WBD184 Audio Transcription

Beginner’s Guide #3: Bitcoin's Pre-History and the Cypherpunks with Aaron van Wirdum

Interview date: Thursday 9th January 2020

Note: the following is a transcription of my interview with Aaron van Wirdum from Bitcoin Magazine. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In Part 3 of The Bitcoin Beginner's Guide, I talk to Aaron van Wirdum, a journalist and Technical Editor at Bitcoin Magazine. Aaron explains the cypherpunk movement and the digital money projects which paved the way for Bitcoin.

“You can’t have a tyrannical government watching over all of your transactions and also realise a utopian future.”

— Aaron van Wirdum

Interview Transcription  

Peter McCormack: Aaron, how are you?

Aaron Van Wirdum: I'm good, how are you?

Peter McCormack: I'm pretty good, thank you for doing this at last minute. I've been doing this Beginner's Guide to Bitcoin and I've been wanting to put together this resource for people, whereby, if they're new to bitcoin, and they want to learn as much they can as quickly as possible, it's a series of interviews that takes the through all the things that they will want to learn as quickly as possible. I've done two shows already. The first one I did was with Andreas, where we covered why we need Bitcoin, so people understand why it's important.

The second one I did was with Parker Lewis, talking about money, so people understand money and how they think about money. Because I know myself, before Bitcoin, I hadn't thought about money. Hopefully after those two interviews, people will have an interest in Bitcoin.

What I think next, is a good point to talk to them about the precursors to Bitcoin, why they did it, what went right, what went wrong, so they can understand it before we talk about Bitcoin, and there's no better person to do that with than you, because your Genesis Files were fantastic. So this is what we're going to do today!

Aaron Van Wirdum: Thanks! I will add, I don't consider myself necessarily the top expert on any of these particular topics, because for any of these particular topics, the top expert would be Nick Szabo for his work. You interviewed him. But I hope I can give you a nice bird's eye view of the whole process, and the step by step iteration of how we got to Bitcoin.

Peter McCormack: Yeah, well I think Nick would be great, but I think yourself, as a journalist, comes at it a different way. During your Genesis Files, you identified four key projects, but also I've dropped in there, into the narrative, the part of the Cypherpunks. We'll work through it all, but essentially there is a history of people who have tried to create a new form of money.

Aaron Van Wirdum: Yeah. I would note actually, the Genesis Files' articles in a way, I see it as series 1. I've always wanted to do a series 2, because there's some projects that are worth covering, that I haven't yet, like RPOW, which was Hal Finney's thing, and E-gold, but I do think that the four that I did cover maybe give the best linear progression towards Bitcoin, in a way.

Peter McCormack: Yeah and it was funny, because I've read your articles before, I've read all four of them. But I've never read them altogether in one go, like I did in prepping for this. What becomes very clear is this journey to Bitcoin. All the things that were tried, all the things that happened that led up to why Bitcoin worked, because without it, you can dive into the world of Bitcoin, and it's really complicated. But there are a number of things that had to have happened to make Bitcoin itself happen.

Aaron Van Wirdum: Yeah, it definitely didn't come out of nothing, which some people may still think, like there was nothing, and then all of a sudden, this Satoshi demigod, created Bitcoin, and there it was! It was more of a step by step process, and if you see all the steps, then you also see that Satoshi didn't invent anything particularly new. He just put it together in a very clever way. A very clever way, all credit to him, I don't want to take anything away from that! It was genius, but all of the pieces of the puzzle were there.

Peter McCormack: Yeah, it was a jigsaw he pulled together, and he rightly thanks and cites those people who influenced the work in the white paper for Bitcoin.

Aaron Van Wirdum: Some of them.

Peter McCormack: Well, yeah. Interestingly, I don't know if you noticed with my interview with Szabo, I actually asked him if he was a bit pissed that he wasn't cited in the white paper, and that was a cool response he gave. But one of the interesting parts for me is that I thought the Cypherpunks were around before Ecash, and the DigiCash project by David Chaum. It was when I was going through this, I actually realized, no, David Chaum predates all of this.

He really saw what was coming with the internet, and saw what was the importance of privacy. This is a quote I'd actually read a few times before, but I'm going to start with this quote, because I think it's really important. He said, "everything you do could be known to anyone else, could be recorded for ever. It's antithetical to the basic principle underlying the mechanics of democracy." Great quote!

Aaron Van Wirdum: Yeah for sure! I think privacy is such an important thing, just for society in general. Without it, and this is one of the things he foresaw is that the internet, if we're not careful, could become the huge panopticon, where everyone could be watched at any potential time. You're not sure if you're actually being watched, but just the potential alone is scary, and it would influence behaviour, it would disincentivize dissidents, or critical journalism even and all of that.

If you have no privacy, you would just behave differently, and with something digital, like in the internet, it's not even the current powers that be that you might be scared of, but you don't know who's going to be in power in 10 years, and if all of your personal data, including transaction data, if it's all stored, you don't know who's going to be very unhappy with you 10 years from now.

