Bitcoins – the US Dollar equivalent of $250,000.

As well as studying the source code, Clear told Davis he might have found an identity for Satoshi. He pointed Davis in the direction of a 31-year-old Finnish researcher at the Helsinki Institute for Information Technology. Vili Lehdonvirta had been following Bitcoin but found it utterly hilarious that Davis had reached him and posed the question of his involvement. Previously having worked as a video-games programmer and subsequently studying virtual currencies, it was easy to see he was a good fit. Lehdonvirta downplayed his prowess with the language of Bitcoin – C++. He also outlined some of his concerns: “The only people who need cash in large denominations right now are criminals”.

Most sellers on The Silk Road are based in the UK and US, and offer products such as heroin, LSD and cannabis. The site’s operators lay claim to prohibiting goods or services intended to harm others, such as stolen credit card numbers, counterfeit currency, personal info, assassinations, weapons of mass destruction, and materials used to make such weapons.

US senator Charles Schumer held a press conference in which he appealed to the DEA and Justice Department to shut down Silk Road, which he cited as “the most brazen attempt to peddle drugs online that we have ever seen”. Nicolas Christin, a researcher at Carnegie Mellon University, estimates Bitcoin transactions on Silk Road are now worth $1.9m per month.

The Silk Road can only be accessed through a network known as Tor, short for The Onion Router which makes up part of the Darknet. Tor directs internet traffic within a network of voluntary nodes. Encryption is added in each layer thus making a trace of internet activity incredibly difficult and allowing users to circumvent any censorship that may be imposed.

In March 2011 The Tor Project was awarded the Free Software Foundation’s Award for Projects of Social Benefit: “Using free software, Tor has enabled roughly 36 million people around the world to experience freedom of access and expression on the Internet while keeping them in control of their privacy and anonymity. Its network has proved pivotal in dissident movements in both Iran and more recently Egypt.”

In the midst of a revolution, the Darknet, also hides a murky and sordid world of child pornography. Wherever a cloak of disguise exists, human nature will seek to conceal their ugliest parts.

One early Bitcoin adopter, a currency trader in London, personifies the anarchistic tendencies: “It’s unfortunate that the Darknet is linked to child pornography, but as much as I don’t like child pornography, that’s not my battle to fight.” What about the juxtaposition of using Tor as a tool for dissent in oppressed countries and child pornography? How can it be used for good in one country and for such evil simultaneously? “You deem dissent to be a good thing, but they’re criminals in their own country.” The technology doesn’t differentiate between the relative human construct of good and evil.

While some live under censorship, The Data Communications Bill currently being debated in UK Parliament, which purports to protect us from the disembodied enemy ‘Terrorism’, will result in constant monitoring of our electronic communication. While civil liberties organisations take the front line against governments, advances in the way we store data borne from the same concept as the Bitcoin system mean that it is more expensive for many companies to delete data than save it. “Don’t think for a second that our every electronic move isn’t already being monitored.” Warns the London currency trader. “Never forget we live in a Tyranny.”

In 2011 Dan Kaminsky created a tribute to his late friend Len Sassaman by encoding a message in the Bitcoin list of transactions with something known as ASCII art. When the message is passed through a filter to extract the readable text, an image of Len created out of keyboard characters is immortalised in the list on transactions. In addition to being an hilarious prank that Len would have loved, this also pleased some other users of Bitcoin.

The number of Bitcoins that will ever be released has a finite amount, so Kaminsky burning Bitcoins will only ever increase the remaining notional value of each Bitcoin. Unlike the current modern economical system where banks and central authorities, such as governments, can effectively print cash and artificially inflate the value, the efficacy of Bitcoin creation is reliant on the mathematical properties of a problem which is too hard to solve in less than 10 minutes.

Currently the released capital stands at over 100 million USD. By the year 2140 the full amount of bit coins will have been released. Each Bitcoin is broken down into 100th and named Bitcent. The smallest denomination is a Bitcoin broken down into 100 million, each known as one Satoshi after its creator.

As the number of remaining Bitcoins to distribute tends towards zero, the difficulty of creating new Bitcoins increases. By 2014, all 21 million Bitcoins will have been discovered and the model will eventually change towards just transaction fees as the incentive for nodes to continue to verify transactions. An obvious way for supporters to dispel Michael Clear’s concern that the early adopters will receive disproportionately large benefits is to increase the number of users as quickly as possible. But scalability reveals its own issues.

Despite feeling that this is one of the top three most interesting security problems this decade, Kaminsky laments that for Bitcoin to be scalable in a way that all transactions can be processed, ‘supernodes’ would have to be introduced. He feels this would very quickly turn into the banking model, with the control becoming centralised. Due to the large amount of data being swapped between the parties in the peer-to-peer model, there will become fewer and fewer supernodes and the threshold for one single entity to control over half of the nodes is, as Kaminisky describes, inevitable.

There is a subtle difference to the Bitcoin based banking model and the current banking model – Bitcoin ‘banks’ still can’t create coins that aren’t mined and, once all coins have been mined, they are not able to create more.

The Bitcoins system can refuse to accept blocks with ‘undesirable’ transactions. In the current banking model, an undesirable transaction is open to interpretation. Governmental bodies can physically suspend activity on accounts and freeze assets or reverse a transaction. With the Bitcoin model, it is possible to retain control of the electronic coins in the face of calamity.

Brainwallet is a concept of storing Bitcoins in one’s own mind by memorization of a specific and personal passphrase. As long as the passphrase is not recorded anywhere, the Bitcoins are thought to exist only in the mind of the holder. A passphrase difficult enough to withstand a brute-force guess is created and turned into a private key which, in turn is used to compute one or more Bitcoins addresses. Bitcoins are sent to the address. In order to recover the Bitcoins, one must recompute the private key with the same phrase. The private key is imported into a wallet. If a Brainwallet is forgotten or the person dies or is permanently incapacitated, the Bitcoins are lost forever.

A London-based Australian hacker envisions two feuding children having to reconcile their differences upon the death of their parent. The parent, dismayed at their bickering, sends all their assets to the Bitcoins addresses created by the Brainwallet, much like dissolving the coins in Aqua Regia, and leaves each child half of the words in the will. Only when they can agree to share the password can they claim their inheritance.

Neither nitric acid or hydrochloric acid can dissolve gold alone; they need one another for the chemical reaction to corrode the precious metal. George de Hevesy returned the the Niels Bohr Institute after the war to find the dissolved gold medals untouched by the Nazi invasion. He set to work precipitating the metal and took the result back to the Royal Swedish Academy of Sciences and the Nobel Foundation. The medals were recast and presented a second time to Max von Laue and James Franck.

The identity of Satoshi remains a mystery.

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