A Crypto-history of Blockchain Technology
by piero scaruffi
Cognitive Science and Artificial Intelligence | My book on A.I. | My book on consciousness | Human 2.0 | Bibliography and book reviews | Contact/feedback/email
This primer includes the following articles:
Hippies, Extropians and Libertarians
Blockchain technology was invented when bitcoin was invented. Bitcoin came out of the counterculture, not of the mainstream. The counterculture that wanted "to change the world" (and which was actually opposed to the technology owned by the rich corporations and of the government) often "hijacked" technology in order to create a new, idealistic society. I have argued that Silicon Valley itself is largely the result of such a process: the counterculture exploiting technology for purposes completely different from the original ones, and typically "to change the world". The result has always been a peak of creativity/innovation and in many cases it indeed changed the world (although not often the way it had hoped to). Bitcoin was born out of a similar contradiction. Bitcoin had its roots in three unorthodox alternative movements, that at some point converged on California: P2P networking, the extropian movement and the cyberpunk movement.
In the 1950s the Bay Area was mostly famous for the "beat poets" and in the 1960s for the "hippies". Collectively, the intellectuals of these movements were sometimes called "human-potential movement" because they aimed to rediscover the potential of humanity, not the potential of machines. They did not like the greed of the capitalist system and viewed the computer technology as harmful to the individual. In the 1970s another famous movement came out of California, the descendant of those previous movements: the "new age" movement. It was, again, a movement that valued spirituality over technology and science. The world became more and more technological and scientific, but California instead became more and more spiritual. At the same time this anti-technological, spiritual "revolution" was proceeding in parallel with the boom of the high-tech industry. That's really the origin of Silicon Valley: it was a strange interaction among universities (Stanford, Berkeley and others), the military industrial establishment (particularly Lockheed and projects founded by the government like the Internet), the "human-potential movement" and the computer technology (especially after computers were connected in networks like the Internet). Silicon Valley has always been a strange synthesis of futuristic technology and rebellious ideology.
Towards the end of the 1980s, just before the invention of the World-wide Web, a quasi-religious movement was born in California: the "extropian" movement. They believed in the power of science and technology to give us immortality. Its members practiced cryogenics to preserve their brain after death. Science has a concept of "entropy" that is very popular when studying order, information, organization. Entropy destroys order, information and organization. Ultimately, entropy is the reason that all things must die. Tom Bell coined the term "extropy" as the opposite of "entropy". When Max More, an Oxford philosopher who had co-founded the first cryonic service in Europe (today it is called Alcor) moved to Los Angeles, he founded the magazine "Extropy - the journal of transhumanist thought" and then founded the "Extropy Institute". The extropian movement spread thanks to an online forum, another example of the "counterculture" using technology for its own purposes. The extropian people held strong anti-government views. They were modern anarchics, people who don't believe in a state. They wanted to create a society based on technology in which the power would shift to the people. Their dream was that technology would allow people to run their state without any need for politicians and police. In 1994 the influential high-tech magazine Wired published an article titled "Meet The Extropians". The people who gravitated around the extropian movement included Hans Moravec (who would become famous for the "Singularity" movement), Ralph Merkle (a cryptography expert from UC Berkeley who would become famous in the age of nanotech), Perry Metzger (the founder of the cryptography mailing list on the Internet), and Nick Szabo and Hal Finney. We'll get to Szabo and Finney later, but first let's put things in context, because i think it is really important to understand that technology does not exist in a vacuum, that technology is always part of a much bigger ecosystem.
These are also the years when Burning Man became the craziest festival in the world. There used to be something called the Suicide Club in San Francisco. It was a group of crazy kids doing crazy things, like climbing the Golden Gate Bridge. Several of them went on to create other crazy events around the Bay Area. One of them, Mary Grauberger, was organizing one of those "human-potential" events: once a year, during the summer solstice in June, she was inviting her friends to a beach party in San Francisco. During her beach part of 1986 two of her friends, Larry Harvey and Jerry James, burned the effigy of a man. It became a tradition for that beach party. At the same time the Suicide Club had evolved into the Cacophony Society, another semi-legal organization that was organizing strange events for young people. People like Dan Kottke, who had been Steve Jobs' best friend during his college years and helped him start Apple, remember fondly the Cacophony Society. In 1990 Kevin Evans and John Law of the Cacophony Society invited Harvey to transplant the burning ritual to the Black Rock Desert in northern Nevada. Kevin Evans was an artist, one of the several artists who had joined the Cacophony Society. Burning Man became a festival, a festival of artistic sculptures in the desert that are burned at the end of the festival. It was started by a carpenter and two jobless Cacophony members. It became (in)famous as an event of wild sex and drugs, but now it is famous for the way it self-organizes in the middle of the desert and for the colossal artistic sculptures, some of which move (a legacy of the Survival Research Laboratories, another unique movement of the 1980s in San Francisco that focused on shows of machines destroying each other).
The history of P2P begins in Boston. In June 1999 Shawn Fanning invented a system to distribute mp3 music files over the Web: Napster. His system allowed people all over the world to share music files. But this was illegal and the music industry eventually forced Napster to stop doing it. Nonetheless, Napster had invented a new technology, peer-to-peer (P2P), and had proved its potential. Napster inspired a new generation of P2P services, most of them used to share music, like Kazaa in Estonia and BitTorrent in San Francisco. These hackers, like Bram Cohen of BitTorrent, became heroes of the counterculture for defying the giant corporations of the music industry.
In 2000 a former Yahoo scientist, Jim McCoy, started EGBT (Evil Geniuses for a Better Tomorrow) to work on MojoNation, a P2P platform. He was inspired by videogames to solve the problem of "Agoric computing", which was a serious topic of computer science for the purpose of improving large-scale computation. The "mojo" was a cybercurrency, but it was not used to buy and sell things: it was used to provide balanced and secure computation for a network. MojoNation was a fascinating application of concepts of economics applied to optimization of computers. In 2001 SUN, that at the time was a major power in the Internet world (SUN originated Java, that powered the Web for many years), introduced a similar open-source project, XTA (Juxtapose). Bram Cohen worked with Jim McCoy. That's where he learned the technology that he used to create BitTorrent, that became the most popular P2P platform. Another EGBT alumnus, Zooko Wilcox-O'Hearn, turned MojoNation into Mnet. Here the concepts of cybercurrecy and P2P had been joined.