Peter McCormack: And do you know what? We look at the internet right now, we look at everything that's happened over the last, say, decade, everything that's happened with Edward Snowden for example, all the issues we have with censorship online, and he was talking about this at the CERN conference in Geneva, in 94. He saw all of this coming.

Aaron Van Wirdum: Chaum did yeah, for sure! It's like the whole world was asleep for decades, while people like David Chaum, and Cypherpunks, they were ringing the alarm bell, and no one was listening, and only recently has this become part of the public consciousness, that the internet's actually a big risk for privacy, and therefore for freedom. Even though we've dwelled in a completely wrong direction, I do like to think that some of these guys at least carved out safe space that's there today.

Even though the internet did become kind of a panopticon, at least we have something like Tor, it's there if you really need it, and that's something Snowden used for example, to contact Greenwald. So even though the internet is not private in general, there's still these safe spaces, and a lot of the guys we'll talk about did help establish it, did help safeguard that.

Peter McCormack: Well I would say right now, there is definitely a movement of people who are understanding the importance of privacy, the importance of money which isn't controlled by the state. We have people working on this now, we have an opportunity, so I would never say it's too late. But I would say that there's definitely a movement now, I feel it.

You and I will feel it more than most people, because we work in the Bitcoin world, so this is all people are talking about. But I think there's a number of interesting projects, and there is a real movement to fight against this. So I'm positive! Let's start with David Chaum, because a lot of people listening to this might not have heard of him and they might even be Bitcoiners who haven't heard of him. I've met David...

Aaron Van Wirdum: He's kind of back in the cryptocurrency space now, isn't he?

Peter McCormack: He is, yeah!

Aaron Van Wirdum: He came back since wrote that article. I'm not suggesting any causation there and I'm sure there's no causation there.

Peter McCormack: Yeah I've met him a couple of times, I think he's a really interesting guy. But for people who don't know who David Chaum is, quick background to him?

Aaron Van Wirdum: Maybe we should take one small step back even before David Chaum, is that public-key cryptography was invented in 1976 by Diffie and Hellman.

Peter McCormack: Yeah, I'm aware, I interviewed Diffie.

Aaron Van Wirdum: You interviewed him as well, very cool! Just for context, before 1976, encryption wasn't a thing that the public could use at all, it was something for secret agencies. That was the domain, they were encrypting their data, but no one else really was. In general they, or without exception I would say, they used, what's it called? There's a term for it, that's slipping my mind. The decryption key would always be the same as the encryption key. So the only way to communicate securely would be to meet up physically first, and exchange keys and only the could you communicate securely.

So that changed with public-key cryptography, which for the first time, allowed people to communicate securely, even thought they'd never met, because there's this public key they could share with each other, and use to encrypt their communication with one another. That was invented on 1976 and then David Chaum, only a couple of years later in 1980, he figured out how to use these kinds of tools for money.

So it was invented for communication basically, and also for signatures, to prove that you could sign data, for example signifying that you agree with the content, much like an actual signature. Then a couple of years later, David Chaum came up with this concept called blind signatures, and that really enabled the first cryptographic money. So it was the first type of digital something that could act as money, really.

Peter McCormack: And why was encryption important for money?

Aaron Van Wirdum: Privacy was his motivation. He was all about privacy. He was not a big libertarian, he wasn't schooled in Austrian economics, that wasn't his motivation, he just wanted to safeguard what we already have, namely cash, something you can use, a bare asset, which can you can use to pay without anyone in the world needing to know that you made that payment. It's just between the payer and the payee. He wanted to create something like that for the internet and he envisioned that the internet was going to be a big thing. This was also in a time where it wasn't clear... The revenue model that dominates the internet today is advertising.

Everything on the internet feels free, but that's because you're being served ads, or something like that. Back in these days, that wasn't obvious that that was going to happen. Some people thought it would be payments, so you'd pay to visit a website and you'd pay to watch a video. He saw this potential, he knew that the internet was going to be big and that to avoid tyranny, we'd need a private form of money. In his paper he even referred to Big Brother, "how to prevent Big Brother" or something, was the subtitle of that paper.

Peter McCormack: So with that, with his design for Ecash, he ended up building DigiCash, which was his first project. So how was DigiCash structured?

Aaron Van Wirdum: DigiCash was a company, was based in Amsterdam. He founded the company around this idea that the Dutch government wanted to implement some sort of toll booth system, where, if you drive your car over a certain roads, you'd have to pay. He thought that should be anonymous. The government doesn't need to know where you're driving your car all the time. That was his pitch to the government. He proposed a government agency, I think it was... Well, doesn't matter the name of the specific agency.

But he made his pitch that, "I think I can make this anonymous for you." At first they didn't believe it, then he riled up some friends from Eindhoven University I believe, and they got together, and they built this system, in like a week, as proof of concept. This convinced the government agency, and then he founded his company around that. Within his company, he wanted to do more, he wanted to also create Ecash.

Peter McCormack: But as you said, the idea here wasn't like Bitcoin to have censorship resistance, the idea wasn't to be decentralized, this was more about privacy. So this was one of the first steps for privacy, but its ultimate downfall, that it was centralized.

