We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, anonymous mail forwarding systems, digital signatures, and electronic money. (Hughes, 1993)
Bitcoin was first proposed in a white paper posted
to the Cryptography mailing list at metzdowd.com in 2008.27 The
archives of the mailing list reveal a forum chiefly concerned with the design and development of computer networks
in which user information is encrypted. In posts that detail the motives for these designs,
it is possible to trace connections with texts and other mailing
lists associated with Cypherpunk activists
– a subculture committed to creating alternative computer networks that challenge those run by powerful organizations, organizations
they see as threatening the privacy and security of individuals. The development of alternative and encrypted
networks was the primary means by which these actors sought to bring about social and political change:
expanding anonymized and computer-‐mediated interactions while subverting the capacities of nation-states. Of these alternative networks,
an electronic payments system that encrypted user information and did not require banks was a central aim. Such
projects were thus familiar to the
subscribers to Cryptography, as were the obstacles and difficulties in
designing them. Bitcoin emerged within this context: an apparent solution
to some of the key problems that
 |
27 The Cryptography mailing list is
publicly archived, available at metzdowd (accessed 19/05/2016)
had long frustrated the attempts
of Cypherpunks to construct an encrypted form of electronic money.
The Cryptography mailing list states its purpose as a forum for
discussion on the “technical aspects of cryptosystems, social repercussions of cryptosystems, and the politics
of cryptography”.28
The first of these concerns is the most frequently discussed, with extensive discussion
threads
addressing
technical issues with various encryption-‐based computer programs. These discussions are
interspersed with concerns regarding the implications of increasing computerization in everyday life. Such
computerization, it is observed, entails the
recording and circulation of vast amounts of personal information across
the world. Many subscribers opened discussions on the social implications of this, ranging
from the development of malicious hardware devices
that are specifically designed for identity fraud, to the potential levels of surveillance and corruption among
corporations and intelligence agencies.
One post from October 2008 for example, responds to the beginnings of the financial
crisis, referencing a report on flaws in UK credit card security
which led to largescale
incidents of fraud. The post articulates a common concern: if criminals were
able to exploit these flaws for their
own gain, what capabilities were being amassed by nation-states?
I’ve long suspected that NSA’s (still secret) budget (approved by a tiny
number of manipulated Congressmen) has been, uh, augmented, by its ability
to manipulate financial markets using inside
information obtained from domestic and global mass wiretaps. You don’t suppose NSA is behind the recent market
volatility, do you? It’s easiest to skim
off billions when trillions are hurriedly sloshing around in a panic.29
28 See metzdowd(accessed 19/05/2016)
29 Posted by John Gilmore
(2008) available
at mail-‐ archive (accessed 19/05/2016)
surveillance, where it was not directly precipitating malpractice, was
noted for producing alarming
vulnerabilities. These concerns frame how world events are
discussed and how Cypherpunks must
respond. This is perhaps expressed most clearly in a post that responds to the signing of the 2001 US
Patriots Act, brought in to increase the powers of the US state after the September 11th attacks. The post
calls on subscribers of Cryptography to ‘go
back to their roots, to develop and promote technologies that can help defeat
this increased level of intrusion into private life on the part of the US
government:
Every one of these policies is an opportunity, not a threat. To the
extent that these crackdowns engender
concern about privacy violations from a growing segment of the population, this is a chance for cypherpunks to spread their knowledge and their technology. You don’t have to be paranoid [sic] anymore to be afraid that the
government is spying
on you. John Ashcroft himself
boasts that Big Government will be watching.
Cypherpunks should be taking advantage of this opportunity to promote
their message of privacy through
technology. For the first time since the group was formed, they can make a legitimate case that the threat of
government surveillance is increasing. With the
Bill of Rights being tossed out the window and the AG openly admitting to
bending the rules to achieve its
goals, a wide community is going to be receptive to this message.
OF course, there are presently
substantial numbers who are caught up in the collectivist urge and who might view
attempts to protect privacy as unpatriotic. But this is a temporary phenomenon, already fading. The flags which
flew from every car and building
in sight a few weeks ago are disappearing. Yet the Draconian
new regulations will not go away. Inevitably there will be a growing
segment of the population that sees the government as a fearsome
threat.
It is time for cypherpunks to go back to their roots. Let us put the
cipher back in cypherpunk. There are
other places where people can whine about how evil Congress is or fantasize
about secession from the U.S. Focus on crypto and what role it can play
in the current crisis. Believe it or not, no one else is doing that. No
one in the world is speaking out to
say, here are tools that can circumvent the government’s efforts to take away our privacy. If the cypherpunks don’t do it, no one
will.30
As is emphatically illustrated in this post, Cypherpunks are politically committed
to combating the powers of the
state by developing ‘cryptosystems. Cryptosystems are a means of securing information across a
computer network through the use of algorithms
that convert plaintext (data
that needs protecting) to ciphertext (encrypted
data) and back again. Crucially, the
ability to encrypt and decrypt lies only with those that possess the cryptographic key that can trigger this
conversion process. In this way, Cryptosystems are discussed as a means of shifting power away from large centralized organizations to individual computer users.
Empowered with technologies of encryption, it is argued,
individuals would no longer require large organizations to provide
security and privacy as services. Instead, these tasks would be performed by algorithms. The potential for corruption
and failure would therefore be minimized, as would the necessity to trust in institutions. In this, subscribers to Cryptography were pursuing the aims of Cypherpunks and
Crypto-‐anarchists, online
subcultures advocating and developing cryptography as a means to achieve social
change. Key projects associated with
Cypherpunks, such as ‘Pretty Good Privacy’ email encryption, were frequently discussed in detail.
Moreover, many posts are signed with the names of key figures associated with the Cypherpunk movement, such as John
Gilmore, quoted above, founder of the
Electronic Frontier Foundation, and the Cypherpunks mailing list, a forum referenced in many posts.31
The development of a cryptosystem that could provide a means of making
anonymous transactions was a
principal aim of Cypherpunks, and efforts made in this direction were frequently scrutinized on the Cryptography mailing
list. The concept
of digital anonymous
|
30 Posted by R. A. Hettinga
(2001) available at metzdowd (accessed 04/02/2017)
31 On John Gilmore’s position within the Cypherpunk movement, see eff (accessed 19/05/2016)
markets had been presented in the more polemical Cypherpunk texts
throughout the 1990s. Timothy C
May’s (1994) document The Cyphernomicon is
a particularly prominent example of
this. New innovations in cryptography, May stated, were to generate markets
that woulthatfree from surveillance.
Strong crypto is here. It is widely available.
2.3.2. It implies many changes in the way the world works. Private
channels between parties who have
never met and who never will meet are possible. Totally anonymous, unlinkable, untraceable communications and exchanges are possible.
2.3.3. Transactions can only be *voluntary*since the parties are
untraceable and unknown and can withdraw
at any time. This has profound implications for the conventional approach of using the threat of force, directed against
parties by governments or by others. In particular, threats of force will fail.
2.3.4. What emerges from this is unclear,
but
I
think
it
will be a form
of anarchy-‐ the capitalist market system I call "crypto
anarchy”
In texts such as May’s, new innovations in cryptography – or ‘strong
crypto’ – are identified as the
drivers of a sweeping social change set to liberate individuals from old
hierarchies of power and control.32
‘Crypto anarchy’ is described as a fast-approaching future in which governments are made redundant by
technical progress, and individuals are subsequently freed from their coercive and supervisory forces.
Cryptosystems are defined
as emancipatory tools that
help bring about this future, allowing groups of internet users to evade and subvert the corruption and
incompetence liable to any governments or large organizations committed to recording and gathering mass amounts
of personal information. Furthermore,
a technical superiority is assigned to cryptosystems which gives their
diffusion, and its perceived
consequences, a sense of historical inevitability. As May went on to state when considering
the effect of cryptosystems on governments:
|
32 May’s earlier (1992) document The Crypto Anarchist Manifesto
and Eric Hughes’ (1993) A Cypherpunk’s Manifesto represent additional sources here.
It dawned on me that public key crypto and anonymous digital
cash systems, information markets, etc. meant the end of
governments as we know them… Not everyone is a fan of it. But it’s coming, and
fast.
This technological determinism and libertarian worldview constitute the
dominant frames of meaning on the Cryptography mailing list. In a word, cryptosystems are defined as disruptive
networks which allow groups to enact and prefigure a crypto-anarchist society. Digital
cash systems, it is argued,
will inevitably grow in importance, and inevitably cause the decline of the nation-state. At the heart of the ‘crypto-‐anarchy’ vision are free markets.
Replacing governmental law which relies on ‘threats of force’, are laws of the
market, and this is made possible by anonymous communication and electronically-‐mediated
exchange.