Both Napster and BitTorrent relied on a central server. That was actually not real P2P. Gnutella, designed by Justin Frankel and Tom Pepper in Arizona, was truly P2P, totally decentralized. Ditto for Freenet, launched in London a few months later. The lawyers who sued these pioneers helped create the phenomenon of the "dark nets". This phenomenon became famous when four employees of Microsoft published "The Darknet and the Future of Content Distribution" (2002), that revealed the existence of invisible password-protected networks within the Internet. These peer-to-peer networks, where you remain anonymous, loved the Onion Router (TOR), another unorthodox marriage of counterculture and military project: a technology that had been invented to protect the military world was now used for "dark nets" within the Internet.
Bitcoin came out of a utopian project to create a society outside the government.
Mathematicians were working on cryptography and on ways to improve security on networks of computers even before the Internet existed, and of course the problem became more impellent after the World-wide Web was launched on the Internet in 1991. Cynthia Dwork at IBM in San Jose wanted to use computational processing to punish spammers, because it was too difficult to punish them with the law; and in 1992 she found a way to do so, a method called "proof of work" that creates a cost for a class of operations, a cost that can become impossible to afford for the wrong people. Her paper "Pricing via Processing or Combatting Junk Mail" conceived computational processing as a "cost" to make "spam" email very expensive, and therefore discourage spammers.
The cryptographer Stuart Haber and the physicist Scott Stornetta at Bellcore devised a way to "time stamp" digital documents. Their paper "How to Time-stamp a Digital Document" (1991) de facto introduced the concept of the "blockchain". They used a cryptographic hash function to generate a hash uniquely identifying the document (so the document would remain confidential), time-stamped the hash, and chained together the hashes in chronological order, each block linking to the previous one. When they moved from theory to practice, once a week they also published in a newspaper (the New York Times) the hash of all the new documents added to the chain in the last week.
The British cryptographer Adam Back wanted to find a way to encrypt messages without having to rely on a central authority; and in 1997 he invented a new proof-of-work system: "hashcash", a method to use cryptographic hash functions on a network to achieve the "cost" envisioned by Dwork for spammers. Again, the intent was to discourage abuse of email, but Back de facto invented a method to control processes a network with no need for a central authority.
The extropian Nick Szabo at George Washington University had an even bigger goal: to create trust in society without any need for that central authority; and in 1997 he published the paper "Formalizing and Securing Relationships on Public Networks" that described a distributed trust model (and one year later he titled his paper "The God Protocol"). He conceived a sophisticated way to prevent people from spending twice a cybercurrency, a way to avoid that people can make copies. Szabo's model is reminiscent of videogames and fantasy movies: there are masters assigning "difficult tasks" to novices; if the novices succeed, they become masters. The "difficult tasks" were a variation on the "proof of work" method employed by Dwork's anti-spam software. Not only did he propose a cybercurrency called "bit gold": Szabo also described how cryptocurrencies could be used to implement "smart contracts" on the Internet.
This is when the counterculture of the San Francisco Bay Area started paying attention. Timothy May was a former Intel employee who held strong anarchic beliefs. In 1992 he had started a group and a mailing list called "cypherpunk" for people interested in using cryptography to avoid the scrutiny of the government. At their first meeting he read the "Crypto Anarchist Manifesto". The key sentence is: "Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner." It was on that mailing list that a lot of discussion took place about creating a "cryptocurrency".
When John Perry Barlow wrote the "Declaration of Independence of Cyberspace" in 1996, he wrote that "Cyberspace consists of transactions, relationships, and thought itself" but not government.
In 1998 the mysterious Chinese mathematician Wei Dai described on the "cypherpunks" forum a powerful mathematical model for a cryptocurrency that would be almost unbreakable. His idea was simple: let everybody have a record of every transaction, so that noone can cheat the others. This idea creates an anonymous and distributed system in which the community (not a central authority) guarantees "trust". Wei Dai said that he was inspired by Tim May's "The Crypto Anarchist Manifesto".
Meanwhile, a new kind of distributed computing was becoming popular. Distributed computing had existed before the Internet, but it became more appealing after the advent of the personal computing (as millions of people now owned a computer) and of the World-wide Web (which made it easier for ordinary people to integrate their work). For example, in 1996 George Woltman in Boston launched the Great Internet Mersenne Prime Search (GIMPS) to search for Mersenne prime numbers (prime numbers that are one less than a power of two), a project that to this day has discovered 17 Mersenne primes. In 1997 a group of amateurs including Jeff Lawson, Adam Beberg (in Chicago) and David McNett (in Alabama) started Distributed.net, a general-purpose distributed computing project, originally to compete in the RSA Secret-Key Challenge, i.e. to break a 56-bit encryption algorithm (they solved the RC5-56 challenge in 250 days revealing an encrypted message that said "It's time to move to a longer key length"). The most famous of these distributed projects was and still is SETI@home to search for signals sent by intergalactic civilizations, i.e. for extraterrestrial intelligence, a project launched in May 1999 from UC Berkeley by David Anderson, who wrote the software and eventually (in 2002) the distributed operating system BOINC (Berkeley Open Infrastructure for Network Computing), the archetypical platform for "volunteer computing", thanks to which ordinary people from all over the world "lend" their computers to astronomers when the machines are idle. BOINC became the largest distributed computing experiment in history, with one million computers joining the search for extraterrestrial life. However, systems of volunteer computing like these pioneering ones didn't need to self-validate their computations, because their computations were not creating money.