Aaron Van Wirdum: Well I don't know if that was the ultimate downfall, but it's important to note that he wasn't necessarily trying to create a new currency. His system was built for banks, it was just regular dollars, euros, just existing banks could use this system. He wasn't trying to reinvent money in the way that something like Bitcoin does, he just wanted to provide a layer for anonymous payments, on the existing monetary infrastructure.

Peter McCormack: But it was ultimately inspiration for people within the Cypherpunk movement to create some... Did he inspire the creation of the Cypherpunks?

Aaron Van Wirdum: I would say he was a big influence yes, for sure. Even though he didn't really like the Cypherpunks himself, and down the road, the Cypherpunks weren't really in love with him either anymore and they didn't really get along too well. But he was definitely a big inspiration, definitely also the cash aspect of it, of course.

Peter McCormack: And it's quite important to note that both Nick Szabo, and Zooko Wilcox, worked with him.

Aaron Van Wirdum: Yeah and a bunch of other Cypherpunks as well, I think maybe Eric Hughes as well. I'm going from memory here, I could be wrong. But yeah, a bunch. For the Cypherpunks, it became this almost internship thing, where a lot of them went there and worked at DigiCash for a little while, and learned the ropes.

Peter McCormack: The bit where it really gets interesting is after this, with the creation of the Cypherpunks. So I think it would be really good to just explain who the Cypherpunks were, how they came to be, and what were their goals and principles.

Aaron Van Wirdum: Maybe it's cool to take a small step back, before we get to Cypherpunks, because there was another group and they're not as often discussed within the cryptocurrency ecosystem today. Have you heard of the extropians?

Peter McCormack: No, I haven't. This is a lesson for me then.

Aaron Van Wirdum: The extropians started in the 80s, they were a group of California-based, super optimistic futurists basically. They got interested in nanotechnology, life-extension technology, space exploration and they saw science progressing at an increasing, exponential pace even, and they started to philosophize about where that could lead society. That led to very futuristic ideas, including eternal life, which is a big one. They believed that it was very possible that, even within their own life spans, and some of them are still alive today, so who knows, science would progress to the point where we'd cure all diseases, as well as old age. So we could live forever.

That was one of the key goals they had, but also, like I mentioned, artificial intelligence, and mind uploading that I mentioned. All sort of these crazy, or I don't know if they're crazy, they didn't think they were crazy for sure. They were taking it very seriously. One of the interesting things about them, a lot of futuristic ideas around that era, they foresaw the future as managed by some sort of super wise, perfect government kind of thing. Something like Star Trek comes to mind when I think of that.

There's perfect government that will make humanity happy. These extropians had a very different idea of how humanity should progress, and it was a very libertarian idea, and it was very influenced by Austrian economics. They saw government as a roadblock to that future. So they got interested in digital cash as well, from an Austrian perspective and also from the privacy perspective, as you can't have a tyrannical government watching over all your transactions, and also realize a utopian future.

So these guys were thinking about digital cash. Next step is, I think Eric Hughes, he moves back to California, or he was looking to relocate in California, or something like that. I think he wanted to live closer to the beach, I think that was it. Then he met up with Tim May, because he lived somewhere close to the beach, that was an old friend of him. Tim May, was one of these extropians and so he was thinking about digital cash, and he was thinking of digital cash in the context of information markets, which is an interesting topic, if you want to get into that.

But Eric Hughes and Tim May, they started talking about digital cash, the future of the internet, and then they basically... It was like a meeting of the mind kind of thing, where they just kept talking about this stuff for days and days. Then at some point, they got the idea that they should form a group to protect privacy, to actually make this work, to use the tools of cryptography that were available, and to start building stuff that was useful. John Gilmore was also one of the three unofficial founders of the Cypherpunks.

So they met up, they invited a bunch of friends and a lot of these friends were also extropians, so there's a lot of overlap. Nick Szabo was in the extropian group, Wei Dai was in the extropian group, Hal Finney was there and a lot of these extropians came to this Cypherpunk meeting, which wasn't called the Cypherpunks yet. The Cypherpunks was kind of a joke they came up with at one of these meetings, was a play on cyberpunk of course.

They started meeting, and they started discussing how to realize this stuff, how to realize anonymous remailers, which are sort of the precursors to Tor, digital cash, information markets, how to ensure that the future of humanity would enjoy some level of freedom through encryption.

Peter McCormack: It's really interesting, through all of this though, there are consistent threads, and the consistent threads are privacy, money, anonymity, and censorship. There's a consistent thread that I found through everything I've read, and everything I researched for this.

Aaron Van Wirdum: Yeah, in a way there were actually two schools of thought within the Cypherpunks, which it may be interesting to note. One school of thought which was more the Eric Hughes school of thought, and that also is closer to David Chaum, for example they wanted to safeguard privacy. Privacy was the thing they cared about, for the reasons we just discussed, to maintain a healthy level of society, to also be beneficial to democracy, and that was their way of looking at this.

Then you have the other school of thought, which Tim May was the main proponent of this, was the crypto-anarchist vision of the future, which wasn't just protecting privacy, but it was actually making governments obsolete through privacy. If your money is private enough, the government can't touch your money.