The earliest posts in the Cryptography archives reference David Chaum’s
commercial efforts to devise an
electronic cash system that encrypted transaction information, protecting the identity
of its users.33 Chaum had instigated a series of attempts to create encrypted
payment systems with his 1981 paper Blind Signatures for Untraceable Payments. A professor of
computer science at the University of California, Santa Barbara, Chaum outlined the design for a cryptosystem in which
the digital signatures of users could be encrypted to ensure a high level of anonymity. Such a system was necessary,
Chaum explained, as leading designs
in the field were threatening to impact substantially on personal privacy by
placing third parties in a position
to record all information related to user transactions. “A new kind of cryptography, blind signatures”, Chaum explained, “allows
realization of untraceable payments systems which offer improved
audibility and control
compared to current
systems, while at the same time, offering increased personal privacy”
(1998: 203). Chaum’s own efforts
included Ecash and Digicash, and as a subscriber to
Cryptography commented, by the late 1990s these efforts
were in decline.34 Chaum’s work had presented to the
|
33 The earliest posts accessible in the Cryptography archives are from 2001. Of these, one is entitled ‘ECash Technologies (digicash.com) announces layoffs’ and is available here: metzdowd (accessed 19/05/2016) Many later posts also reference
Chaum’s work.
34 Chaum’s vision
for ECash and Digicash ultimately culminated in commercial efforts to provide electronic payments systems. By the late
1990s these ventures were in decline, and Chaum
had been removed as CEO. The
story of Digicash is available here: Cryptome (accessed 19/05/2016)
Cypherpunks the possibilities but also the obstacles of designing
electronic cash systems, and these
issues would continue to fuel discussions on the Cryptography and Cypherpunk mailing lists.35
Various other attempts to create electronic cash systems are discussed
in the posts of Cryptography. Wei Dai, a computer engineer
who frequented the Cypherpunk mailing lists,
had in 1998 proposed a protocol for achieving an untraceable medium of
exchange, and named it B-‐money. In outlining
the purpose for B-‐money, Dai stressed the importance
of an anonymous decentralised monetary system
to the crypto-‐anarchy vision.
I am fascinated by Tim May's
crypto-‐anarchy.
Unlike
the
communities traditionally associated
with the word
"anarchy", in a crypto-‐anarchy the government
is
not temporarily destroyed but permanently forbidden and permanently unnecessary. It's a community where the threat of violence
is impotent because violence is impossible, and violence
is impossible because
its participants cannot be linked to their true names
or physical locations.
Until now it's not clear, even theoretically, how such a community could
operate. A community is defined by
the cooperation of its participants, and efficient cooperation requires a medium of exchange (money) and
a way to enforce contracts. Traditionally these services
have been provided
by the government or government sponsored institutions and only to legal entities.
In this article
I describe a protocol by which these
services can be provided to and by untraceable entities.36
Dai proposed a network in which transactions were publicly broadcast.
This would replace the need for a
third party to record transaction information on central servers. Instead, transaction information would be encrypted and recorded by other users
on the network.
|
At the crux of Dai’s design was a means of ensuring the identities of users could not be linked to the identities they used when participating in the network. “The protocol proposed
35 For a discussion of Chaum’s
influence to the Cypherpunk movement
more broadly, see Julian Assange’s (2012) book Cypherpunks: Freedom
and the Future
of the Internet. OR books:
London
36 This extract from Dai’s
b-‐money proposal is
taken from his personal website. It is undated. Available here weidai(accessed 15/06/16)
in this article” Dai wrote, “allows untraceable pseudonymous entities to cooperate with each other more efficiently… I hope this is a step toward making crypto-‐anarchy a practical
as well as theoretical
possibility”
(1998:
1).
Dai’s
b-‐money designs proved influential, particularly for the most frequently discussed
digital cash project
on the Cryptography mailing list,
Hashcash.
Adam Back, a frequent poster to Cryptography, in 1997 published a paper
in response to some of the key problems that arose when developing electronic
cash systems: Hashcash – A Denial of Service Counter-‐Measure, was initially
announced on a Cypherpunk mailing list.37 A denial of service attack is an attempt to disrupt
a computer network by overloading its servers with ‘useless traffic’.
As Back explains, Hashcash “was originally proposed
as a mechanism to throttle
systematic abuse of
un-‐metered internet
resources such as email, and anonymous remailiers.” (2002: 1) These were issues affecting
all projects based on free-‐ to-‐access computer networks, the most common of which becoming well-‐known as email
‘spamming’.
Back proposed a system in which sending data across the network was a
costly process. At the centre was a cryptographic puzzle that required
a certain amount of time and computational power to solve before data
could be sent. This ensured that sending data
across the network would be unproductive for those wanting to flood the
network with useless traffic. Solving
the cryptographic puzzle involved generating a hash, a string of data with
a fixed size. This hash must pass a series of tests written into the Hashcash
algorithm. If the data passes these
tests, a ‘token’ is created and attached to the data, which would demonstrate what Back called ‘proof-‐of-‐work’: proof that the sender of the data has taken the time to generate the token. The
processing time to match the conditions for one email address was small enough to ensure it would not significantly inconvenience a regular PC. To
send emails to multiple addresses however, the hashing process would be large
enough to obstruct email spam or
denial of service attacks. Back outlined how this served as a counter-‐measure to malicious attacks. He also specified
in his design that there were many
possible applications for Hashcash. These applications reveal much about the context within
|
37 Back provides the link on his personal
website -‐ cypherspace -‐ to the original posting of the HashCash paper.
which they were presented and developed. It is hoped a brief discussion
on micropayments will help to illustrate the interpretative
flexibility of these technical innovations.
Hashcash drew together many technical elements and innovations found in
designs for micropayment systems.
The concept of micropayments was in the 1990s garnering
particular interest among corporations involved
in information markets
and electronic finance. Micropayments could
allow for
the
sale
of internet
content
in
a
“pay-‐per-‐click”
system that would empower internet vendors (Herzberg & Yochai, 1997). The
cost to users would be fractional,
yet the scale of use would lead to considerable profits for content providers. Micropayments could also allow
financial organisations to provide services for small transactions across computer networks,
which had previously been considered unfeasible due to the costs incurred. As
one article published by the IBM Research Division claimed, micropayments would
“require
the
inclusion of
a
third
party
such
as
a
micro-‐ payment broker” (Hauser et al, 1996:
1) that would render the operation unfeasible. That is to say, offering
third party verification on transactions below a certain
value was unprofitable. Hauser et al thus proposed
a solution bringing
together symmetric cryptography and digital
signatures:
“each individual micro-‐payment is digitally signed by the buyer with a highly
efficient but specialised signature scheme… chains
of coupons can be
used
to
implement
efficient
one-‐time signatures” (1996: 3). This is significant as it effectively proposes a
system of micropayments built on cryptographic proof rather than third party verification. Each transaction
would generate a digital signature, made unique through encryption. This would make transactions near-‐impossible to reverse. This process
would act as automated verification, eliminating the need for a third party to actively
maintain records of every
transaction.
Hauser et al credit the design for this process to a number of computer
scientists working in the 1980s, stating ‘several applications
of this idea are known’. 38 The aim of the Hauser et al paper
was to apply these ideas
to enhance systems
of electronic payments
under
|
38 The initial
reference given by Hauser et al for a micropayments system based on
cryptographic proof is: Ralph C.
Merkle (1987) ‘A digital signature based on a conventional encryption
function’. In Carl Pomerance, editor,
Advances in Cryptology { CRYPTO '87, number 293 in Lecture Notes in Computer Science, pages 369{378, Santa Barbara, CA, USA, August 1987. Springer-‐Verlag, Berlin Germany.
development by corporations, specifically IBM’s ‘Internet Keyed Payments
Protocol’. As we shall see, their
work anticipates many of the innovations eventually brought together as Bitcoin twelve years later.39
The immediate point is that technical innovations in encrypted electronic payments systems appear in
multiple contexts in the 1990s. Cryptographic hash functions and digital signatures are techniques which illustrate
interpretative flexibility, on the one hand brought
together in designs
for micropayments that aim to increase the efficiency of central servers,
and on the other in designs for digital cash that seek to establish
‘decentralised’ networks in which data is processed
across many nodes. As a frequenter of the Cypherpunk and Cryptography mailing
lists, Adam Back’s design for Hashcash
emerged within a context of the Cypherpunk movement, committed to replacing centralised
computer
networks altogether. Technical innovations
such
as
one-‐time digital signatures and hash functions
were in this context defined
as ways of subverting and supplanting
institutions. Since the expansion of Bitcoin as a technology, many users have understood its technical elements as
evidence that decentralised monetary systems are superior and inevitable.40 Hauser et al’s paper shows that other applications of these techniques defined them as ways of bolstering centralised networks and the
organisations running them. Only through the extensive efforts of many cyber-‐libertarian developers were
these technical elements brought together to construct digital cash systems,
and as we will see in the following
sections, many problems had to be solved before Bitcoin ultimately became
a successful concatenation of these technical elements.