Theoretical work on cryptocurrencies continued until in October 2008 Satoshi Nakamoto published the paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" on a new cryptography mailing list, metzdowd.com. A few weeks later he sent the very first bitcoins to Silicon Valley-based Hal Finney, an extropian who had become famous on the cypherpunk mailing list. Nakamoto had posted frequently his opinions about cryptomoney on the cypherpunk list (opinions brilliantly summarized as a virtual interview in George Gilder's 2018 book "Life After Google - The Fall of Big Data and the Rise of the Blockchain Economy").
Note that several attempts had already been made at establishing a digital currency. David Chaum, a cryptographer from UC Berkeley, had launched DigiCash in 1990, followed by Douglas Jackson with E-gold in 1996. There were virtual currencies limited to videogame communities such as Second Life's "linden dollar". Even frequent-flyer miles and credit-card points can be considered forms of digital cash, as they are stored in computers. Just the year before bitcoin, Andrew Draper had launched Perfect Money. Many people had realized that the Internet could make money circulate just like it made email circulate. Nobody had solved the "double-spending problem": how to avoid that users of the digital cash make unauthorized copies of the money. It took Nakamoto and his "blockchain" to solve that problem.
The method used by Nakamoto is now called "blockchain" and derives from the sum of all those methods developed in the 1990s to create trust without having to rely on a central authority. It combined hash functions, proof of work, digital time-stamping (all ideas that already existed) with a reward for doing "proof of work". In his grand scheme "miners" are motivated by the reward to add blocks to the blockchain, each block representing bitcoin transactions, and the blockchain is distributed to the network.
Bitcoin was a currency, but it was also a lot more: its underlying blockchain technology was a new way to run a society without a central authority. Satoshi Nakamoto left the Bitcoin project almost immediately after release 0.2 (December 2009), co-written with Martti Malmi, a student at the Helsinki University of Technology who was interestested in decentralized cybercurrencies. Nakamoto's last posted something in December 2010 (except for posting in 2014 a short sentence "I am not Dorian Nakamoto" to dispel a magazine story). Hal Finney added some code to the original code soon after the publication of the white paper when the code was posted on the website Sourceforge. Malmi, who was the first person to sell bitcoins for dollars (5,000 bitcoins for 5 dollars), left too in 2011 and the project moved to the open-source repository Github (coincidentally created the same year that Nakamoto developed Bitcoin) and since then it has been developed by a community of volunteers. Gavin Andresen, formerly a virtual-reality expert at Silicon Graphics in Silicon Valley, joined in 2010 and in 2012 started the Bitcoin Foundation in Boston (established with a large donation by Silicon Valley-based anarchist and bitcoin evangelist Roger Ver, who in 2011 had created the first major online store accepting bitcoin payments and previously had been jailed for selling explosives on eBay).
Basically the recipe for creating Bitcoin includes the following ingredients: some crazy religious cult, some quasi-gangsters on the Internet, mathematicians who borrow ideas from economics and from videogames, some military software, and a group of hippies who shun academic journals and communicate over a mailing list.
Bitcoin became the first successful currency not to be printed by a government. Bitcoin shifted the power from the central government to a P2P network.
Even before Bitcoin became famous, the success of peer-to-peer models had generated a lot of enthusiasm in the counterculture. Michel Bauwens, a Belgian philosopher living in Thailand, published pamphlets such as "P2P and Human Evolution" (2005) and "The Peer To Peer Manifesto - The Emergence of P2P Civilization and Political Economy" (2007) about the transformative power of peer-to-peer economics. Three years before the birth of Bitcoin, Ori Brafman published "Starfish And The Spider" (2006) and Yochai Benkler published "The Wealth of Networks" (2006), books which popularized the notion of "distributed autonomous organizations". Brafman, an Israeli-born Stanford-educated economist, compared the distributed organization to a starfish and the centralized organization to a spider, which dies if its head is cut off. Benkler, an Israeli-born Harvard professor of law, hailed "commons-based peer production", the production and maintenance of open-source software (such as Linux, launched in 1991, and Apache, launched in 1995) and of Wikipedia (launched in 2001), a third mode of production, neither capitalist nor communist. Bitcoin realized their dreams. Bitcoin is not just a cybercurrency: it is a method to reinvent government bureaucracy without the bureaucrats.
Bitcoin proved again the importance that the independents have on new revolutionary ideas in technology. No major corporation and no major venture capitalist thought of it. The universities developed the math but did not see the potential. This kind of ideas can only come from individuals who work outside the "system".
Bitcoin remained mostly a theoretical exercise until Ross Ulbricht opened an online marketplace called "Silk Road" for people to buy and sell anything anonymously. One of the tricks that he employed was to have payments made in bitcoins. "Silk Road" became popular with all sorts of criminals, and with ordinary drug addicts. Ross Ulbricht was arrested by the the US government in October 2013 and eventually sentenced to life in prison. Just like Napster, an illegal operation, had proven the power of P2P communications, Silk Road proved the power of bitcoin commerce.
Much has been written and speculated about the real identity of Satoshi Nakamoto. Satoshi stopped communicating in 2013. Hal Finney (who died in 2014), Szabo and Dai have been obvious suspects. In 2016 Craig Wright, a computer-security expert based in Australia with a PhD in theology, and a long-time subscriber to the cypherpunks mailing list, claimed to be the real Satoshi Nakamoto, and that was the beginning of a long personal saga. He convinced very few people, but attracted attention to his business partner, Dave Kleiman, based in Florida, a paraplegic and a computer-security expert who died a horrible death, alone and poor, in 2013 (the year when Satoshi disappeared). In 2018 Kleiman's brother sued Wright claiming that Wright has "stolen" to the early bitcoins mined by Kleiman, which are now worth a fortune.