If your property, and more of it would become digital, then you can protect that through encryption, through cryptography, and it would render governments obsolete. So that's sort of the visions that cooperated within the Cypherpunks, even though they weren't all necessarily on the Tim May school of thought there.

Peter McCormack: Yeah, and I have the quote, "privacy is necessarily for an open society in the electronic age. We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy. We must defend our own privacy, if we expect to have any. Cypherpunks write code, we know that someone has to write software to defend privacy, and we're going to write it."

Aaron Van Wirdum: That's Eric Hughes, right?

Peter McCormack: Yeah.

Aaron Van Wirdum: That's the Cypherpunks manifesto. Well I should say, I think it was called a Cypherpunks manifesto, and there's actually a reason for that, because the Cypherpunks didn't see themselves as an organized... It wasn't an institution, it was a loose collective of individuals and they were all free to do whatever they want, they just found each other voluntarily in their goals. This is something also Tim May for example, he really rejected this idea that the Cypherpunks should organize themselves, or should lobby governments.

He saw the Cypherpunks as like the Black Panthers equivalent of the Civil Rights Movement. The Civil Rights Movements had its more organized parts of it, and then there were the more radical, unorganized activists, and that's really how you should see the Cypherpunks, I think. They were like the unorganized activists that were there to make sure it happened, without having to... Like the lobbying to the Electronic Frontier Foundation, and like these guys, they weren't opposed to them, just the Cypherpunks were radicals, and individuals.

Peter McCormack: And they would submit proposals into the mailing list of what they were working on, get feedback, get ideas, and build and test these things.

Aaron Van Wirdum: Yeah, for sure. They had physical meetings as well, where they discussed these kind of stuff, but at some point, I think the mailing list became probably the most important center of discussion and at some point, I think there were like 1,000 people on there from all across the world, discussing how to realize privacy, how to realize digital cash, how to make it happen, and write code.

Peter McCormack: Do you know what the status is, of the Cypherpunk movement at the moment? Because it's not as it was.

Aaron Van Wirdum: The mailing list definitely died down. I think as a movement, it died. But their ideas didn't die. I think that's the right way to look at it. At some point the mailing list, I think by the late 90s, maybe there were still some serious contributions in the year 2000 or something, but around that time it got spammed, and it got noisy, and it got hard to read, which was in part because they had a pretty strict non-moderation policy, which was in the philosophy of the Cypherpunks themselves.

They didn't want to have anyone in charge, so there was no moderation. That worked while they were small, but at some point it just got overrun by noise. So the ideas live on I would say, but as a movement... I guess some people still call themselves Cypherpunks nowadays, but...

Peter McCormack: They do yeah, you see it in their Twitter handles.

Aaron Van Wirdum: Yeah I guess there's nothing wrong with that. If you look at the original idea that it's individuals doing whatever they want, as long as they embrace that ethos. But the mailing list definitely died, and I'm sure the meetings died long before that.

Peter McCormack: And there's a number of very well known people in it, a lot of them we will know as being people in Bitcoin, but probably the most famous name in it, that other people will know, will be Julian Assange.

Aaron Van Wirdum: Yeah, I think Elon Musk may have been on there as well.

Peter McCormack: Really?

Aaron Van Wirdum: I think so. I saw an email from x.com at some point, and I think it was also on the topic of digital cash. So x.com was his first website, which kind of merged in PayPal. So I think he was on there. A lot of the current Bitcoin OGs were on there.

Peter McCormack: They have some very significant achievements. When you look back at all the work they did, it's very significant things. PGP came out of it, you could argue Wikileaks came out of it, and Bitcoin itself. These are genuinely things that are known and used globally now.

Aaron Van Wirdum: Yeah and I would add Tor to that list.

Peter McCormack: So Tor wasn't a CIA invention?

Aaron Van Wirdum: Well let's just say the technology that Tor ended up using, that definitely was brewing there on the Cypherpunk mailing list, with remailers, and sort of similar tack.

Peter McCormack: So out of this, one of the very prominent Cypherpunk members was somebody called Adam Back, someone we both know. He's been on my show, I know you know him well. He is a very prominent person in Bitcoin, cited in the white paper for his work on Hashcash. Let's talk about Hashcash, what it is, and then we can talk about why it's so important for Bitcoin.

Aaron Van Wirdum: Midway through the 90s, spam became a problem, spam email. You even see that on the Cypherpunk mailing list actually, if you dig through the archives, you see just nonsense, "increase your penis" types of emails, because they didn't have any moderation. It became a real problem. It also became a problem for the remailers, which I mentioned. They were being spammed, so they were taking up resources for no good reason. There needed to be a solution for that and the Cypherpunks started to discuss the problem and how to solve it.

Now one way to solve it of course, is to get government involved, to just make spam illegal and try to track down the spammers and throw them in jail or fine them or something like that. But Cypherpunks and Adam Back in particular, he didn't like that idea at all. He saw that as the beginning of the end of the free internet and that if you get government involved in that way, it could lead to the equivalent of an internet driving license, where you're only allowed to use it if you have government approval.