In the initial 1997 posting of his Hashcash paper, Back concludes by
detailing some potential usages for his designs,
including ways to improve Chaum’s
Digicash system. In a 2002 republication, Back proposes the idea of “hashcash as a minting mechanism for Wei Dai’s b-‐ money
electronic cash proposal, an electronic cash scheme without a banking
interface” (2002: 7). The token generated by the ‘proof-‐of-‐work’
function could
act as a unit of
currency. Specifically, a currency without
banks. This concatenation of flexible technical
|
39 This idea for a ‘chain of coupons’ based on ‘one-‐time
signatures’
is the essentially the idea underpinning the
‘block chain’ in the bitcoin network,
detailed in the next section.
40 See chapter 6,
‘Incorporation’. Libertarian groups of Bitcoin users see its technical
functionality as a justification for
the superiority and inevitability of a decentralised monetary system that will replace
many functions of nation
states.
innovations was brought together in response to the shared interests and
values of the Cypherpunks. This was to happen again in the design for bitcoin.
1.2 The ‘Block Chain’:
Delegating banking to an algorithm
Announcing the first release of Bitcoin, a new electronic cash system
that
uses
a
peer-‐to-‐peer network
to
prevent
double-‐ spending. It's completely decentralized with no server or central
authority (Satoshi Nakamoto)41
The archives of the Cryptography mailing list show frequent discussions
on the problems that occur in designing electronic cash systems. The most common is the ‘double-‐spending
problem’. In rejecting the authority of a trusted third party to verify when a
transaction has taken place, problems
arise in ensuring that particular tokens are not duplicated, effectively allowing users to spend money they don’t
have. Banks solve this problem through vigorous authentication processes, ensuring physical money is difficult
to forge, and verifying that all electronic transactions
result
in
the
correct adjustments
to
account
balances.
A
cyber-‐ libertarian cash system therefore
required a decentralised process to carry out authentication and prevent fraudulent transactions. This was the key innovation proposed
in the design of Bitcoin. The solution, now known as the blockchain, made possible a process in which proof of publication was secured
through the actions of individual nodes across the network.42 This section examines this key innovation
in the design of Bitcoin and interprets how it brings together
many technical elements
and social meanings
to perform a libertarian program
of action: automated and ‘decentralised’ banking.
|
41 Post to the Cryptography mailing list. Available
here: metzdowd (accessed 21/06/2016)
42 In the initial
design and forum discussions, ‘chains’ of ‘blocks’ are discussed without the
direct labelling of ‘block chain’ as
a distinct entity. This term develops later among groups of enthusiasts and entrepreneurs as the innovation ‘underlying’ crypto-‐currencies. See chapter 6, ‘Incorporation’.
On October 31st 2008 Satoshi Nakamoto first announced to the
Cryptography mailing list a new
decentralised currency system. An abstract for the design was posted, along
with a link to a white paper entitled ‘Bitcoin: A Peer-‐to-‐Peer Electronic
Cash
System’. This was
Nakamoto’s first post to the mailing list,
and it received no replies
until it was reposted three months later. Little is known
about Nakamoto’s true identity. Unlike other subscribers such as Adam Back and Wei Dai, there are no available
connections to trace his/her activities preceding the first proposal
for Bitcoin.43 This is problematic for identifying the conditions that led Nakamoto to write the
paper. However, the document brings together
many of the issues, actors and texts prominent on the Cryptography mailing list. Moreover,
it outlines a concatenation of technical elements that were already
being circulated on the forum;
articulates them within a framework of meaning consistent with that expressed
in other posts; and triggers a
collaborative effort that takes place across three internet forums, where
various actors contribute to discussions
regarding the direction of its development. 44
The ‘electronic cash system’ Nakamoto
proposes in the white paper expresses the Cypherpunk
aim of constructing a form of digital cash that does not require centralised financial institutions. As outlined in
previous designs for digital cash systems, Bitcoin was to be a cryptosystem that provided
individuals with the privacy and security normally delivered by banks.
|
43 At
the time of writing the true identity
of Nakamoto is still unconfirmed, although current evidence
now suggests Australian cryptographer Craig Wright.
Andrew O’Hagan presents
this evidence in a publication for the London Review of Books, accessible here: lrb (accessed 21/06/16).
This issue
is not addressed in the research,
and neutral pronouns are used where necessary.
44 The
initial post by Nakamoto announcing the design for bitcoin is accessible in the
archives here metzdowd (accessed
02/06/16). It received no responses, prompting the author to repost the
announcement on the 8th of January 2009, available here: metzdowd (accessed 02/06/16) as well as posting it on another
forum, the P2P Foundation on 11th February 2009, available here p2pfoundation (accessed 02/06/2016). BitcoinTalk was subsequently set up as a forum dedicated to developing Bitcoin,
from which time discussions moved from Cryptography and the P2P Foundation to BitcoinTalk. Nakamoto’s contributions to these discussions is archived here: satoshi nakamotoinstitute (accessed 02/06/2016)
A purely peer-‐to-‐peer
version of
electronic cash would
allow online
payments to be sent directly from one party to
another without going through a financial institution. Digital signatures provide part of the solution, but the main
benefits are lost if a trusted third party is still required to prevent double-‐spending. We propose a solution to the double-‐spending problem using a peer-‐to-‐peer network.
(Nakamoto, 2008: 1)
The influence of Chaum and other developers from the Cryptography forum
is immediately visible in the
identification of digital signatures as a key technique for constructing a
digital cash system. The major
addition offered in Nakamoto’s white paper is the design of a public ledger, comparable to the record-‐keeping
carried out
by
banks.
Banks manage
electronic finance through the verification of
transactions and adjustments to account balances. All information on transactions and balances is kept securely
within databases on central servers that banks alter on request from
clients, who are subject to security checks to
confirm their identities. The design for Bitcoin hinges on an attempt to replace this ‘centralised’ system
of record-‐keeping with
a
‘decentralised’ peer-‐to-‐peer
network. This entails that all information on
transactions and balances is broadcast to every node in the network,
and these nodes are then responsible for storing the data and verifying transactions. Nodes are encouraged to carry out this service through an incentive-‐structure called mining,
which will be the focus of the next section. The result is an ever-‐increasing record of verified transactions
encrypted and stored in servers across the entire network. In brief, this solves
the
double-‐spending problem
by
ensuring
all
users
are committed to maintaining the integrity of the
ledger. Significantly, this addresses a key concern of the Cypherpunks, and does so by modifying their previous efforts.
As discussed previously, users of the Cryptography mailing
list had identified the construction of a digital cash system as an essential
element of crypto-‐anarchy: a vision for
society in which encryption technologies diminish the power of nation states
and liberate individuals. Digital
cash would function
without the need for ‘trusted
third parties’ or institutions, and would thus be ‘decentralised’. These convictions, shared among the subscribers
to Cryptography, involved the identification of certain problems with existing monetary systems, including criticisms of
their own efforts to construct cryptosystems that could function as currencies. The design for Bitcoin is thoroughly shaped
by this context.
From the shared meanings that define the purpose of such a system, and the specific
problems with constructing one that Bitcoin proposes to solve, to the
technical elements from the previous efforts of Cypherpunks that Bitcoin brings together in its design.
The white paper starts by outlining the strengths of the Cypherpunk aim to replace
contemporary banking systems with cryptosystems. Starting with some
dilemmas common in the development of technologies for internet commerce, the justification for Bitcoin swiftly moves on to a critique of the
contemporary financial systems per se,
due to the necessity for users to trust institutions.
Commerce on the Internet has come to rely almost exclusively on financial
institutions serving as trusted
third parties to process electronic payments. While the system works well enough for most transactions,
it still suffers from the inherent weaknesses
of the trust based model
(ibid: 1)
Trusting financial institutions to mediate electronic transactions means the public are required to pay significant fees. This is particularly problematic, Nakamoto argues, when two
individuals want to transfer small amounts electronically. Here, the paper
echoes the earlier issues
identified by designers
of micropayment systems:
“The cost of mediation increases transaction costs, limiting
the minimum practical transaction size and cutting off the possibility for small casual transactions.” (ibid: 1) This
is problematic, as it precludes the development of an electronic cash system.
Cash represents the untraceable type of money consistent with Cypherpunk
values. Cash allows for everyday
transactions between individuals that, in the moment of transaction, require
no third party to record or verify the event. Due to the relative
anonymity of internet users however, third parties
are necessary for recording transactions and mediating disputes that may occur. This leads precisely
to the type of surveillance anathema to Cypherpunks.