Bitcoin's "blockchain" mechanism is the real revolution. Blockchain technology allows a network of computers to make changes to a global record without the need for a central authority. The blockchain is a ledger shared by all the computers of the network, and its technology makes it impossible to spend the same money twice (no counterfeits). You can use it for the "smart contracts" that Szabo envisioned. In theory, you can create a society in which there is no need for central authorities of trust. Today, trust is guaranteed by something like the national bank (run by the government) or the title company (the agency that certifies who owns a house). Blockchain creates trust through an algorithm. Any form of peer-to-peer contract (whether selling a house or renting a car) can be made safer through blockchain. The blockchain technology is much more than a method to manage a virtual currency: it is a digital record keeper that does not require intermediaries/middlemen and cannot be distorted/hijacked.
Smart contracts, ultimately, are mathematical formulas. Philosophically speaking, this is a major revolution: every contract in human societies can be reduced to a math problem. Computers had reduced contracts to data stored in a database, but "smart contracts" are more than just the record of an agreement: they include an algorithm that needs to be calculated in order to verify the validity of the contract and that then automatically executes the contract. Legal contracts are written in legal language. Smart contracts are written in software. Smart contracts are a series of instructions (typically written in "solidity", the programming language of Ethereum). Smart contracts can also be used to build DAOs, "decentralized autonomous organizations".
Vitalik Buterin's Ethereum (2015) marked a notable step forward from the original (bitcoin) blockchain because it introduced its own programming language (solidity, originally proposed by Gavin Wood in August 2014) and aimed to become the "world computer" (it is "Turing-complete", i.e. it can implement any program), or, more realistically, a general platform to develop decentralized applications ("dApps"). The blockchain was designed to avoid cheating: it was not designed to be the backend of a distributed system. Ethereum changed that, and since then many other blockchain engineers have proposed platforms to develop dApps. Ethereum and all subsequent systems built on blockchain technology operated in the same way to reward participants in, and contributors to, the network: by issuing "tokens" that are de facto cryptocurrencies. Ethereum was also crucial to legitimize smart contracts. Any dApp typically has its own token and rewards members of the network that contribute whatever the dApp needs, for example content or computing power. The reward is always automatic, built into the code of the blockchain, i.e. all tokens are programmable entities that automatically perform the same function all the time for all users (a sort of universal law that is truly fair and impartial).
Meanwhile, in July 2013 JR Willett had funded his MasterCoin project (later renamed "OmniLayer") by offering his own tokens to investors, the first ICO ("initial coin offering") In 2014 Karmacoin and Ethereum held their ICOs. The ICO is an alternative to traditional methods of raising money for a project: the project founders offer their own tokens in exchange for Ethereum's currency eth. In 2017 the number of ICOs exploded and more than $4 billion were raised through ICOs.
Thanks to its Turing-complete programming language Solidity and the ERC20 standard for creating new tokens, Ethereum has become the default blockchain for smart contracts, ICOs, DeFi (decentralized finance, such as Rune Christensen`s Maker, that created the stable coin Dai, or Robert Leshner's and Geoffrey Hayes's Compound), NFTs (non-fungible tokens) and DAOs.
A decentralized application (a dApp) is made of smart contracts. Each dApp has its own native currency, which is called a token. Once you are inside the dApp, you use its token. The first dApp of some relevance was CryptoKitties, launched in November 2017. Roneil Rumburg and Forrest Browning in San Francisco launched a decentralized Spotify competitor, the Ethereum-powered streamine platform Audius (September 2019). Hotel-booking platform Travala launched DTravel, a decentralized competitor of Airbnb (June 2021).
Decentralization had historically meant chaos, but blockchain is a system based on decentralization that actually guarantees order. It sounds like a contradiction, but its technology is basically order enforced through chaos. It is also much more secure than government databased and corporate databases, because the security of a transaction is guaranteed by all the computers in the network.
Blockchain is often hailed as the missing disruption. The world runs on three processes: storage, which is the most ancient; computation, which allows each organization to do something with the data that it has stored; and communication, which allows an organization to carry out transactions with other organizations. The personal computer disrupted computation. The Internet disrupted communications. But nobody had disrupted storage before the blockchain was invented.
Nobody in particular is in charge of recording a transaction. Nobody is in charge of recording the truth. It is the whole network that reaches consensus via mathematical algorithms. The original one, the one used by Nakamoto in Bitcoin, is "proof of work". A new transaction is added to the blockchain when a miner finds the solution to a difficult mathematical puzzle, and then this miner is awarded some bitcoins. The puzzle is so difficult that miners have to consume a lot of electricity to solve it. Proof of Stake replaces miners with validators. These have a power that is proportional to the amount of coins they own. The advantage is that it takes a lot less power. The disadvantage is that it may recreate the aberration of the physical world in which a small number of people exerts great influence, the exact opposite of the egalitarian ideals that fueled the P2P and cypherpunk movements. Proof of Importance takes into consideration not only your stakes but also how often you transact with others, and with whom, how active you are. Delegated Proof-of-Stake and traditional Proof-of-Stake stand to each other like direct democracy stands to representative democracy. In delegated PoS, every participant that owns coins is allowed to vote for delegates. The delegates who get the most votes are the ones who earn the right to validate transactions and create new blocks, and make money out of it. In 2021 Ethereum migrated from a proof-of-work consensus algorithm (which is blame for consuming a lot of energy) to a proof-of-stake consensus algorithm. In Proof-of-Space the "miner" must dedicate a significant amount of disk space as opposed to computation to be rewarded with cryptocurrency.
From the beginning it was obvious that any blockchain-based system would consume an enormous amount of electricity because of the electricity needed by miners to prove their work. Proof of Stake was introduced by Peercoin (in 2012) precisely to save on electricity. In 2013 NXT used it too, and BitShares used delegated PoS. In 2013 Gridcoin used Proof of Stake and volunteer computing on the BOINC network. In 2014 an anonymous developer introduced Burstcoin (built from a fork of the NXT cryptocurrency) that used Proof-of-Capacity, a kind of Proof of Space, the first "green" alternative to Bitcoin. Dan Larimer invented delegated Proof of Stake (end of 2013) to avoid the inevitable consequence of Proof of Work: mining would inevitably move to countries with cheap electricity and mining would become increasingly difficult for ordinary people with no access to lots of cheap electricity. His new consensus algorithm rescued miners with home computers.
