The whitepaper released by Satoshi Nakamoto on this Halloween night in the middle of the subprime mortgage crisis describes an idea that will inevitably take the world by storm. While most people still think of A Peer-to-Peer Electronic Cash System as nothing more than a (get-rich-quick scheme) — completely missing the profound change it will continue to have on society. — it becomes more obvious every day that it won’t go away. And allows “owned our identity,” meaning you have some kind of digital passport (or wallet) that proves you are you, not some imposter, and that this passport is secure, easy to use, and widely accepted in all corners of the internet, and also at banks and gyms and schools and shops, etc…?
We went from a world where digital cash was just an idea to a world where A Peer-to-Peer Electronic Cash System exists.As we shall see, this new reality is more powerful than one might think at first.It is powerful because it will usher in a new economic paradigm. It is powerful because it can’t be stopped.
Contrary to popular belief, Peer-to-Peer Electronic Cash System did not come out of nowhere. The idea of digital cash has a long and rich history. Most notably, a loose collective known as the cypherpunks wrote at length about digital anonymous cash, how such systems might be realized, and the societal implications of strong cryptography in general. Hence the name: cypherpunks. 1
After forming the group in 1992, Eric Hughes, Timothy C. May, and John Gilmore created the cypherpunk mailing list to discuss and share their ideas around cryptography, remailers, anonymity, digital cash, and “other interesting things” with a wider group of people. Many years later, a cypherpunk by the name of Satoshi Nakamoto chose to publish the Bitcoin whitepaper on a similar mailing list: the cryptography mailing list.
As is apparent by studying their writings, the cypherpunks cared a great deal about the idea of digital cash. In 1993, Eric Hughes discussed the idea of digital cash, its relation to privacy, and its importance for a free society in A Cypherpunk’s Manifesto: “Since we desire privacy, we must ensure that each party to a transaction have knowledge only of that which is directly necessary for that transaction. Since any information can be spoken of, we must ensure that we reveal as little as possible. In most cases personal identity is not salient. When I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am.”
They identifies multiple problems with our current monetary system and the conventional currencies that are native to it:
- trust in third parties
- currency debasement by central banks
- credit bubbles
- fractional reserve banking
- privacy
- lack of micropayments due to overhead costs
- middlemen
Knowing his audience, they goes on to point out how similar trust-related issues were solved in the world of computer systems in general, i.e. how strong cryptography did away with having to trust system administrators with your data. Once your files are encrypted, you do not need to trust whoever has access to these files, since they would need your password to decrypt them. In other words: we moved from trusting humans to trusting mathematics. This is especially relevant in a peer-to-peer setting, because thanks to strong cryptography (asymmetric key), you can exchange confidential data with others—including your future self—without having to rely on any middlemen.
While Bitcoin is a breakthrough in many ways, all the technical parts that make it work did exist already:
- Public-key cryptography
- Peer-to-peer networks
- Digital signatures
- Cryptographic hash functions
- Cryptographic time stamps
- Hash chains
- Proof-of-work