The record-‐keeping of
third
party organisations involves
the
gathering
of immense amounts of their
clients’ personal information in order to make
security checks:
Merchants must be wary of their customers, hassling them for more
information than they would otherwise need… These costs and payments uncertainties can be avoided
in person by using physical currency,
but no mechanism exists to make payments over a communications
channel without a trusted third party (ibid:
1)
The current model of internet commerce, it is argued, therefore requires
escalating levels of trust. The more
transactions that take place through the internet, the more information required by financial institutions, and
the more individuals are required to trust them to store and use it responsibly. The scope of Bitcoin thus goes
beyond that of micropayments, which aimed to increase the efficiency
of online commerce, to challenge the entire ‘trust-‐ based
model’ of finance on the internet. “What is needed” the author concludes, “is
an electronic payments system based
on cryptographic proof instead of trust” (ibid: 1).
This emphasis on trust significantly distinguishes Bitcoin from designs
for micropayments technologies aimed
at improving existing monetary systems, and reveals its Cypherpunk influences. Like the digital
cash projects of Adam Back and Wei Dai, Bitcoin
prioritises delegating to an algorithm the actions
of recording and validating financial transactions, as algorithms are perceived as more trustworthy and efficient than human-‐run
institutions. Indeed, Nakamoto lists Wei Dai in the footnotes, referencing how Dai’s B-‐money broadcasts transactions across its entire network. “Without
a trusted party”,
Nakamoto agrees, “transactions must be publicly announced”
(ibid. 2). The design for Bitcoin modifies and
advances this technical aspect
of B-‐money, as well as carrying its ideological objective. As with B-‐money, in the Bitcoin network transaction information is automatically broadcast to all the other nodes for validation
because this precludes the need for corruptible financial institutions to record it. A further
connection is the definition of digital signatures as a new form of
‘physical’ money.
In outlining Bitcoin as a new monetary system, Nakamoto details the
technical existence of units of currency. Units of currency
in Bitcoin are encrypted records:
digital signatures representing account balances that may only be altered
by those that can operate
a corresponding cryptographic key. Nakamoto refers to these records as ‘coins’:
We define an electronic coin as a chain of digital signatures. Each owner
transfers the coin to the next by
digitally signing a hash of the previous transaction and the public key of
the next owner and adding these to the end
of the coin (ibid: 2)
The terminology of physical currencies is used in line with the stated
aim of designing electronic cash. The
unit of currency is thus a ‘coin’ to represent the familiar process in which an object signifying value is moved from one owner to another. This assists the author in explaining how a chain of digital
signatures can function
as money. It also maintains focus on the construction of
Bitcoin as electronic ‘cash’, as opposed to the credit offered by banks.
Electronic coins are thus referred to like cash – things in the possession of owners – despite a technical explanation which effectively describes
credit money, an agreed-‐upon balance attributed to a client.
Nakamoto explains that coins in the Bitcoin network are designed to exist
only as digital signatures registered
on a public ledger. When a transaction occurs, the addresses (personal accounts)
of the two users involved are altered on the public ledger, the respective
values updated when every node in the
network accepts, processes and validates the transaction. In other words, the signatures that
represent coins remain exactly where they are, but new signatures are created that signify changes in ownership. The
terminology of coins being transferred
from one owner to the next signifies a meaning
attached to Bitcoin in its design. A
particular concatenation of technical elements, elaborated below, is defined as
electronic cash in Bitcoin’s design,
carrying the meanings consistent with the efforts of a network of actors
committed to developing digital cash systems.
The technical element Nakamoto’s paper brings into focus are ‘time-‐stamp servers’.
Digital signatures, proof-‐of-‐work
cryptographic hash functions, and automated broadcasting
of transactions
information
across
a
peer-‐to-‐peer network,
are elements in Bitcoin’s design
that were already being circulated and modified by actors on the Cryptography
mailing list (associated with the work of Chaum, Back, and Dai, respectively). Bitcoin brings these techniques
together alongside
designs for time-‐stamp servers first articulated in a paper by
Stuart Haber and W. Scott Stornetta in 1991. Haber and Stornetta’s paper considered changes in intellectual property rights triggered by the “prospect of a world in which
all text,
audio, picture, and video documents are in digital form on easily
modifiable media” (1991: 0). They proposed a means of attaching a time to a digital
signature that would be ‘unforgeable’. Digital documents, they stated, are too easy to tamper with. What is needed
is an automated means of time-‐stamping
the data, without the need for a third party:
First, one must find a way to time-‐stamp the data itself, without any reliance on the characteristics of the medium on which
the data appears, so that it is impossible to
change even one bit of the document without the change being apparent.
Second, it should be impossible to
stamp a document with a time and date different from the actual one. (1991: 1)
To do this, Haber and Stornetta outlined a design for a server which
would include a hash function. A
cryptographic hash function generates a fixed value for a string of data.
Hashes are a form of encryption
commonly used in data storage, as large amounts of information (strings of data) can be reduced to much
smaller fixed values. They also act as a security mechanism: while it is relatively simple for a computer to
inspect that a hash accurately contains the data it is supposed
to, the function is practically impossible to reverse
engineer.45
Haber and Stornetta described a process in which “the hashes of documents
submitted to TSS [time-‐stamp servers] are linked together, and certificates recording the
linking of a given document are distributed to other clients”
(1991: 11). This means all the information contained in a document could be registered on the server at a
particular time, and an automated
hash function would instantly compress the information, along with the time of publication, into a string of code near-‐impossible to invert. It would therefore be possible to use a computer to check what the
registered information was, in its entirety, and when it was published. It would not be possible however, to modify any of this information. In this
45 This time-‐stamping technique has recently emerged as a key functionality and purpose for Bitcoin among particular groups of artists (see for example,
Ascribe: ascribe) and academics
researching ways of developing ‘blockchain technology’ as a computer network
that records and verifies authorship and copyright information (see Open Music Initiative, mdx). These ‘relevant social
groups’ are not examined in the thesis, yet their activities illustrate the
interpretative flexibility of Bitcoin, something
that is examined in the next chapter.
way, an algorithm that encrypts and distributes data could record user
information securely, rather than a
third party organisation. Haber and Stornetta referred to this as ‘distributed trust’.
After outlining the need for
a
new
monetary
system within
a
Cyber-‐libertarian frame
of meaning, and explaining the major obstacle to overcome in the double-‐spending problem,
Satoshi Nakamoto states “the solution we propose begins with a timestamp
server” (2008: 2). Nakamoto’s insight was to employ Haber and Stornetta’s innovation as currency.
A cryptographic hash
function, instead of timestamping digital documents, would timestamp digital
cash. This would ensure all digital
signatures – or ‘coins’ – would be near-‐impossible
to duplicate or manipulate. It would do this by ensuring that each new digital
signature submitted to the server
would be grouped together with all the information of previous transactions
and
time-‐stamped: “each
timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp
reinforcing the ones before
it” (ibid.).
Figure 7 -‐ The Block Chain
Transaction information broadcast
to the network is grouped together
in blocks, ‘time-‐ stamped’,
and encrypted with a hash function.
(Image from Nakamoto: 2008: 2)
Every time a transaction takes place, information (a digital signature)
is broadcast to the network stating
that the balance of one user is lower, and the balance of another user is higher.
This transaction information is then grouped
together with other transaction information happening on the network
around the same time (other digital signatures) and compressed into a hash. This hash includes
a timestamp registering when the hashing
function took place. Hashes also include the hash of the previous
grouping, or block, of transaction information. The resulting
chain of encrypted information, ‘a chain of blocks’, thus acts as a ledger recording all transaction information, confirming the time of transactions and preventing the
manipulation of accounts balances. As with Haber and Stornetta’s digital documents, the cryptographic hash function
would allow users to check the
information stored on the network, while at the same time preventing any
modifications to it. It may be
updated but not retrospectively altered – new digital signatures can be produced,
but those confirmed to the ‘block chain’ may not be altered.
Figure 8 -‐ BitcoinTalk Posts
The early discussion threads on BitcoinTalk.46
The chain of transaction history and account balances, the ledger, is
accessible for all to see. Shortly
after Nakamoto’s paper had been circulated on the Cryptography mailing list and
the P2P Foundation forum, a new forum,
BitcoinTalk, was set up as a space for people
to collaborate on Bitcoin’s
development. The early discussions oriented around one question: how to
make Bitcoin anonymous.
As discussed earlier a key value of the Cypherpunks is the protection of
personal privacy on computer
networks. The visibility of the block chain is therefore problematic. Nakamoto sought to address this by ensuring that
the ‘keys’ individual users used to make changes to their addresses were
kept anonymous:
|
46 Archived at satoshi nakamotoinstitute (accessed 08/05/2017)
The traditional banking
model achieves a level of privacy by limiting access to information to the parties
involved and the trusted third party. The necessity to announce all transactions publicly
precludes this method,
but privacy can still be maintained
by breaking the flow of information in another place: by keeping public keys anonymous.