The boom of ICOs created the atmosphere for establishing a more robust and professional form of fintech on top of Ethereum. Initiatives multiplied after 2017, often intended to encourage "liquidity providers" to participate in crypto financial marketplaces. Hence "liquidity mining", in which decentralized exchanges incentivized users to supply cryptocurrencies into liquidity pools by offering them rewards based on how much they participated. In May 2020 Compound, created by Robert Leshner and Geoffrey Hayes in 2018, launched its liquidity mining program that rewarded with tokens the users that borrowed or lent on Compound, and basically incentivized the distributed users of Compound to to operate like a traditional money market.
Another innovation was the "price-elastic token", such as Evan Kuo's Ampleforth (2019) and Brock Elmore's Yam (2020), tokens that adjust their supply in response to demand (when the price climbs above the desired value, the token's supply is increased until the desired price is restored, and viceversa the supply is decreased when the price falls below the desired value until the desired price is restored). Yam became instantly famous after its launch but lost 90% of its market capitalization within a few days when a bug was discovered.
Decentralized Autonomous Organizations (DAOs)
In September 2013 Daniel Larimer wrote about Decentralized Autonomous Corporations (paper) and the 19-year-old Bitcoin developer Vitalik Buterin wrote about Decentralized Autonomous Organizations (paper). Those were the paper that showed a way to realize Brafman's distributed autonomous organization by using smart contracts of the kind that Ethereum was about to make possible. The key intuition was to use "secure multiparty computation", introduced by Chi-chih "Andrew" Yao at UC Berkeley in the 1980s ("Protocols for secure computations", 1982), in turn based on the "secret sharing algorithm" invented by the Israeli cryptographer Adi Shamir ("How to share a secret", 1979), to run the algorithm that controls the DAO (e.g. to generate Bitcoin addresses and sign transactions).
Such "decentralized autonomous organizations" or DAOs are unmanned organizations (no office, no staff) that run under the control of an incorruptible algorithm. The algorithm is, in turn, implemented in an open-source software that can be "audited" (verified, controlled) publicly. DAOs are autonomous; DAOs are self-enforcing; DAOs have no central control. and its widely publicized hack gave a bad reputation to the DAOs.
As Larimer pointed out, Bitcoin itself was a proto-DAO that issued 21 million shares (the final number of bitcoins) to shareholders (the owners of those bitcoins) and employs miners and validators (who gets paid with new bitcoins for adding blocks to the blockchain). Bitcoin is not a real DAO because there is little decentralized governance: bitcoin owners cannot vote on the direction of the project. A real DAO has a more sophisticated algorithm of governance instantiated in a set of smart contracts. Anyone who buys its cryptocurrency has the right to vote on the DAO's future, proportional to the amount held.
A traditional corporation has a mission statement which is supposed to guide its business and is supposed to be enforced by the board of directors and be agreed upon by the shareholders. A DAO encodes that mission statement into a blockchain-based piece of software (a smart contract) that runs on the network, rewards people who perform some tasks, and also makes money for the people who join it. This is because the code, the smart contracts, and the transaction history of any decentralized protocol are visible by any node of the network.
The difference in transparency is colossal. The "shareholders" (or better token holders) of a DAO have visibility of its "balance sheet" all the time because it is stored on the blockchain, whereas a public corporation publishes financial statements every now and a private corporation doesn't even have to do that.
Not only can people vote on proposals, but they can even "fork" the protocol if they disagree with the decisions taken, i.e. literally spawn a separate DAO. This is much more "check and balance" than comes in the world of corporations.
The first successful DAO was Larimer's BitShares, launched in 2014. The first DAO on Ethereum, called "The DAO", was coded by Christoph Jentzsch and launched in April 2016 but shut down a few months later due to a hack. The Dao was just one particular DAO, neither the first one nor the best one,
In January 2018 Vitalik Buterin also proposed the DAICO, a combination of DAO and ICO, to mitigate the risk of scam ICOs.
In January 2020 Jesse Walden suggested that projects should not start as DAOs but get to DAO state through a process of "progressive decentralization". At the start-up stage, the focus should be on developing a good product, and control should be in the hands of the key developers: no decentralization. Once a good product exists, the startup should open up to external developers, rewarding whose who contribute, so to create a community of developers that extends beyond the original team. Only at this point should the project become a DAO and distribute tokens to anyone willing to abide by the DAO's smart contract. Now the DAO is controlled by the community according to the governing smart contract. For example, Uniswap became a DAO only two years after its creation: for the first two years its founder Hayden Adams made all the important decisions, and token holders couldn't interfere in the governance of Uniswap. In 2020 Uniswap introduced a token that gave governance rights to all token holders.
The End of Civilizations and the Clash of History
The historical moment in which Bitcoin arrived can be better appreciated by referencing two popular books of the 1990s. Francis Fukuyama in his essay "The End of History" (1989), later expanded and published as a book, wrote that history has a universal direction, tends inevitably towards an "end", and that "end" is the political model represented by Western liberal democracy, the final and ideal form of human government. Samuel Huntington in his lecture "The Clash of Civilizations" (1992), later expanded and published as a book, argued that humankind was entering an era of conflicts driven not by resources or ideology like in the past, but by cultural traditions, in particular pitting the worldview of the West against those of Islam and of China. The World-wide Web was launched on the Internet in at about this time. Fukuyama and Huntington were motivated by the fall of the Soviet Union and the end of the Cold War to analyze how the international order would change. Neither Fukuyama nor Huntington knew what was happening on the Internet. They certainly didn't know that in 1992 Timothy May published the "Crypto Anarchist Manifesto" to inaugurate the "cypherpunk" mailing list and that also in 1992 Neal Stephenson published a science-fiction novel, "Snow Crash" (1992), set in the metaverse. And later in the decade they were probably more interested in the Middle East and in China than in John Perry Barlow's "Declaration of Independence of Cyberspace" (1996) or Shawn Fanning's P2P platform Napster (1999) or SETI@home's volunteer computing (1999). But these events heralded a different kind of "end" and of "clash". The clash was the clash between government and cyberspace with its nascent digital anarchy. And for those in cyberspace the "end" of human history was a whole new form of self-government. Western liberal democracy had made the Internet possible but also marked the beginning of a new era in which Western liberal democracy looked hopelessly obsolete with its grotesque apparatus of governments, banks, stock exchanges, corporations, etc. It wasn't necessarily wrong, just technologically retarded.
