Nick Szabo’s Bit Gold: Digital Gold Before Bitcoin

bit gold of Nick Szabo - Source: Pixabay
bit gold of Nick Szabo - Source: Pixabay

As we saw in the first piece on the history of Bitcoin, the latter did not appear out of nowhere but rather evolved from a broader framework that combined technique, philosophy, and experimentation. Cypherpunks in the 1990s, anxious to develop a digital currency but conscious that systems like eCash and e-gold could not function due to their centralized design, considered models that did not rely on a trusted third party. Wei Dai introduced b-money, a distributed type of electronic cash, in 1998. In the same year, a man named Nick Szabo proposed a decentralized digital gold system called bit gold.

What is Bit Gold?

Bit gold, introduced by blockchain pioneer Nick Szabo in 1998, was one of the first efforts at creating decentralized virtual money. Despite the fact that the bit gold project was never realized, Szabo’s endeavor is widely regarded as the forerunner to Satoshi Nakamoto’s bitcoin system. Indeed, the bit gold and bitcoin protocols are so similar that some have suggested that Szabo is Satoshi Nakamoto, the secretive bitcoin designer (although Szabo has denied this claim)

The bit gold system (usually stated in lowercase except at the beginning of the phrase) is a forerunner to Bitcoin, as Satoshi Nakamoto recognized in 2010:

Bitcoin is an implementation of b-money proposed by Wei Dai on the Cypherpunks mailing list in 1998 and Bitgold proposed by Nick Szabo.

This system was designed to oversee the manufacture and trading of bit gold, a virtual resource. Unlike e-gold, which was backed by actual gold, or b-money, which was supposedly linked to a basket of products, bit gold should have an unfalsifiable rarity and hence comprise wholly digital gold. Before Bitcoin, Nick Szabo predicted that an electronic unit may gain value without first being linked to another commodity. Bit gold, like b-money, has never been implemented, but it is an intriguing notion that has piqued the curiosity of its developer, Nick Szabo.

How Is Bit Gold Different From Bitcoin?

Szabo predicted that the difficulty of extracting bit gold will change over time. It would not necessarily get easier or more difficult, but there would be oscillations in the quantity of bit gold that could be made at certain moments in time. Bitcoin, on the other hand, is constructed in such a way that mining it becomes increasingly difficult over time. (Bitcoins also have a limited quantity.)

More crucially, unlike bitcoin, bit gold was never meant to be electronic money in and of itself. Bit gold was developed as a reserve currency to support another type of electronic money. Bit gold was designed to function as tangible reserves in the days before fiat currencies.

Is Nick Szabo the same person as Satoshi Nakamoto?

A pseudonymous individual or group known as Satoshi Nakamoto introduced bitcoin on a cypherpunk email list in 2008. Nakamoto’s genuine identity remained unknown, though there is a long list of people suspected of being Nakamoto. People have hypothesized that Szabo is Nakamoto, despite his numerous denials.

Dominic Frisby’s research found circumstantial evidence, although he concedes that no proof exists that Satoshi is Szabo.

In an email to Frisby in July 2014, Szabo wrote, “I’m afraid you got it wrong doxing me as Satoshi, but I’m accustomed to it.”

Nick Szabo, an Universal Spirit

Nicholas J. Szabo is an American computer scientist, lawyer, and cryptographer best known for his work on digital contracts (now known as smart contracts) and money, as well as his involvement in the 1990s crypto-anarchist movement. He is one of the individuals thought to be Satoshi Nakamoto and the creator of Bitcoin, along with Wei Dai and Hal Finney.

Nick Szabo, an Universal Spirit – Source: Google Image

Nick Szabo was born in America, most likely in the late 1960s, to a Hungarian father who escaped the Soviet dictatorship during the 1956 Budapest uprising and an American mother. He had a scholarly upbringing, learning to read at a young age with to his mother, and was exposed to programming in Basic on the Apple II.