(2008: 6)
While information on the block chain is possible to see, the only means
of updating account balances is
through the use of encryption keys. A user of the Bitcoin network has two encryption keys that enable them to modify
balance information on the parts of the block
chain assigned to them. The first encryption key is the public key. This signifies the
particular part of the block chain
assigned to that user, their address.
This address can be broadcast to other
users that may wish to make a deposit there. The second key is the private key. This key is known only to the specific user, the ‘owner’ of the
address. For a user to complete a transaction,
the public key must be signed by the private key. This process forms a digital signature and the information is broadcast
to the network so that it may be ‘hashed’ and
written into the block chain,
as described above.
This use of cryptographic keys allows users to maintain a fixed identity
on the network (their address)
without any necessary connection to an identity outside of the network (the
actor using the cryptographic key).
As Nakamoto concludes, “the public can see that someone is sending an amount to someone else, but
without information linking the transaction to
anyone” (ibid: 8). Through the block chain, Nakamoto advances the
Cypherpunk project of constructing a
cryptosystem for electronic cash. The block chain solved the problem of double-‐spending within
the
acceptable parameters of
action
delimited by Cypherpunk values; of personal privacy, decentralised power, and individualised security measures.
This section has focused on the block chain as the central innovation in
the design of Bitcoin. At the heart of this innovation is a program
of action rooted in the aims and shared meanings of
Cypherpunks.
The
cyber-‐libertarian worldview
of these
actors informed
their
efforts to construct and use encrypted digital cash systems. The design for
Bitcoin responds to these goals and the problems
identified by other actors by bringing together
and modifying ideas and techniques from the network of Cryptography subscribers and beyond.
The block
chain
brings
together
technical elements of time-‐stamping,
one-‐time
digital
signatures, hash functions, and cryptographic keys; with nontechnical elements
of individual privacy concerns and
imperatives for ‘decentralising’ finance by replacing institutions with algorithms. This culminates in a program
of action to: (1) record
transactions, (2) encrypt
and time-‐stamp transactions, (3) broadcast them to the network, and (4) validate them by
writing them into an unmodifiable ledger. These actions
are delegated to an algorithm
which is given the name Bitcoin and assigned a meaning which constitutes
it as ‘electronic cash’. Bitcoin
is
designed
to
facilitate cyber-‐libertarian
modes of
association
–
private
exchange – by continuously performing this program action. For this action to
be sustained, the network
required a continuously expanding number of users and this presented
a further problem, which was solved with the
‘mining’ incentive structure.
1.1
Bitcoin Becomes
an Actor: Enrolling ‘miners’ into the network
The steady addition
of a constant amount of new coins is analogous to gold miners expending
resources to add gold to circulation.
In our case, it is CPU time and electricity that is expended (Nakamoto,
2008: 4)
The functionality of the block chain rests on its constant maintenance.
As described above, transactions must be grouped
together in blocks
and encrypted as a hash before they can be published to the block chain as
confirmed transactions. The algorithm that performs this process is run on the hardware devices of users across the
network. To encourage individual users
to contribute their time and computational energy to the network’s maintenance, Bitcoin is designed with an incentive
structure which rewards users in units of Bitcoin. This aspect of Bitcoin’s
design plays three crucial roles in the expansion of Bitcoin as a sociotechnical network. Firstly, the
incentive structure prescribes a
program of action back onto human
users, specifying a particular type of usage necessary for the network’s
overall construction, maintenance, and growth. Secondly,
this prescribed program
of action is designed to be competitive, in such a way that it enrols a continuously expanding
quantity
of human users and hardware devices. Put briefly, for Bitcoin to function
the amount of computational power in
the network must increase in proportion to the total number of transactions being made, and the incentive
structure is designed to ensure this continuous growth. Thirdly, the mining incentive
structure condenses technical
elements with an ideological
choice, consequently carrying that ideology to new users in a modified form: as
a politically neutral, technical fact. This section focuses on
the first and second functions of Bitcoin’s ‘mining’
process: how it prescribes a program of action and incentivises the enrolment of additional machines and actors to
expand the network.
At the centre of the incentive structure
proposed in Bitcoin’s
design is Adam Back’s Hashcash model. As described above, Back
had proposed a system in which sending data across
a network was a costly process. For data to be confirmed on the network and
sent, a cryptographic test had to be
passed. A set of conditions were set in the Hashcash algorithm, and for data to be accepted, a hash must
be generated by a user’s computer that met these conditions.
Generating a hash involved ‘brute computational force’ – a computer would generate thousands of alternative hashes until one
was found that matched the conditions set in the algorithm, an arduous process of trial and error. The difficulty
could be set in the core algorithm by
making the conditions harder or easier to meet, calculated by the probable time it would take a computer to generate enough hashes. Back proposed to set this difficulty at a relatively
low level to combat email spam. The hashing process would require
a probable amount of processing time small enough to go by unnoticed by
a node sending one email, yet large
enough to obstruct a node attempting to send multiple emails at once. Back also proposed in his conclusion that
this process could provide a ‘minting mechanism for Wei Dai’s b-‐money
electronic cash proposal’. With
multiple
computers
performing a more difficult hashing process, the
successful hash could act as a trigger for a new unit of currency: ‘proof-‐of-‐work’ would be rewarded with electronic cash. Nakamoto applied this to
the public ledger design.
To implement
a distributed timestamp server on a peer-‐to-‐peer basis, we will need to use a proof-‐of-‐work
system similar to Adam Back’s
Hashcash… For our
timestamp
network, we implement
the proof-‐of-‐work by incrementing a nonce in the block until
the value is found that gives the block’s hash the required zero bits
(Nakamoto: 2008: 3)
The use of
Back’s proof-‐of-‐work
model allowed
Nakamoto
to
set
a
particular value in the cryptographic hash function. Nodes
in the network would hash the transaction information in blocks as described
above. If their hash met the conditions set in the algorithm, it would be accepted. These conditions are set by
the use of a nonce, an arbitrary
number generated by the core algorithm. The successful hash would have to ‘find’ this nonce, through generating as many random numbers as possible.
Once achieved, a successful hash would be broadcast to the network whose
nodes could check that the hash did
indeed meet the conditions. Compressed into this successful hash would be transaction information, a hash
of the previous block, a timestamp signalling when the conditions were successfully met, the correct
nonce, and also all of the generated
hashes representing the proof-‐of-‐work carried
out. Nodes
in
the
network confirm
their
acceptance of the block by incorporating this successful hash into their
ongoing process. It would make up the first part of their search for the next successful block.
As with
Back’s
model, a token would
be
generated once
the
proof-‐of-‐work had been successfully carried out. This
would take the form of a digital signature produced by the core algorithm representing value for the node
that successfully hashed the block. The address of that node would be
updated with a new balance.
As the confirmation of blocks is the only time a balance
can be updated without a transaction
between two nodes, this acts as a minting mechanism. New currency units come into the
network. The incentive structure thus acts as the network’s monetary
policy:
The first transaction in a block is a special transaction that starts a
new coin owned by the creator of the
block. This adds an incentive for nodes to support the network, and provides a way to initially distribute
coins into circulation, since there is no central authority to issue them. The steady addition
of a constant amount of new coins is
analogous to gold miners expending resources to add gold to circulation.
In our case, it is CPU time and electricity that is expended. (ibid: 4)
The user is thus rewarded
for maintaining the currency network
in new units of the currency.
This acts as a dual incentive for users to both serve the network and advance
its value as currency more broadly.
To the key technical innovation of Nakamoto’s paper, the block chain, is added an incentive structure for users to
contribute to its development and expand
the network with more computational power, and with more human users of the currency.
Figure 9 -‐ The Mining Incentive Structure
Users of the Bitcoin network,
‘miners’, are encouraged to program their computers to generate hashes. The computer that generates a hash matching
conditions set in the algorithm receives a reward in Bitcoins.