Logic has been viewed since Aristotle's syllogism as a way to prevent and resolve arguments. Through the medieval scholastics and the scientific revolution of Galileo, Descartes and Newton, logic became the way to "explain", to "prove" and to "predict". The universe, in which every action seemed to be the inevitable result of previous actions, became increasingly deterministic, and this was reflected in society, where increasingly people demanded deterministic (not arbitrary) laws and the government enacted them to be deterministically applied (and, to some extent, the punishment for violations was also deterministic). The history of the universe and even human history came to be viewed as a "chain" of events, each event contributing to other events in a deterministic fashion. The progress of logic led to the mathematical logic of Frege, Peano, Whitehead, Russell, Hilbert, Goedel and eventually Turing. Turing's "machine" (later implemented as the software program) was the ultimate conceptual artefact of determinism.
The blockchain is therefore the descendant of a long genealogy of deterministic systems. Previous deterministic systems were applied to domains like mathematics and physics in which it was only important to reach "a" conclusion, not necessarily the "only" conclusion. But the blockchain was invented to pilot the creation of money, an object that has some peculiar properties: it has to be protected from both theft and duplication. The blockchain therefore exhibits properties that one doesn't find in other deterministic systems: it realizes a form of irreversible, incorruptible determinism.
A combination of mathematical techniques had to be invented for the blockchain method to exist. First of all, the secure hash functions. A hash function transforms a "message" into a code of a fixed length. The one used by the bitcoin blockchain is the SHA-256, ironically invented by the National Security Agency (NSA) in 2002, that turns a string into a 256-bit value (i.e. a 64-character code, since 8 bits make a character like "5" or "D"). The hash function creates a code for a string and the string cannot be recreated from the code: it's a one-way encryption. The blockchain is shared by a network of nodes, by all the nodes in the network, which in theory means that every single node on the network should have a complete copy of every single transaction ever recorded on the blockchain; but a mathematical makes it possible to limit the amount of data that each node has to maintain: the "Merkle Tree" (or "binary hash trees"), invented by Ralph Merkle at Xerox PARC in 1987. The purpose of a Merkle Tree is to separate the proof of data from the data themselves, so each node on the network can verify the data without any need to get a copy of all the data. Each block of the blockchain contains thousands of transactions, and each transaction has its own unique id, a 256-bit value (i.e. a 64-character code). By using the hash function SHA-256, all the transactions of a block are "compacted" in one 256-bit code, which is called a Merkle root. The "root" is the result of a recursive process of hashing together pairs of transaction ids: a pair of ids is "hashed" into a 256-bit id, and then two such ids are hashed into another id, and so on until there is only one remaining 256-bit id for the entire block, and this is its root. A Merkle root is the hash of all the hashes of all the transactions that are part of a block in a blockchain. Because it starts with the "leaf" and ends with the "root", the Merkley Tree looks like an inverted tree. (Ethereum uses the Merkle Patricia Tree which is a more complex version of a Merkle tree, one with three roots instead of just one). By summarizing thousands of transactions in a 64-character key, Merkle trees encode blockchain data efficiently and securely. The Merkle tree allows users to verify transactions without downloading the whole blockchain (gigabytes in October 2021). Each block within the blockchain is identified by such a hash, the result of recursive hashes on all its transaction ids; and each block contains the hash of its parent inside its own header, so that the sequence of hashes linking each block to its parent creates a "chain" that extends all the way back to the first block ever created, known as the "genesis block". The header of each block contains three kinds of information, three sets of metadata: a link to the parent's hash, its own hash (its Merkle root, that summarizes all its transactions) and data related to the mining competition (difficulty target, timestamp, and a counter called "nonce").
The next mathematical component of the blockchain is the digital signature. When users submit transactions to the network, they must sign the transactions with digital signatures before miners can create the blocks recording those transactions. Digital signatures are implemented via a system of so-called "public-key cryptography". The first one to be recognized by the US government was the Digital Signature Algorithm (DSA), invented by David Kravitz again at the NSA in 1991. There are many kinds of digital signature. Bitcoin chose the Elliptic Curve Digital Signature Algorithm (ECDSA), a variant of the DSA invented in 1992 by the Canadian mathematician Scott Vanstone who used a method of public-key cryptography called Elliptic Curve Cryptography that had been discovered independently in 1985 by Victor Miller and Neil Koblitz.
Mining is the trick that gives bitcoin its security and it feels more like a game than high mathematics. Mining is the process by which new blocks of the blockchain are created, i.e. new transactions are recorded. Mining is the trick used to secure the system against fraudulent transactions and against double spending of bitcoins. Mining is a costly process for which miners are rewarded with bitcoins. Mining is not an algorithm per se but consists in solving a difficult mathematical problem (based on a cryptographic hash algorithm). Mining is not assigned to anyone in particular: anybody can compete to solve the problem and become a miner. The solution to the problem is called the "proof of work". The problem is not a logical problem: it doesn't require great thinking, just a lot of trial and error. It consists in finding the "nonce" (a random string) that, coupled with other block information, generates a hash that is lower than the target number (e.g., a hash that begins with a higher number of zeroes). It is a process of brute-force search more akin to trying a lottery than to solving a logical problem. The winner of the lottery gets to record the new block on the blockchain and gets rewarded with bitcoins and a transaction fee. Note that mining is both about recording transactions and creating new bitcoins. The number of new bitcoins per block gets halved every 210,000 blocks. Around 2137 it will become impossible to "mine" more bitcoins (the final number of bitcoins will be 21 million minus one) and the only "mining" will be about transactions.