Szabo studied at the University of Washington in the northwest United States in the late 1980s. He earned a computer science degree there in 1989, about the same time as Wei Dai. He later worked with such organizations as JPL, Cuesta Technology, and Arcot Systems. For six month he worked as a consultant for Digicash, David Chaum’s business that develops and administers the eCash system.

He was introduced to digital currency processes and difficulties during his work at Digicash.

In the 1990s, he got completely immersed in the cypherpunk mainstream, moving to the San Francisco Bay Area to attend in-person gatherings hosted by Timothy May and Hal Finney. Online he participates in many crypto-anarchist mailing lists and, in particular, leads the resistance campaign against the Clipper chip, a cryptoprocessor built by the NSA to ease communication listening.

He was interested in science fiction and extropianism, an optimistic sort of transhumanism ready to fundamentally change the human condition via technology, like many other cypherpunks of the time.

Nick Szabo is also recognized for theorizing smart contracts, which are autonomous programs that operate without the requirement of a trusted third party and are currently being implemented in Bitcoin and Ethereum protocols. In his first official publication on the subject in 1994, he came up the term “smart contract”, which he described as “a computerized transaction protocol that executes the conditions of a contract.”

Later in 1996 he wrote an article on the topic for Extropy magazine, named “Smart Contracts: Building Blocks for Digital Markets“, and in 1997, he completed his work on the topic with his essay “Formalizing and Securing Relationships on Public Network“.

In the 2000s, his interest in contracts pushed him to return to school to deepen his knowledge of human law and polish his thinking. He earned a legal degree (Juris Doctor) from George-Washington University in Washington, DC in 2006.

Nick Szabo is an inquisitive, diverse individual with a wide range of interests. He would write prolifically throughout the years, first on his own website, then on his blog, on a numerous topics – “the list of issues […] is so large and varied that it cannot be mentioned.” Nick Szabo will speak about (among other things) law, computer science, economics, politics, and biology. Other scholars usually refer to him as a “universal spirit”.

Traditional Financial System shortcomings

According to Szabo, the existing financial system requires parties to invest a significant amount of confidence in order for transactions to take place. For example, if a person finds a broker to obtain a verified loan, as most secured loans are obtained through a broker, and then accepts a loan from a financial institution, the institution must trust that individual to return the loan as promised. Similarly, bank customers must have confidence that their funds are appropriately safeguarded and will not be misused by the bank.

Transacting through trust-based systems opens the door to issues such as fraud or theft. According to a Lexis Nexis research done in 2009, retailers in the United States lose around $190 billion per year due to credit card theft. Szabo was inspired by the existing banking system’s high cost of losses and segregated design.

Bit gold was created to create a better transaction architecture. In his lecture at the 2015 Bitcoin Investor Conference, Szabo mentioned that Bit gold’s primary goal is to be a”software to reduce all parties’ vulnerability to one other.”

Traditional Financial System shortcomings – Source: Pixabay

When questioned about the motivation for Bit gold, Nick Szabo stated, “I was trying to mimic as closely as possible in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority,” Szabo’s answer described the distinguishing features of a decentralized network, which Bitcoin successfully accomplished a little more than a decade later.

Goals of Bit Gold

Szabo stated, that he designed bit gold in order to overcome various inefficiencies in the existing financial system. According to Szabo, in order for transactions to take place in the traditional financial system, parties must have a significant amount of trust in each other. For example, if a customer wants to get a loan, she/he must first find a broker. Then, after accepting a loan from a financial institution, the institution must have faith that the individual will repay the debt as promised. Same goes other way – bank customers must have confidence that their funds are safe and not being misused by the bank.

Unfortunately, using trust-based systems exposes customers and financial institutions to fraud and theft. Indeed, Szabo was inspired by the banking system’s record of repeated losses (and the enormous expense of this fraudulent behavior and siloed design) to propose bit gold, a more trustworthy mechanism for trading. Szabo’s lecture at the 2015 Bitcoin Investor Conference focused on the core objective of bit gold: “software to limit vulnerabilities of all parties to one other.”

A free view of money

Currencies hasvealways been a major theme for Nick Szabo, regardless of what else he had on his plate. As a result, he formed an innovative vision around this topic that few few grasp in reality, and it is this vision that drove him to invent bit gold.