This aspect of Bitcoin prescribes a program of action back onto human users. For the network
to function, a sufficient amount of individual users of Bitcoin
must become competitive ‘miners’ who organize
and manage hardware
devices that continually run an
energy-‐intensive process of
‘hashing’:
grouping data and generating hashes. In its early development, this task required
a relatively small amount of energy as there was less data to
be grouped together and processed. The BitcoinTalk archives illustrate how this
process was initially undertaken by Bitcoin’s early developers and supporters, such as software
coder Martti Malmi, and a group of libertarian enthusiasts named ‘New
Liberty Standard’ which helped to
test the software.47 The mining feature of Bitcoin however appeals
beyond the voluntarism of cyber-‐libertarian
actors and aims to provide
a
profit incentive for a broader range of actors to contribute
their hardware to the network. Furthermore, this profit incentive is
designed to secure the network:
The incentive may help encourage nodes to stay honest. If a greedy
attacker is able to assemble more CPU power than all the honest nodes, he would have to choose
between using it to defraud
people by stealing
back his payments, or using it to generate new coins. He ought to find it
more profitable to play by the rules, such rules that favour him with more new coins than everyone
else combined, than to undermine
the system and the validity of
his own wealth. (ibid. 4)
The future security
of the incentive structure is thus founded on the rational self-‐interest of profit-‐seeking
users that will see more value in competing
to mine a new block of Bitcoin than
they will in augmenting their influence over the network
itself. Mining therefore
prescribes particular types of usage based on a particular logic. Namely, assembling hardware devices to continuously run the Bitcoin algorithm in
order to make a profit. This prescribed
usage is competitive, as the more hashing power a ‘miner’ possesses, the more chance they have of obtaining the reward.
This entails that ‘miners’ are likely to seek out new ways of introducing more computational power in the network, a process which triggers
continuous expansion, a practice which is further incentivised by predetermined increase
in hashing difficulty.
The mining incentive structure is designed to increase with difficulty as
the number of users in the network
increases. The conditions set in the algorithm are programmed to increase in difficulty with each block that is hashed, entailing
that the network
requires more
|
47 See bitcoin talk (accessed 27/08/17)
computational power as time goes on. This is intended
to maintain a balance in the network, and avoid the type of problem
envisaged in the quote above, as the increases
required in computational power make it more difficult for a user to
obtain enough hashing power to exert
undue influence over the network. As blocks of transactions are confirmed when a majority of nodes in the network
accept them, this means that a user, or group of users, with a majority of hashing power could theoretically
confirm blocks of transactions that suit their interests, updating multiple balances
during the same transaction (i.e. ‘double-‐spend’).48 The difficulty of hashing a block is therefore
set
to
increase
in
tandem
with the increase of computational
power in the network.
A consequence of this design choice however is to ensure the continuous
expansion of the network, and this
happens in two ways. Firstly, ‘miners’ are incentivised to run the Bitcoin algorithm
on their machines
for a profit; yet their chances of obtaining the reward in Bitcoins
are diminished unless they continuously increase their hashing power. Secondly,
for Bitcoins to constitute value,
more users must be attracted to the network, and this involves the expansion of Bitcoin’s meaning: more
people must recognise
the purpose of using Bitcoin. In these two senses, the program
of action prescribed by Bitcoin’s design involves the continuous enrolment of
further actors and/or machines into the network, by users. This prescribed activity is examined
further in chapter
six, with groups of libertarian users seeking to expand the network through
various means. The immediate point here is that this logic was present in the design of Bitcoin. Bitcoin achieves the
Cypherpunk aim of constructing a
monetary cryptosystem by advancing previous attempts to delegate banking services
to an algorithm, yet its design reveals that Bitcoin goes beyond this to prescribe a set of practices for human users that require the enrolment of further machines and
actors. To continue with Latour’s
vocabulary, an assessment of Bitcoin’s early development brings to light the action devised and
constructed by Cypherpunks, now performed in part by an algorithm, Bitcoin, and a network of actors, ‘miners’, which
make it possible for people to use Bitcoin
as currency. Moreover,
this action carries
meanings from the site of its construction through to an expanding number of users. Here Bitcoin
becomes an actor in a
 |
48 This problem
was widely discussed among developers on BitcoinTalk, who came to term it ‘the 51% attack’. See a discussion thread from
2011, bitcoin talk (accessed 27/08/17)
cyber-‐libertarian panorama:
enrolling, convincing,
enlisting
actors into programs of
action
which involve a particular logic and worldview.
Latour’s concepts help identify the activity that constructs, sustains,
and expands Bitcoin as a set
of practices and meanings. Bitcoin is an algorithm that has been constructed through the modification and development of technical and nontechnical elements that were circulating in a
network of Cypherpunks. The action delegated to Bitcoin during its history of development continues to structure the
action of many Bitcoin users, structuring
practices that are examined in chapter six. What the history of Bitcoin’s
design also reveals, however, is the contingency of its development upon
context. As outlined in earlier sections,
the technical elements
which were brought
together as Bitcoin
in the design process were demonstrative of interpretative
flexibility: many were being developed differently
to address different problems in designs for micropayments. As discussed above, the ‘block chain’ brings together many of these elements
as a digitally-‐mediated means for private exchange to address the
concerns of Cypherpunks. The mining incentive structure also demonstrates contingency, and reveals the influence of
libertarian economic concepts traceable to hegemonic discourses of neoliberalism.
This is the subject of the next
section.
1.1 The Contingency of Mining: Neoliberal values condensed in design
I think the internet is going to be one of the major forces for reducing
the role of government, and the one thing that’s missing,
but
will soon
be
developed, is a reliable e-‐cash: a method on the internet whereby you
can transfer funds from A to B
without A knowing B or B knowing A. (Milton Friedman, 1999a)
So far this chapter has examined the local context
in which Bitcoin
was constructed, focusing on how choices in design reflect
the values of a relevant social group, Cypherpunks, and how these choices delegate particular forms of action, as
well as prescribing types of action for future users. The beliefs
shared in this local context,
those circulated on
Cryptography and BitcoinTalk, are informed by broader discourses from
which knowledge is derived. As one
website popularised on the BitcoinTalk forum puts it when referring to a list of texts produced by libertarians, crypto-‐anarchists, and ‘Austrian economists, “Bitcoin was not forged in a vacuum. These works
serve to contextualize Bitcoin in the broader story of cryptography and freedom.”49 Informing those engaging
with Bitcoin in its early stages were discourses
that define money as a commodity, and something that should be freely traded outside
of regulatory controls.
In examining Bitcoin’s
design, we see how these meanings are condensed
with technical logic, with the mining structure simultaneously existing as
a necessary functionality and an ideological choice. This is affirmed by subsequent adaptations of Bitcoin which have revealed
the mining feature to be particularly flexible and contingent on the meanings of the social groups involved in its
development. In this final section, I draw on Feenberg’s critical
constructionism to interpret
Bitcoin’s incentive structure
as neoliberal discourse expressed in technical form.
As described above, the mining process acts as a minting mechanism
for the Bitcoin network. New
Bitcoins are generated when a block of transactions is successfully hashed. The user that groups together all existing
transaction information and meets the correct
hashing criteria is rewarded with Bitcoins. This feature of the mining
process is the only instance in which
new units of currency are issued in the Bitcoin network. Additionally, the number of Bitcoins generated in this way
is programmed to decrease over time, ultimately terminating entirely, at which point miners will be rewarded not
with new Bitcoins but with transaction fees.
Once a predetermined number of coins have entered circulation, the
incentive can transition entirely to
transaction fees and be completely inflation-free (Nakamoto, 2008: 4)
This design choice, as well as incentivizing miners, regulates and
predetermines the number of Bitcoins in the network, and this is done, as Nakamoto states, as a deflationary measure.
|
49 Quote from the Satoshi Nakamoto
Institute, which aims to promote Bitcoin through research, archiving, and advocacy: nakamotoinstitute Popularised and discussed on BitcoinTalk here: bitcoin talk and here bitcoin talk (all accessed 20/06/2016)
The increasing difficulty of hashing a block ensures that the rate of
Bitcoin creation is slower than the rate of user adoption. In the first
three years that Bitcoin was operational, 2009-‐ 2011, miners received 50 Bitcoins for
successfully hashing a block, which many were able to do on personal computers.50 In 2012 the number of
Bitcoins generated as rewards halved to 25,
while the time and energy it took to hash a block continued to expand, along
with the number of users making transactions.51 Demand has thus exceeded supply
both intentionally and extensively, a deflationary measure
that has created
value through scarcity.
In subsequent adaptations of Bitcoin, the proof-‐of-‐work hashing
program, on which Bitcoin
mining is founded, has been redesigned. In Peercoin for example, a group of
developers prioritizing sustainability modify the hashing process, devising
a ‘proof-‐of-‐stake’ system that
validates transactions by verifying the records of randomly selected users.
This is far less energy intensive
as there is no competition between miners. The selected users, who contribute to maintaining the network by
making their encrypted transaction history open for inspection, are rewarded with a 1% increase in their holdings.