So just the idea of getting government involved to stop this kind of stuff was... Cypherpunks wanted a different solution and Adam Back in particular, wanted a different solution. Now of course, one solution that people discussed in this context was to use something like Ecash, that could have worked or you could have used Ecash to buy some sort of digital [Inaudible 34:27], that could have worked.

But Ecash wasn't really getting off the ground at this point and banks weren't really pushing it. There was the chicken and egg problem of, it's only useful to have Ecash if you can spend it somewhere, so if merchants will actually accept it, and merchants will only accept it if people are willing to spend it, so if there's people that have Ecash.

So it was kind of a chicken and egg problem that Ecash wasn't able to overcome, maybe also because of some of Chaum's decisions in how he managed the company, he's been getting come flack for that. He thinks that's nonsense, but who knows? Different people, different opinions. But bottom line is Ecash didn't really get off the ground. Then Adam Back came up with a different solution, called Hashcash.

The idea behind Hashcash is, if you'd want to send someone an email, you'd have to actually take some parameters of that email, like the recipient address, and I don't know, maybe the time you sent it, I'm not sure what was included, it doesn't really matter. The point is that you had to hash these parameters and the outcome of a hash is random, so you have to invest some computing cycles to get this random hash and then only some hashes would be considered valid. For example, a hash would have to start with a specific number of zeroes.

So if you wanted to send someone an email, and that person would only accept emails that included Hashcash, then you'd have to invest some computing cycles, you'd have to invest some computing power in order to get a valid piece of Hashcash, a valid stamp in a way. Now, this would cost you a little bit of energy, and therefore minuscule amount of money, which is fine if you're sending someone an email, you're not really going to care about a fraction of cent.

But if you're a spammer and you're only profitable if you send the same spam email to 10 million people, then you have to make these computations 10 million times, then it becomes unprofitable. It was to disincentivize spam and in that sense it could have worked, but it never really caught on either.

Peter McCormack: Yeah, a very small amount of traction, but ultimately it proved to be a very important development for Bitcoin.

Aaron Van Wirdum: It introduced something new. It introduced this idea that you can tie real world resources to something digital, basically a number. A number which you can then email, or which you can just send over the internet, something digital. If we want to get very technically specific, maybe the better way to think about it is, even copying a file, just making a copy of a file, costs a little bit of energy, so if you make a million copies of a file, that costs a bunch of energy to do it.

But then if someone wants to verify that you actually made a million copies of the same file, that would cost as much energy as actually making the copies themselves. Well Hashcash had this very clever property, that it would cost a bunch of energy to create, and then cost almost no energy to validate that you actually did create it. Hard to produce, easy to verify. That was really the innovation in a way.

Peter McCormack: Yeah and the best analogy for me, for somebody new coming in and wants to really understand it, it's just to do the reference to gold mining. If you want to mine gold, you have to invest in a bunch of equipment and a bunch of people and where ever that gold is, you have to mine it. Whether it's at the bottom of an ocean, or in the ground, you have to invest a whole bunch of energy, and work, and cost, to mine that gold for you to then sell on.

The analogy for Bitcoin being is that if you want to mine Bitcoins, for the creation of new Bitcoins, you then have to do something similar. You have to invest a bunch of resources and money to mine that Bitcoin, and that's how Bitcoin has value, because it costs money to create. Is that a fair analogy for someone new?

Aaron Van Wirdum: Yeah! I would say Bitcoin takes another step, because of proof of work. These proofs, are themselves kind of the money. While with Bitcoin, it's just a way of creating money, it's not the proofs themselves you use. So Bitcoin took another abstraction, which was very clever. But this idea of using the proofs themselves, was subsequently used as an idea for other cash systems. So these came before Bitcoin.

Peter McCormack: So, after Hashcash, a very similar time, about a month apart, we had both B-money, which came from Wei Dai, and we also and Bit Gold from Nick Szabo. But let's cover B-money first, because you think Bit Gold is more like Bitcoin, so it's a logical step.

Aaron Van Wirdum: Yeah I would say so. Bit Gold is almost Bitcoin, and B-money is slightly different.

Peter McCormack: Okay. So Wei Dai, a mysterious person, never met him. Don't see much of him or hear much of him. What do we know about him?

Aaron Van Wirdum: Very little, he's a very seclusive guy. He's still active on some online forums, giving his ideas. He's a smart guy for sure. He's a genius, I can tell you that much. But he's very much outside of the public eye and clearly he likes it that way. I happen to have a friend who, his girlfriend went to Singularity University I believe, or I think they renamed it, and he gives lectures there, or he gave lectures there. So he's still around, but not really in the cryptocurrency space.

We know very little of him, they always knew very little of him. I think Tim May at one point commented that they didn't even know that he was a guy or a girl or some people suspected that it was a pseudonym for someone, maybe for one of the other Cypherpunks. People didn't know and still today, he's a secretive guy.

Peter McCormack: Well he was very much inspired by Tim May's crypto-anarchy.