Since 1998, Nick Szabo has had liberal wiews, believing, like many liberal thinkers like as John Locke, Frédéric Bastiat, and Lysander Spooner, that common law arises from the character of man, rather than from political will. Within his blog, “Unenumerated”, Szabo write on the range of the topics (last article 2018). He also aggrees with the Austrian school (Menger, Hayek, von Mises, Rothbard, and Hoppe), which leads him to believe that money comes from the market rather than through government interference.

In his major article, Shelling Out: The Origins of Money, published in 2002, he explores how proto currency may have developed in Upper Paleolithic civilizations. His thesis, based on the revolutionary work of John Maynard Smith and Richard Dawkins, is stating that humans were driven (for partly genetic reasons) to collect objects with certain specifications, such as seashells, animal teeth, blades, precious stones or precious metals, and to assemble them in the form of jewelry (necklaces, bracelets, etc.) This characteristic enabled Homo Sapiens to become the dominant species, fostering compassion outside of familial bonds and allowing it to extend beyond their own impulses to other species. Although those objects did not yet play a function as money as is, hunter-gatherers utilized proto currency for trading between tribes, inheritance, marriage, tribute payment, and dispute settlement.

Nick Szabo defines the parameters that make a product acceptable for proto-monetary use in his research of what he terms “collectibles.” This objects are characterized by the following:

  1. It is resistant to accidental loss and theft. This means that it could be easily transported in a hidden way.
  2. Its worth is tough to forge. This requires, among other things, that the product has an unforgeable costliness, that is, a cost required to manufacture it, which makes it uncommon.
  3. Simple observations or measurements can be used to correctly identify the worth of the object.

Of course, as the world became more globalized, many of these proto-currencies faded away to make room for the items that best fit this criterion: precious metal coins, ideally produced by a government. Nonetheless, certain historical behaviors can still be retained in modern languages, such as the verb “to shell out ” in American English, which simply means “to pay” and derives from the payment in shells performed by the Amerindians and adopted by the colonists.

Only recently in human history has money lost one of these properties: the termination of the gold standard and the introduction of fiat currencies in the twentieth century have truly caused the reduction of this unjustifiable high cost, allowing the currency to function as a store of value. As Szabo puts it:

“The problem, in short, is that the value of our currency is currently based on trust in a third party. As many episodes of inflation and hyperinflation in the 20th century have demonstrated, this is not an ideal situation.”

Szabo’s aim is to construct a digital currency based on this concept: a rare currency where money supply would be hard to expand due to the rules established. Currency which would not be linked to any other asset, and where value would exist “purely for its monetary purposes. This is “bit gold.”

Bit Gold, a Reserve Currency System

Nick Szabo started his own private mailing list “libtech” in 1994, shortly after becoming active in the cypherpunk movement. A lot of people were involved in this, including Wei Dai, Hal Finney, and economists Larry White and George Selgin. Money and free banking theory were vigorously debated, giving Szabo the notion of building a reserve currency system on top of which a payment system would be developed.

Szabo develops his notion of bit gold, which he outlines on this email list, in 1998. (on which Wei Dai will also describe his b-money). At the time, he maintained a draft white paper titled “Bit Gold: Towards Trust-Independent Digital Money” on his own website, which mostly contained the communications he may have had with Hal Finney. Bit gold will be introduced to the wider audience in an article published on Unenumerated in December 2005.

The concept behind bit gold is to reduce trust. The latter, by minimizing the involvement of trustworthy third parties, would allow the unfalsifiable high price of precious metals to be replicated in cyberspace.

The protocol’s basic tenet is that monetary production is accomplished through proof of work: bits of bit gold is therefore generated using the processing capacity of computers. Each answer is calculated from the previous one, producing a proof-of-work chain. Bit gold does this by employing what Szabo refers to as a safe benchmark function rather than an algorithm based on the partial inversion of a hash function, like Hashcash (and Bitcoin) do.

Szabo’s concept is to properly evaluate difficulty and so understand the worth of a solution.