Hence the mining mechanism relies on a combination of cryptography and game theory. Game theory studies the strategies developed by rational agents when they interact, typically to compete for some resource. The mining mechanism is designed as a game that offers an incentive to the "rational" nodes of the network.
Another mechanism, which is not high math but simply a smart strategy, is the one used for verification of the transactions. Before being recorded in blocks by miners, all the transactions are propagated through the network of nodes. Each node of the bitcoin network receives a transaction, validates the transaction and then forwards the transaction to other nodes. This is a strategy that erects multiple barriers against invalid transactions. Only valid transactions are propagated across the network. The entire network participates in validating a transaction: only global consensus can validate transactions. All nodes in a blockchain network must agree so a particular transaction gets validated. Therefore only valid transactions reach the mining nodes, where miners compete to aggregate many transactions into one new block.
Bitcoin and Ethereum are "permissionless" networks, i.e., public blockchains in which any node can participate in the network. "Permissioned" networks like Hyperledger Fabric are instead private and requires permission, which means that consensus needs to be reached only among a small group of authenticated nodes.
The complexity of blockchain determinism is therefore a combination of the complexity of hashes, Merkle trees, digital signatures, consensus algorithm and transaction verification.
Coincidence or not, Bitcoin was invented in the middle of the biggest financial crisis in the world in a century. Satoshi Nakamoto's white paper was published six weeks after the collapse of Lehman Brothers on 15 September 2008 that triggered the global financial crash.
Bitcoin was the outcome of a process driven by digital libertarians (like the cypherpunks) who wanted to take money (and many other aspects of social life) outside of the control of governments. It was then revealed that, by turning every transaction into a form of currency, one could organize the entire society without institutional intermediaries, a notable update to the ideals of the self-organizing communes of the hippies of the 1960s.
However, taking money out of the control of government does not mean changing the nature of society. The world of Bitcoin is still a world of capital accumulation and speculation. There are still privileged classes. To start with, by design, Bitcoin privileges early users. A wealth gap is almost automatically created between miners and non-miners. And, in practice, the Bitcoin network has come to be controlled by a small number of mining pools (mostly from China) that, for all purposes, represents a form of unbridled capitalism. So much for a program that "markets" a decentralized model. Bitcoin is indirectly leading to the formation of a new class of plutocrats. The elimination of the state does not necessarily benefits the individual, as proven for example by the feudel world that succeeded the fall of the Roman Empire.
Usually, criminals are the first ones to benefit from a collapse of the state, as proven over and over again in places like Iraq and Libya. In fact, the first beneficiaries of the Bitcoin network were criminal organizations. The reason that today the world of cryptocurrencies is less plagued by criminals is that governments cracked down on criminals hiding behind cryptocurrencies. Crime is an essential element in judging the merits of Bitcoin because crime is the contradiction in terms of the Bitcoin world. The whole point of the blockchain is to make sure that noone can break the "laws". But blockchain refers to the digital laws of cyberspace. The people using bitcoins, however, are in the physical world, and sometimes commit physical crimes. The blockchain makes suse that transactions are valid, not that they are used by nice people for good activities. The blockchain judges a transaction valid if it is made according to the rules by gun smugglers, drug cartels, prostitution rings, genocidal dictators, and so on. Blockchain technology was born out of ethical principles and encodes ethical principles, but they are principles about the ethics of government, not about the ethics of ordinary life.
The blockchain community has mostly appropriated terms of the political left such as "open", "transparent" and "democratizing", but in reality the ideology underlying much of their Far West is close to the rhetoric of right-wing movements like the Tea Party and the Make America Great Again in the USA, movements that have fueled the rise of authoritarian regimes in both the USA and Europe. Bitcoin emerged from a view of government as oppressive and inefficient beyond redemption, ironically eachoing right-wing president Ronald Reagan when he stated that "government is not the solution to our problem - government is our problem". Their anti-state rhetoric was de facto simply a stratagem to engineer regime change and install an even more centralized regime.
The fact that the Chinese Communist Party is probably the world's most enthusiastic supporter of blockchain technology (while at the same time banning all cryptocurrencies) is revealing of how the technology born to reduce the power of the state may end up having exactly the opposite effect.
"Decentralized" is a-critically assumed to be better than "centralized" in all respects. Centralization is certainly an impediment to the decentralized flow of capital and ideas, but there are cases in which a centralized flow of capital and ideas has arguably been more effective to boost creativity than decentralization. For example, cinema and other arts rely in many countries on subsidies from the government. It is not clear that without state subsidies those arts would survive, especially the ones that require considerable budgets like cinema.
Even at face value, the libertarian ideology that inspired Bitcoin sounds naive if not misguided. It aspires to liberate us from the supposed tyranny of the state, but that is neither the only tyrany nor the main one. The tyranny of corporations is often a bigger one, and often collides with the tyranny of the state in a struggle that ignores the interests of average citizens. After all that's precisely what happened to the largest network ever invented, the Internet (invented, incidentally, at another time of crisis, after the Cuban Missile Crisis), now controlled by a handful of high-tech corporations.
Physical money has two functions: it carries out transactions and it stores value. A cryptocurrency based on a blockchain inevitably neglects the second function to focus almost exclusively on the first one. The other function of money, however, the function of "saving", is more typical of the middle and lower classes. A volatile speculative financial asset like a cryptocurrency is more typical of wealthy investors who can afford to risk.
Like any other techno-utopian ideology, the ideology behind Bitcoin tends to create a technocratic oligarchy rather than true democracy. The reason is that "governance by infrastructure" implies (whether codified or not) that only software engineers, and sometimes only core developers, are able to vote (or at least able to understand what they are voting about). In fact every cryptocurrency is run like a technocratic regime (or as an enlightened quasi-dictatorship in the case of Ethereum and others).