Aaron Van Wirdum: Yeah, one of the founding Cypherpunks.

Peter McCormack: Let me put the quote in for that, "in a crypto-anarchy, the government is not temporarily destroyed, but permanently forbidden, and permanently unnecessary." I think those last two words are very interesting. the "permanently unnecessary."

Aaron Van Wirdum: Yeah his idea was that governments... States never shrink, they always tends to increase, and same for rights. They always tend to diminish, you never really seem to get them back or they never really seem to increase, short of a full-blown revolution. So to safeguard this stuff through laws and regulations, it's a slippery slope. Safeguarding it through technology seemed like a much stronger guarantee.

Peter McCormack: I liked his quote as well, I'm bringing a lot of quotes into this, but they've written so many profound things, but with B-money, he said, "efficient cooperation requires a medium of exchange, money and a way to enforce contracts. The protocol proposed in this article allows untraceable, pseudonymous entities to cooperate with each other more efficiently, by providing them with a medium of exchange, and a method of enforcing contracts.

I hope this is step towards making crypto-anarchy a practical as well as theoretical possibility." Again, it follows those same themes, money, anonymity. but it also, this is the point where smart contracts, they start to raise their head, and it does that with Nick Szabo's Bit Gold as well.

Aaron Van Wirdum: Yeah, Nick Szabo basically introduced the concept, he invented it.

Peter McCormack: The structure of B-money was... I can see a lot of similarities to Bitcoin when I was reading about it. Ultimately, a distributed ledger, and...

Aaron Van Wirdum: Yeah, that was one of the key insights, in both B-money, and Bit Gold.

Peter McCormack: That was a real innovation in the development of digital money.

Aaron Van Wirdum: Yeah, up until that point, for example, Chaum or digital cash schemes that people were coming up with, there were some ideas on the Cypherpunk mailing list that resembled Chaum's idea, but they all relied on the central server or a bank or someone, some entity that would keep track of the balances of all participants, of all users.

So if Alice pays Bob one coin, then that central entity would update the ledger, and subtract one coin from Alice's balance, and add it to Bob's balance. B-money and Bit Gold, they really turned this on its head, and said, "no, all participants are going to have the ledger, and they're all going to update their ledger every time a transaction is made." That was definitely a big insight and also a big step towards Bitcoin.

Peter McCormack: Decentralization is something you'll hear a lot about with regards to Bitcoin, if you're coming in. There was a lot of other projects that people might hear about and they might be interested in, but Bitcoin has such a focus on decentralization. Why is this so important?

Aaron Van Wirdum: I would say it's important because if you have a central entity doing this kind of stuff, then that central entity can mess with it as well. That central entity can block transactions, it can maybe even freeze balances, or even change balances, maybe change its own balance. It can mess with it in all sorts of ways. Even if the central entity is totally honest, unless the central entity has a very good way of remaining private, then you can have governments interfering.

You can have governments stepping in, and telling the central entity, "you know what? We don't really like that whole Wikileaks organization, we want you to block all payments to it." By decentralizing this, you sidestep this problem. There's no central entity that can cheat, there's no central entity that can be pressured into obedience.

Peter McCormack: So, it's step now beyond privacy. Where David Chaum was working on privacy, this step beyond is actually to create an economic system that can't be censored and can't be switched off.

Aaron Van Wirdum: I think that's fair to say, yes.

Peter McCormack: So, what went wrong with B-money? Why didn't it end up... Because it didn't actually end up being developed, it was a proposal.

Aaron Van Wirdum: Yeah, it was a proposal and I would say it was a rough proposal as well. There was still some hand waving going on, on how it should exactly work, how should coins come into circulation, that was a big question. If you start from scratch, then who's going to get the coins, or why? Another problem was how do you prevent double spending? If Alice sends the same coin to both Bob and Carol, and she does it at exact same time, and she sends the same transaction, the same coin to different parts of the network, then you get a divide over the network on which is the true state of balances.

That was a hard problem to solve. It would have been solved in a hypothetical situation where everyone sees every transaction instantly, but that's not the reality of networks, it takes a time for a transaction to make its way through the network. So you get this problem that wasn't really solved.

One way to solve it, it was a bit hand wavey, but you could have different tiers of users, where you had a client server system, where there was a group of upper tier servers that would maintain the balance and then you check with a subset of the servers, but there's no guarantee that the servers will agree, there's also no guarantee that the servers won't collude against you.

There's these loose ends in the proposal that weren't perfectly solved, even though it was a very clever idea, there were unsolved problems. He knew that, he admitted that, but it was still worth publishing, and getting people to think about the money system that would work like this. But it wasn't a finished system, it couldn't have worked as he proposed it.

Peter McCormack: One of the really interesting things that I find with B-money is that his original vision was it was essentially a stable coin.

Aaron Van Wirdum: In a way, yes. But that's difficult as well.