The process is as follows:

  • The creation of public reference information (” challenge bits “)
  • Proof of work is generated by a “bit gold miner” from
  • This proof of work is timestamped securely and disseminated via several timestamping providers.
  • This proof of work and its timestamp are added to the ownership ledger, which is a distributed ledger, by the miner.
  • The proof of work is transformed into fresh reference data, from which a new proof of work is calculated, and so on.

The chunks of bit gold in this concept are represented by timestamped evidence of labor. Anyone may review the reference information, proof of work, and timestamp, which are all public data, to validate the authenticity of a piece.

Exchanges take place via a public register of title deeds, as detailed by Szabo in his essay “Secure Property Titles with Owner Authority“. Users are identifiable via their public key, which they use to sign transactions. The ledger is validated and maintained by the “ownership club,” a network of computers that agree on who owns what using the Byzantine fault tolerance method known as the Byzantine Quorum System. As a result, anyone may use this register to determine who owns a piece of bit gold.

Clearly, Szabo’s proposed approach has some conceptual flaws. To begin with, the set nature of the rules implies that the bits of bit gold created are not fungible, meaning they cannot be combined together. Indeed, when machine performance improves or cryptanalysis advances, a piece of bit gold generated today may not have the same value as a piece produced years later. This is why Szabo envisions a model of markets set up to assess the worth of each piece of bit gold, with the goal of combining and dividing these pieces of bit gold to generate an actual exchangeable and fungible currency.

In addition to the fungibility issue, bit gold relies on centralized timestamping services to identify proofs of work in time. These, although many and separate, comprise a single point of failure.

Finally, bit gold relies on a conventional consensus protocol for its ownership register, which requires that the servers be picked in advance, known to everybody and that 66 percent of them act correctly, i.e. -say that they are not lying about the information they transmit. As a result, the system is not very strong, and Szabo’s sole (quite unsatisfactory) remedy in the case of an assault is a movement of honest services, which would result in the construction of a new ownership club – that honest servers replicate the register and form a new ownership club. “ If the rules are broken by the voters who win, the losers who are right can leave the group and form a new group, inheriting the old titles”, he explains. Such a step is now known as a hard split, and a recent example is the launch of Ethereum Classic in 2016.

At the time, bit gold was envisioned as a settlement system that would allow for the management of a scarce reserve currency, on top of which a payment system, similar to eCash, would be developed. Nick Szabo considered his concept for a long time, even asking for aid again on April 10, 2008, in a comment on Unenumerated:

“[Bit gold] would greatly benefit from a demonstration, experimental market (eg with a trusted third party to substitute for the complex security needed in the real system). Does anyone want to help me program one? »

However, due to fundamental defects, the implementation of bit gold will never see the light of day, and it will take a few months for a system that corrects them to materialize: Bitcoin.

Benefits Proposed by Bit Gold

The trustless financial concept of Bit gold offers a series of unique benefits for users. Szabo, in particular, envisioned two fundamental characteristics of a trustless system:
Financial Institution Independence
Users might transact safely over a decentralized Bit gold network without having to trust or pay a banking institution to handle those transactions. The Bit gold network itself would be capable of tracking user account balances and conducting valid transactions. Furthermore, users hold the private keys to their own riches (monetary sovereignty.)

These traits, when combined, meant that transactions and money storage could take occur online and independently, reducing reliance on financial institutions.
Borderless Operation
There are various silos in the old financial system. Sending money across borders might take anywhere from a few days to many weeks. This is because banks must go through a very strict and regulated process before sending money to other financial institutions.

What Bitcoin Owes Bit Gold and Nick Szabo

We can’t help but notice that bit gold and Bitcoin are conceptually very similar: in addition to their respective names, the constituent elements of bit gold (a proof-of-work chain, a timestamp service, and a property register) are present in Bitcoin, with the only difference being that in the latter, these three elements are merged into a single concept: the blockchain. As a result, bit gold resembles bitcoin so closely that some people believe bitcoin is simply a straight implementation of the idea underlying bit gold, even going so far as to suggest that Nick Szabo is Satoshi Nakamoto. On the surface, however, everything suggests that this is not the case.