This entails that Peercoin’s
version of mining, a process they call ‘minting’, is consistently inflationary.52
This does not constitute a problem for Peercoin’s developers, who prioritize ‘long term sustainability’ over deflation. In the
words of one Peercoin developer, “’ inflation’ is a dirty word in the Bitcoin community, who think that Bitcoin’s
deflationary aspects are revolutionary,” a post which differentiates between
views of the Bitcoin and Peercoin ‘communities’.53 In another
adaptation of
Bitcoin,
Faircoin, the proof-‐of-‐work
hashing
program is redesigned differently to make it accountable to its
community of users. Faircoin’s developers
call
this
‘proof-‐of-‐cooperation’,
as
its
users
select
‘trusted’
members of a cooperative organization to perform the hashing process,
making it
|
50 See, for example, this discussion thread between miners
on BitcoinTalk bitcoin talk (accessed 20/06/2016)
51 See bitcoin talk (accessed 20/06/2016)
52 The Peercoin
developers forum elaborates on these processes: talk peercoin (accessed 28/08/17)
53 This quote is
taken from a fascinating post by a Peercoin developer who addresses criticisms
of Bitcoin made by economist Paul
Krugman, and how they relate to Peercoin, in the process clearly differentiating the views of Peercoin developers
from their Bitcoin counterparts. Available here: talk peercoin (accessed 28/08/17)
collaborative instead of competitive.54 Here too, a finite
supply of ‘coins’ is not a priority and is
actually seen as something that may encourage hoarding and speculation, and
deter exchange. Faircoin
developers, therefore, opted to incorporate and modify a minting mechanism similar to Peercoin. These
examples illustrate the flexibility of Bitcoin’s design and its contingency on the meanings shared by those developing
it. As outlined in Bitcoin’s design,
the network specifically targets a future state in which the electronic cash
system is ‘completely inflation
free’. This begs the question, why is ‘deflation’ and a finite supply prioritized in Bitcoin’s design?
In the cyber-‐libertarian
texts shared
on the Cryptography, Cypherpunk, and BitcoinTalk
forums, free markets are envisaged at the heart of ‘crypto-‐anarchy’, an ‘anarcho-‐capitalist’ future in which governments,
as Wei Dai stated, are ‘permanently unnecessary’ as digital technologies make the possible free and
private exchange. In Langdon Winner’s analysis of cyber-‐libertarianism, he analyzed the work of popular writers on digital culture
in the 1980s and 90s, such as Alvin Toffler, Stewart Brand, and John
Perry Barlow. He identified three elements of cyber-‐libertarianism as a political ideology.55 Firstly,
the rapid development of
digital technology is understood as the driving force of social change, often
expressed as “a kind of evolution that can be explained in
quasi-‐biological
terms” (1997:
15).
This technological determinism sees social deliberation on directions of technical development as something that can only be obstructive. Secondly, radical
individualism characterizes this ideology.
New
digital
technologies enable the full pursuit
of rational
self-‐interest without the burdens of cumbersome traditional social structures. Indeed,
“because inherited structures of social, political, and economic organization pose barriers to the exercise of personal
power and self-‐realization,
they
simply
must
be
removed” (ibid). The final element identified by
Winner was the concept of free-‐market capitalism as reformulated by Milton Friedman.
Winner notes that particular writers in the 1980s, such as George Gilder, helped bridge the utopian ideals of cyber-‐libertarians with the tenets of the
Chicago School SchoolnomiEconomicsEconomicssuch as his 1989 book Microcosm.
|
54 See Faircoin case study, next chapter.
55 For further analysis
of the ideology of these
writers, see Turner,
F. (2006) ‘From
Counter Culture to Cyber
Culture’
In Gilder’s view, the wedding of free market economics with the overthrow
of matter by digital technology is a
development that will liberate humankind by generating unprecedented levels
of wealth (Winner, 1997: 15).
These elements that together comprise the ideology of cyber-‐libertarianism offered a vision, Winner states, that many found
coherent and appealing. The growth of this ideology spread the concepts and logic of free market
capitalism to many technology enthusiasts who saw a compatibility between the decentralized architecture of computer networks,
and the decentralizing strategies of free market economics. A prominent
example of this about crypto-‐currencies
is seen in the work of Nick Szabo.
Nick Szabo is a cryptographer that writes frequently on decentralized
digital currencies. In 1997 Szabo
outlined first his own proposal for ‘BitGold’ which brought together the vision
of David Chaum, Haber and
Stornetta’s time-‐stamping
function, and various aspects of B-‐ money and HashCash.
His proposal was thus remarkably similar to that of Nakamoto,
leading to speculation on BitcoinTalk that Szabo is Nakamoto.56 In introducing his proposal, Szabo reiterated the Cypherpunk concern
with powerful third parties in financial systems. In doing so, however,
Szabo focused on specific economic concerns with inflation:
The problem, in a nutshell, is that our money currently depends on trust
in a third party for its value. As
many inflationary and hyperinflationary episodes during the 20th Century
demonstrated, this is not an ideal state of affairs (2005)
Szabo had previously analyzed the protocols of Chaum and successors such
as HashCash and attempted to advance
elements of their respective protocols in which he focused solely on issues of mathematics (1996,
1997, 1999). Szabo
had elsewhere discussed crypto-‐currency
projects in the context of a history of cryptography (2002). In the above
proposal for BitGold however, Szabo
brings together a concatenation of these efforts with the concepts of free market economics. In particular, Szabo
advanced the concept of gold as possessing intrinsic value, in part due to
its ultimately finite supply.
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56See bitcoin talk (accessed 28/08/17) This opinion was also held by
one of my interviewees, Suzanne Tarkowski Templehoff, founder of BitNation.
Gold, Szabo claimed, is scarce and has an unforgeable quality. As such,
it carries intrinsic properties for
dealing with issues of authenticity and stability, issues typically entrusted
to a third party with
government-‐authorised
forms of
money. Problems
occur , however,
in
assaying and transporting gold, which inevitably involve powerful third
parties. BitGold was designed to
address these issues, nominally offering a system for the trading of digital commodities that resemble the characteristics of precious metals.
Precious metals are understood in the monetary theory of Carl Menger to
have emerged historically as the most suitable commodities to represent value. Due to their physical
properties, individuals engaging in trade increasingly valued precious
metals and this gave rise to their
emergence as money. The process was thus “no accident, nor the consequence of state compulsion… it was the just
apprehending of their [actors in the market] individual self-‐interest
which brought
it
to
pass,
that
all
the
more economically advanced nations accepted the precious metals as money” (Menger, 2009: 48-‐9). While the gold standard, the direct linking of currency
to quantities of gold, fell out of favor in mainstream economics, as Nigel Dodd explains in The
Social Life of Money (2014), Menger’s theory continued to resonate
in circles committed to limiting the capacity of governments:
Menger’s theory is especially popular among libertarians, who believe
that money is best organized by
markets, not states. The argument that money began as an easily traded commodity offers persuasive support
for the view that currencies should be linked to the value of a precious metal such as gold,
which is naturally scarce (21)
The understanding that money is a commodity that’s valued is best determined by the laws of
the market was taken up in discussions of monetary policy by key figures of
neoliberalism in the 1960s
and
70s.
In
A Monetary History of the United
States
1867-‐1960,
Milton
Friedman (1963) argues that inflation is the direct result of expansions to the
money supply. If the money supply
expands, the purchasing power of that currency decreases and prices are driven up. Control of the money supply
thus bestows central planners considerable
leverage over an economy, without
the same recourse
to democratically accountable actions such as taxation. Friedman posits a fixed monetary policy – the ‘k-‐percent rule’ – in which
the money supply
would increase by a set percentage each year, fixing
and limiting
supply, like the gold standard. One of the effects this would have is to
reduce the power of governments to
direct or intervene in economies, actions which Friedman argues lay behind the collapse of global markets
in the aftermath of the Wall Street Crash – an era he describes
as ‘The Great Contraction’. The k-‐percent rule could be imposed by central banks
such as the US Federal Reserve. Though Friedman recognises this as an imperfect
solution due to the corruptibility of
such organisations and their subjection to government influence, he nonetheless sees it as a realistic
one. For Friedrich Hayek (1976), this is an unnecessary compromise on the part of Friedman: “The present political
necessity ought to be no concern
of the economic scientist,” Hayek states in The
Denationalisation of Money, “His task ought to be, as I will not cease repeating, to make politically possible what today may be politically
impossible.” Hayek continues,
I am in complete agreement with Professor Friedman on the inevitability
of inflation under the existing
political and financial institutions. But I believe it will lead to the destruction of our civilisation unless we
change the political framework. In this sense I will admit that my radical proposal concerning money will
probably be practicable only as part of
a
much
more far-‐reaching change in our political
institutions, but an essential part of such a reform
which will be recognised as necessary before long. The two distinct reforms which I am proposing in the economic and
the political order are indeed
complimentary: the sort of monetary system I propose may be possible only under a limited government such as we do
not have, and a limitation of government may
require that it be deprived of the monopoly of issuing money. Indeed the latter should
necessarily follow from the former (84)
For Hayek, a denationalised currency with a fixed supply was envisioned
as the central technique of a political
strategy to transform
the capacities and responsibilities of governments. As he had argued emphatically in The Road to Serfdom (1944), in taking on the management of economies all world governments were preparing the way for totalitarianism.