Peter McCormack: Of course. But then I look to his quote regarding Bitcoin that I found very interesting. He said "I would consider Bitcoin to have failed with regards to its monetary policy, because the policy causes high price volatility, which imposes a heavy cost on its users, who have to either take undesirable risks or engage in a costly hedging, in order to use its currency." I've done nearly 200 interviews now and I've also met people who are actually using Bitcoin and volatility is a constant problem that is raised. There are people who are either accepting the risk or they are looking at ways to hedge. So I know some will argue it's not a flaw, but he did identify a debatable flaw within Bitcoin.

Aaron Van Wirdum: Yeah, it's interesting that he saw that as a big flaw too. Not just for Bitcoin, but even for cryptocurrency in general. In a way, he took a very maximalist approach, interestingly, where he said something like, "Bitcoin only has one chance to succeed", basically. Bitcoin has taken up the niche of cryptocurrency and it's very hard to surpass it now and since it's flawed, it will always be a marginal thing. So since Bitcoin can't be overtaken and it will remain a marginal thing, now cryptocurrency is forever doomed to be a marginal thing.

Peter McCormack: This is where I think Bit Gold and Nick Szabo is a little bit more interesting. This is where I think it takes the step further, because Nick's view was actually, it was more gold, than it was money. I know gold can be money, but if we think of money as the medium exchange and gold as more of a store of value, and I know they both can overlap and interchange, but he saw Bit Gold more to act like digital gold and accepted the volatility.

Aaron Van Wirdum: I think Szabo had a brilliant insight, in many ways. There's of course the whole Austrian economics tradition and the whole gold bug tradition, and I think Szabo agreed with a lot of the arguments. But where typical gold bugs just assumed that gold was the real money, and gold was the way to go, Szabo in a way, took a step further and started to think, "okay, but why is gold the way to go? Why is gold such a good money?" Then he started to think about, "okay, what are the properties that make gold such good money?"

These are properties like, it's very secure, it's easy to validate and incredibly important one is the unforgeable costliness. This is something you touched on before. You can't just create gold, you can't just create more gold, you actually have to dig it out of the ground. You have to actually get it from somewhere, invest energy to get the gold out of the ground. This unforgeable costliness is what Szabo wanted to translate into something digital.

He wanted to make a digital money that had this unforgeable costliness, that's what we talk about today, when talk about stock to flow, his insight in many ways. He explained it in, what's the name of the paper? "Shelling Out". "Shelling Out" is I think, a seminal paper, that people should read, and it will really make them think about money in a way that Bitcoin starts making sense.

Peter McCormack: Yeah I covered that in the last episode with Parker, where we talked about money, we talked about how money has changed, and lots of different things have been money, which Nick talks about.

Whether it's the yapstones, or its shells, or it then becomes metals, trying to help people understand that, if you forget about a physical versus non-physical, if you can abstract yourself away from thinking money has to be something produced by the government, and has to exist in notes, if you just think based purely on the properties, I think it's six different properties there are, if you actually look at Bitcoin, Bitcoin is the evolution from gold and fiat money, because it solves a couple of the problems in that it's essentially gold that you can transfer over the internet.

Aaron Van Wirdum: Exactly. One property that I didn't mention is of course, that all of these properties need to be there, without the need for trusted third party.

Peter McCormack: Because in Nick's quote, "trusted third parties are security holes."

Aaron Van Wirdum: Exactly!

Peter McCormack: Yeah, you were about to say it.

Aaron Van Wirdum: I was yeah!

Peter McCormack: Were there any other innovations in Bit Gold?

Aaron Van Wirdum: Yeah, for sure. In a way it was a precursor for blockchain in a way, I'll explain that very shortly. He embraced this idea of proof of work as a way to creating new money and in his system, the way proof of work would work is that you'd have a candidate string which is just a random number and then you'd have to use that to create a valid proof of work, so you'd have to, what we explained, you'd have to make a bunch of hashes, invest a bunch of energy until you find a valid follow-up proof of work on that candidate string.

This would give a new candidate string for others to hash on and then they would have to use that candidate string, and they'd hash, and hash, and hash, invest energy, until they would find a valid hash, then that would be the new candidate string. So then you got a string of candidate strings basically. You've got string of hashes and that's almost what a blockchain is.

Peter McCormack: What happened with Bit Gold? Because Nick wanted to build it, he requested a few people to help him, but he never actually got round to building it.

Aaron Van Wirdum: Yeah, he requested people's help as late as 2008. He posted on his blog he wants to actually implement it and no one responded publicly. Maybe someone responded privately, we don't know. Maybe someone privately had some extra ideas, we don't know that. But no one responded publicly, let's keep it at that.

Peter McCormack: All right cool. From that, we then get Bitcoin. We don't need to go into this too much, because I'm going to touch on that in the next episode. October 31st, I'm in Las Vegas, it's my birthday, so my birthday is whitepaper day. I didn't see it until years later. But a whitepaper drops for what Bitcoin is, from Satoshi Nakamoto. Still, at that point, this was just another proposal, just like B-money was, just like Bit Gold was.

Aaron Van Wirdum: And like many others were, yeah. By the way, at that point, the Cypherpunks mailing list of course didn't exist anymore, so it was posted to the cryptography mailing list, which was the unofficial successor of the Cypherpunk mailing list.

Peter McCormack: Did you look much into the reception of the whitepaper at the time?