As previously stated, Satoshi had no awareness of Wei Dai’s b-money when he finished creating Bitcoin in the summer of 2008 and learned of its existence through interaction with Adam Back. He emails Wei Dai to clarify the year of publication of the b-money description and to get his view on what would become Bitcoin. Dai will argue that Satoshi was also unaware of Nick Szabo’s bit-gold:

“In the first emails Satoshi sent me, he seemed to ignore Nick Szabo’s ideas. »

Wei Dai will also say in passing that Nick Szabo is not Satoshi:

“[Satoshi] talks about how bitcoin ‘expands my ideas into a fully functional system’ and ‘achieves almost all the goals I set out to solve in my paper on b-money’. I don’t see why Nick if he was Satoshi, would say things like that to me in private. »

As a result, the system proposed by Nick Szabo is not included in the white paper when it was published on October 31, 2008. Satoshi discovers the existence of Szabo’s system later, most likely as a result of Hal Finney’s participation on the Cryptography Mailing List on November 7, who remarked on bitcoin’s likeness to Szabo’s bit gold:

“I also believe there is potential value in a form of tamper-proof token that has a predictable rate of production and cannot be influenced by corrupt people. This would be more comparable to gold than to fiat currencies. Nick Szabo described several years ago what he called ‘ bit gold ‘ and this would be an implementation of that concept. »

In early 2009, the bit gold reference was ultimately included on bitcoin.org, alongside Wei Dai’s b-money.

For his side, Nick Szabo evidently knows about Bitcoin early on, since he discusses it in a blog post on May 7, 2009. Despite this, he is first suspicious, as such a concept is not new to him. Szabo released an essay on Bitcoin two years later, around the time Satoshi Nakamoto vanished totally, explaining why the notion took so long to arrive and what difficulties bit gold did not have. unable to solve

With the spike in price at the end of 2013, the Satoshi suspicion expanded among the general public, owing in part to linguistic studies that revealed a similarity between the phrases employed by Szabo and Nakamoto. Nick Szabo emphatically denies it. In May 2015, he told Nathaniel Popper:

“As I’ve stated many times before, all of this speculation is flattering but incorrect — I’m not Satoshi. »

He became increasingly engaged in the cryptocurrency community in 2015, appearing on various podcasts and providing seminars about his coinage design and autonomous contracts. He was particularly active in Ethereum’s devcon 1, a project that first piqued his attention but that he eventually abandoned.

The year 2015 also marks the peak of the discussion over Bitcoin’s scalability, during which Nick Szabo advocates for a severe cap on block size and a transfer to the second layer via solutions like as side chains or the Lightning Network. And for good reason: this mechanism is entirely consistent with the two-layer concept he conceived for bit gold, with a base layer ensuring the currency’s unfalsifiable scarcity and an upper layer making payments. workforce.

It’s difficult to say how much influence Szabo’s position had on the argument, but Bitcoin eventually adopted his concept. Thus, although failing to inspire Bitcoin (what Satoshi Nakamoto envisioned was substantially different), bit gold will have had an impact on its evolution: fact, the notion that Bitcoin should serve as a reserve currency system over which overcoats appear to be prevalent in the community today.

Bit gold is therefore a key forerunner of Bitcoin: digital money with unforgeable scarcity enforced by proof of work, and whose value derives directly from this feature rather than being backed by another commodity. Although bit gold had no direct impact on Bitcoin (provided Wei Dai and Nick Szabo are not lying), Satoshi Nakamoto’s innovation sprung from the same technological and conceptual ground. Furthermore, as we have seen, Nick Szabo’s theories influenced the growth of Bitcoin, whose primary function now is to act as a reserve currency system comparable to digital gold.

Nick Szabo omitted the implementation. He never sought to put his method into effect, instead of focusing on monetary theory, which he studied up and down and across. However, others have attempted to implement similar concepts after him, such as Hal Finney and his reusable proof-of-work (RPOW) system developed in 2004.

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