The only way centrally planned market sectors could function, he posited, would be to increasingly deprive people of
choice. As more and more aspects of peoples’
lives were dependent on the economic activities of others, this removal
of choice would inevitably penetrate
every sphere of action. It was therefore
possible for Hayek to state, in
concluding The Denationalisation of Money, that the development of competing denationalised currencies represents “the
one way in which we may still hope to stop the
continuous progress of all governments towards totalitarianism” (1976: 134). Hayek’s
argument here is, along with those Menger and Friedman,
implicit in the writings of Cypherpunks
and
Crypto-‐Anarchists, examined
above, in which
stateless currencies
were envisioned to protect individuals
from the overreaching power of nation states. Indeed, as Langdon Winner notes, the ideas and arguments of free market
capitalism are a crucial component
of cyber-‐libertarianism.
The decision in Bitcoin’s design to steadily reduce the reward for mining
is, as stated, a deflationary measure
aimed at creating
value through scarcity. This intentionally imitates
the finite supply of gold. As Nakamoto states, “the steady addition of a
constant amount of new coins is
analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that
is expended” (Nakamoto, 2008: 4). Dodd documents the influence of Menger’s monetary
philosophy on Bitcoin,
yet points out that many ‘Austrian’
economists remain critical of Bitcoin because, “firstly, Bitcoins are not actually gold
– indeed, according to this view, they have no intrinsic value; and second,
because Bitcoins did not evolve as
money because of their high use value, as Menger’s theory would suggest” (2014: 362). While these tensions
exist with Menger’s theory proper, Nakamoto’s
design choices reflect
an influence of the free market monetary
theory originating in Menger’s
work and augmented by the later concepts of Friedman and Hayek. Indeed, the fixed rate of
monetary
expansion is better
understood in terms
of Friedman’s k-‐percent rule, which advocates stable expansion to control
inflation.57 Discoveries of gold ensure its supply is not entirely stable; there is no possibility of a
‘gold rush’ equivalent in the Bitcoin network.
Furthermore, the open source nature of Bitcoin and its proposal as one of many designs
for encrypted payments
discussed on the Cryptography and BitcoinTalk forums
implies its competition with other alternative currencies. In this way, Bitcoin
is a manifestation of Hayek’s proposal to Friedman. It maintains Friedman’s
logic of fixed
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57 Indeed,
in a 1999(b) interview with the libertarian think tank the Cato Institute, Friedman states: “I have,
for many years, been in favour of replacing the Fed with a computer… it would
print out a specified number of paper
dollars… Same number, month after month, week after week, year after year.”
monetary expansion yet opens currency
to a “control of value by competition” (Hayek, 1976: 48).
In the critical constructionist approach of Feenberg, we see how values
may be ‘condensed’ with technical
logic in a ‘technical code’: a framework of meaning that defines technology (1999: 87-‐8).
In
the
design
of Bitcoin, we
see
a
similar
process. The mining incentive structure is a feature
in Bitcoin that is due not to inherent features
of the technical architecture
but the influence of free market concepts. As stated above, adaptations of Bitcoin have come to show the range of
alternatives in designing incentive structures and rates of coin creation. The choice to algorithmically
predetermine the number of Bitcoins in the network
and the rate of their creation follows
the logic of a particular monetary philosophy in
free market economics. The monetary theory underlying this choice thus plays a significant role in the social
construction of Bitcoin. Moreover, as a key component of the hashing process that underpins the
network, the mining function condenses these concepts within the technical
logic of design.
The functionality of Bitcoin rests on an increasing amount of computational power to maintain the network. Users are
incentivised to contribute this power through accepting digital signatures as ‘rewards’ that denote monetary value. As
value is conceptualised within the free
market concepts
of supply-‐side economics
–
namely that money
is
a
commodity
and a fixed rate of supply is superior – users are introduced to these
arguments on what constitutes monetary
value in technical
form. The functionality of the technology as outlined in design is therefore fundamentally linked to this economic doctrine.
The meanings in neoliberal
discourse are carried through widely circulated texts, modified in the writings
and
discussions of
cyber-‐libertarians, condensed
in
the
designs
for Bitcoin, and presented to users in a technical
form. This is not to say that Bitcoin’s libertarian influences are concealed to users, but that neoliberal meanings are transformed by this process.
Where Hayek’s proposals existed as a theoretical argument, they now
exist as a technique. Bitcoin, as a ‘mediator’ in Latour’s
terms, has transformed the meanings from neoliberal discourse it was meant to carry. ‘Denationalised money’ is now an entity that
is encountered by actors,
something that prescribes to them certain practices which involve the enrolment of others, and not unimportantly, offers them a means of making profit. This
is a radically different form of neoliberalism, most closely aligned to
the various techniques analysed by
Dardot and Laval (2013). Such techniques, they observe, brought into existence via a pervasive discourse, subtly guide
behaviour through “motivation, incentivization, and stimulation” (260). Significantly, Bitcoin illustrates the capacity for such techniques to emanate from the
disparate activities of various actors, connecting meanings and technical elements in collaborative networks. The
flexibility of these technical elements also reveals however, the capacity for ‘counter-‐conducts’ to emerge. As already stated, other actors that have encountered Bitcoin have done so
in contexts that prioritise other meanings and have adapted Bitcoin accordingly, acting in what Feenberg terms ‘the
margin of manoeuvre’. These actors
constitute the other relevant social groups in Bitcoin’s development, and are examined
in the next chapter.
Summary
This chapter
has
aimed
to
show the role
of non-‐technical
values
in
the
construction of
Bitcoin. Throughout the 1980s and 90s various innovations were made in the
digitisation of communication, exchange, and the recording
of documents. Many of these ideas were
discussed and developed on the Cryptography mailing list, a forum for
the discussion of cryptosystems and their social repercussions. In other contexts,
such as commercial research into micropayment systems,
these innovations were developed in different ways to
suit the interests of various organisations. On the Cryptography mailing list
however, as examined
in
section 4.1,
the
prevalence of cyber-‐libertarian meanings cast
these innovations as tools for ‘decentralising’ banking
by delegating the services financial
institutions perform to a cryptosystem. Cypherpunks, Bitcoin’s first
relevant social group, advanced developments in encryption technology as a means of achieving ‘crypto-‐anarchy’
– an ‘anarcho-‐capitalist’
system in which
individuals
were able to engage
in
digitally-‐ mediated
private exchange and communication, free from the ‘coercive’ power of nation states. At the heart of this utopia was a
decentralised and encrypted payments system. In this context, Bitcoin
was first proposed
to the subscribers of the Cryptography and developed by users of the BitcoinTalk
forum. Bitcoin outlined
the design for a peer-‐to-‐peer
electronic cash system that required no ‘centralised’ organisation to
function, and as such was
defined
in
contrast
to
the
‘trust-‐based model’ of conventional
commerce. This addressed key concerns of
Cypherpunks and the problems they had encountered in their efforts
to
construct
digital
cash
systems, most
notably the ‘double-‐spending
problem’. It purported to solve this problem by designing a public ledger that is encrypted and maintained
by its users.
On examination of Bitcoin’s design, it is possible to trace the connections made between meanings and technical elements. In the first instance, this is observable in Bitcoin’s ‘block chain’ innovation. As discussed in section 4.2, the block chain brings together many technical elements that were circulated and frequently discussed on the Cryptography mailing list, to address the aims and concerns of Cypherpunks. Nakamoto’s paper proposes to delegate the services provided by banks to an algorithm which is run across many servers and maintained by a network of disparate users. To incentivise users to run this program, Bitcoin provides a reward system. As outlined in section 4.3, this reward system prescribes a type of usage based on a particular logic. Namely, the assembling and maintenance of hardware devices for a profit. This incentive structure is designed to be intensely competitive to ensure the expansion of the network, which encourages users to enrol additional machines and actors into the network. In section 4.4, we saw how this feature of Bitcoin also acts as a minting mechanism, issuing currency at a fixed rate. As subsequent designs have come to show, this feature of Bitcoin’s design was not an inherent feature of its technical architecture but contingent on the interests and beliefs shared by its developers. These beliefs are informed by broader neoliberal discourses and a ‘technical code analysis’ reveals how these meanings are condensed in design and transformed into a technique. For many, these meanings continue to shape how they encounter Bitcoin and prescribe how they use it. Others however, have interpreted Bitcoin in significantly different ways, challenging the ideas expressed in its design. It is to these latter groups analysis now turns.
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