Aaron Van Wirdum: I did look at it. It's been a while, but I read the thread.

Peter McCormack: Then, I guess three months later, we get the code drop.

Aaron Van Wirdum: Yeah, there wasn't much enthusiasm for it on the email list at first, except from Hal Finney. Hal Finney, we haven't really discussed yet, but he also had his own digital currency project called RPOW, which I think I mentioned, he published that in 2005. He was one of the few, if not the only positive recipients of the proposal and then a couple of months later, there was the code.

Peter McCormack: And we're here 11 years later, so we can say this is the most successful project, it looks like it will last, it always will have threats.

Aaron Van Wirdum: I'll note one thing that I think is interesting, what happens between the whitepaper, and the code drop, which is that for some reason the 21 million limits was implemented there. It wasn't really explained why, I think. It wasn't in the white paper, it wasn't discussed on the mailing list, it was just a new thing that was in the code.

I think that was a very important insight, and I suspect personally that Hal Finney may have told Satoshi to do this, because by giving it this 21 million limit, there was actually a reason for people to speculate on future value, to actually buy it, to actually want to hold it and by people speculating on future value, and wanting to hold it, that that gives incentive for miners to actually mine it. Shall I read you one quote from Hal Finney?

Peter McCormack: Yes.

Aaron Van Wirdum: All right, I'm going to read you one quote from Hal Finney, and that's why part of me suspects that this may have been his contribution to Bitcoin. He wrote, and I think this was after Bitcoin launched, he wrote, "as an amusing thought experiment, imagine that Bitcoin is successful, and becomes the dominant payment system in use throughout the world, then the total value of the currency should be equal to the total value of all the wealth in the world.

Current estimates of the total worldwide household wealth, that I have found, range from $100 trillion, to $300 trillion. With 20 million coins that give each coin a value of about 10 million. So the possibility of generating coins today with a few cents of compute time, may be quite a good bet, with a payoff of something like 100 million to one. Even if the odds of bitcoin succeeding to this degree are slim, are they really 100 million to one against?

Something to think about." So there you see it, this 21 million limit gives sort of a game theoretical reason for people to actually want to buy it and mine it and invest in it and I think that was actually pretty crucial idea.

Peter McCormack: And there are people who will say you have to have volatility, you can't go from something from zero to worth trillions, without volatility. Another thing I'll just drop in, it stuck with me, that Dan Held said, he puts in that the four year halvening, creates a marketing hype cycle, and with that, that helps grow the network.

Aaron Van Wirdum: Yeah, but like Wei Dai said, maybe it's actually very bad idea and Nick Szabo wasn't sure either. He said in one of his posts, I think in 2011, or 2013 that he's not sure that the 21 million limit is a good idea, but we can say that at least it works. At least we have something that's working today!

Peter McCormack: Were there any other innovations within Bitcoin, and the whitepaper that really stood out, that made it work?

Aaron Van Wirdum: Yeah, the clever insight was of course to combine the proof or work system with a consensus system. These were the two aspects that Wei Dai was struggling with, like how do you get the coins into circulation, and also if there's a dispute on the state of the ledger, then who gets his way? Which one is the real ledger?

Bitcoin brilliantly combined these things by having new coins come into circulation through proof of work, but not as the proof of works themselves, but through a distribution mechanism. The proof of work just works as a lottery to decide who gets the new coins and at the same time, the longest chain determines which is the true state of the ledger. So two big problems were brilliantly solved with one stone.

Peter McCormack: Amazing! Okay look, this has been fantastic, really useful. I'm going to share all your articles in the show notes, if people want to read more. Are there any other parts of history that are missing here that you want to raise, before we close out?

Aaron Van Wirdum: There's a lot of Austrian economics of course, that I think led up to Bitcoin. I think Hayek's Denationalization of Money was a very important work, although Hayek's idea was closer to Wei Dai's idea in the sense that the currency needs to be stable, he expected the market to pick a stable currency.

But it's interesting that The Denationalization of Money was published in 1976, which was also the year that Diffie and Hellman published their whitepaper on public-key cryptography. So in a way, I see that as the birth year of Bitcoin, these two idea published in the same year.

Peter McCormack: Well, it's a fascinating bit of history, it's fascinating to look back. I really appreciate the work that you did for this, it was very helpful to me. It was very helpful to me to read them all in one go, and piece it all together. You said you're going to do some more work on this which is great, I'll look forward to it. But really appreciate this. Just before we close out, if people want to follow your work Aaron, where can they find you?

Aaron Van Wirdum: I'm on Twitter, @aaronvanw. If you speak Dutch, I have my own podcast with two friends, which is The Bitcoin Show, you can find that on YouTube. Of course Bitcoin Magazine, still write for Bitcoin Magazine.

Peter McCormack: Well listen, thanks for doing this. I'll let everyone know you've come and done this very last minute, it's a bit late for both of us, so I appreciate your help here. I owe you one now. So if you ever need anything from me, you let me know.

Aaron Van Wirdum: All right, thanks for having me Peter!

Peter McCormack: Thank you!