In general, technology de-politicizes a phenomenon because it soon becomes absorbed and immersed in its own rituals of releases, debugging, updates, requests for proposals, standards, etc. There is a whole digital vocabulary and discourse that takes over the original ideology of a project. Violent arguments may erupt between proponents of the same technology who, passionate about how to implement it (features, user interface), forget why they wanted it in the first place.
The ideological core of Bitcoin was to remove the intermediary that guarantees trust, the central authority like a central bank that everybody can trust. That was an ideological move, but it could be that trust is precisely what creates prosperity in the modern world. Francis Fukuyama in his book "Trust - The Social Virtues and the Creation of Prosperity" (1995) identified trust as the main factor that makes some countries prosperous and others less so. In countries like Germany and Japan there is enough trust between business partners that transactions flow smoothly with no need to follow rigid procedures. On the other hand, in countries like Italy and France the state has to step in with rigid regulations because the level of trust among businesses is very low. One could argue that trust was also high in the Italian city states of the Rinascimento and among the Arab traders of the middle ages. Trust, it turns out, is a key ingredient of a healthy economic ecosystem.
The blockchain removes the need for a trusted intermediary, but trust does not dissolve: it simply mutates into trust of algorithms. These can be trusted to be "honest" and "transparent" because of their deterministic nature, but not unbreakable and infallible. So an algorithmic system still demands a degree of trust. The blockchain is built on open software and anonymous decentralized nodes, not exactly the most reassuring of foundations, and anyone can become a node and have a say in verifying transactions. It takes a lot of trust in the complex apparatus of blockchain math and software for someone to actually invest money in it.
The blockchain world also demands a lot of trust when it launches Initial Coin Offerings. All the beautiful mathematics stacked in the blockchain cannot do much to appease the fears of investors who buy into an ICO: that requires old-fashioned trust. Without trust, there wouldn't be any ICO, and without ICOs many blockchain projects would have never existed. So ironically the progress of blockchain technology depends on trust, the one thing that the blockchain was supposed to remove.
Bitcoin wasn't the only exercise in digitizing trust in those years. In 2008 2008 Airbnb was founded and in 2009 Uber was founded, to name the two that became multinational corporations. Both Airbnb and Uber were based on the principle of letting two strangers "trust" each other with services without any visible mediation. Being about money, Bitcoin had to solve a bigger algorithmic problem, but, being about people, Uber and Airbnb had to solve a bigger psychological problem that the Bitcoin has so far ignored: the "peers" who transact on the blockchain are "people". What a blockchain-based cryptocurrency connects is not people but peers, peers on a P2P network. When a person becomes a peer on a P2P network, that person loses her personhood. But Bitcoin in reality is a platform that mediates social relations among people just like Airbnb and Uber do, because financial transactions and contracts are no less "social" that staying at somebody's home or riding in somebody's car. However, a blockchain-based system, due to its hyper-deterministic nature, does not invite people to think in terms of network, of community, but rather in terms of separate, isolated, independent individuals. The blockchain does not encourages a network spirit at all, it fosters no spirit of collaboration. Even the fact that the algorithm prescribes incentives for all the crucial functions clearly sabotages any altruistic instinct: there are no "good samaritans" in a blockchain. A cryptocurrency is first and foremost a tool for the community to exchange goods and services but in reality it cannot belong to the realm of social media: the blockchain is not "social" at all. The blockchain leans in the opposite direction: by replacing human interactions with automated code, it further depletes social cohesion. It also increases the "rigidity" of the procedures by which we have to live, as if they hadn't been rigidly codified enough. A future of smart contracts means a future of human interactions that are mere computations, either encouraged by material incentives or enforced by code on a blockchain. In fact, a future of smart contracts means a future in which every human interaction has been reduced to the equivalent of a financial transaction, because on the blockchain it's all about currency and tokens, even if what you are doing is organizing a hike on the mountain. Every interaction becomes a form of money, and your social life becomes an economy. The centrality of money in the cryptocultural future could become the ultimate post-capitalist dystopia.
How the blockchain relates to the idea/ideal of freedom is also debatable. Freedom should be the core idea of US political and philosophical life, but in practice there is strong disagreement on what it is and entails. The right worships freedom like a religion but then it constrains it in every possible way to maximize economic and security benefits to society (they even justified torture during the Islamic wars of George W Bush). The left supports freedom fights by minorities at home and by oppressed people around the world but then submits to the fascination of socialist policies that limit individual freedom. Meanwhile, nobody agrees on what the boundaries should be on freedom of speech, as freedom of speech can easily turn into discrimination, disinformation, and worse (incitement to violence or to commit a crime, treason, public health crises,...) Increasingly "freedom" on social media means the freedom to insult, slander, bully and harass others. Economists tend to think of the "free market" as a liberating force although the result of free markets is often the suffocation of individual freedom in the name of freedom for corporations (even declared to be "persons" by the Supreme Court of the USA). Technologists tend to think of technologies as liberating forces although this means that technology "mandates" a new form of freedom on people which sounds like the exact opposite of freedom. The latter is precisely the definition of freedom that emerges from political debates about the blockchain. A person brainwashed to repeat an "opinion" is not free to think and a person who is only given one option is not free to choose. So freedom begins with the person being able to choose independently among different alternatives. In order to be able to choose, the person must also be knowledgeable enough, which requires a minimum degree of education. And so on. The requirements for real freedom can be many. The liberation brought by the blockchain is basically a liberation from having to use the financial and legal institutions of the state. That liberation is delivered by a totalitarian algorithm that sees everything and controls everything, a digital panopticon combined with a HAL 9000. Instead of being surrounded by the plethora of procedures (algorithms) of the state, we are being swallowed into one giant blockchain. Existentially speaking, it is not clear that the blockchain will increase our "freedom".
Further Readings (in chronological order):
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