Nick Szabo Was on The Verge of Developing Bitcoin – Part 1


Participants of the Bitcoin community and many outside observers have long wondered about the true identity of Satoshi Nakamoto. The search for this person (or group of people) has been going on for more than one year. During this time, the media managed to find a certain Dorian Nakamoto, who unwillingly survived the “moment of glory”. The developer of Bitcoin was called the developer Gavin Andresen, the founder of the darknet marketplace Silk Road, Ross Ulbricht, and even the head of Tesla and SpaceX Elon Musk, and Dr. Craig Wright from nChain who did not even wait for someone to nominate him.

Nevertheless, only one person is now known, who is most suitable for the role of creator of the first cryptocurrency. This is not about the media personality and one of the leading entrepreneurs of our time, not about a person serving a life sentence in Colorado, and not even about a developer who has long supported the development of the Bitcoin protocol. This refers to the well-known in narrow circles cryptographer Nick Szabo, who managed to create a protocol so reminiscent of Bitcoin that many still refuse to believe that it was written by different people.

Szabo himself has long stated that he is not Satoshi. However, this does not mean that he did not contribute to the creation of Bitcoin, as Satoshi himself once noted that Bit Gold, the digital gold standard developed by Szabo, formed the basis of the first cryptocurrency and inspired its creator. Moreover, it was this truly extraordinary person who, back in the 1990s, developed the concept of smart contracts, implemented only in 2014 in Ethereum.

We bring this to your attention with an article by Aaron van Wirdum published in Bitcoin Magazine on how Nick Szabo came close to creating Bitcoin as early as the last millennium and probably pushed some Satoshi to complete his work.

Nick Szabo’s parents were forced to leave post-war Hungary when the Communists seized power and went to the United States. It is the California Peninsula in the 1990s that will become home to the famous cryptographer. There he was a frequent guest at personal meetings of the cypherpunk community, organized by Timothy May, Eric Hughes and other founding members of a team of cryptographers, programmers and privacy fighters. All of them were members of the e-mail list of the same name in the 1990s.

Like other encryption, Szabo was extremely concerned about the issue of privacy in the coming digital age and tried to swim against the tide. For example, in the mailing list for cypherpunks, Szabo headed an opposition group opposing the introduction of Clipper microchips in their phones, which could allow the US National Security Agency to listen to calls.

Szabo had a talent for explaining complex narrow-profile things to the masses who did not possess the necessary technical knowledge. He spoke publicly several times, talking about the risks of such interference with privacy, and also distributed leaflets. As a result, producers and consumers rejected the Clipper chip.

By analogy with other members of the libertarian wing of cypherpunks, Szabo was interested in digital privacy issues not for the sake of privacy alone; his vision was much broader. Inspired by Timothy May’s Crypto-Anarchist Manifesto, he saw the possibility of creating a completely free-trade zone. May and Szabo were convinced that the pseudo-physical force field from the novel could be replaced by the newly invented public-key cryptography magic.

“If we step back and look at what many cypherpunks are trying to achieve, a major idealistic theme is a Ghandian cyberspace where violence can only be make-believe, whether in Mortal Komat or “flame wars”.  Cypherpunks want our telephone networks, Internet businesses, etc. to be both protected from force, and not dependent on force for their existence. Our 20th-century information commerce systems, from publishing to credit cards, have often been very dependent on the threat of violence, usually law enforcement, to protect intellectual property rights, deter fraud, collect debts, etc.  There is no utopia in sight where such threats can be completely eliminated, but we can recognize that they exist and carefully work to reduce our dependence on them,” Sabo wrote in the mailing list of cypherpunks.

Nevertheless, Nick Szabo understood that free enterprise requires more than encryption as a security guarantee. Inspired by another libertarian, economist Friedrich Hayek, he found that society was based on such blocks as property and agreements, the execution of which was provided by the state.

Szabo understood that in order to get rid of the state and create a digital alternative in which there would be no violence, it is necessary to transfer these fundamental things online.

It was these reflections that pushed him to create the concept of smart contracts in the mid-1990s. These (hypothetical at the time) digital protocols were supposed to facilitate, validate and enforce the agreements, ideally without the participation of third parties.

“Trusted third parties are security holes,” Szabo said.

Smart contracts were only part of the big picture. The second tool Szabo needed to build the imagined was even more important – money.

Electronic money

Digital currency, the unit of payment on the Internet, has always been the key goal of encryption, but very few people, except Szabo, have been so immersed in its development.

In the essay “The Origins of Money“, he described how the use of money was embedded in human DNA. Initially, this idea was advanced by evolutionary biologist Richard Dawkins. Studying primitive communities, Szabo discovered that it was customary in various cultures to collect rare and easily portable objects to create jewelry. These ornaments, in turn, played the role of money, allowing people to interact: the so-called mutual altruism from game theory through trading on various scales and through time.

Szabo also showed a great interest in free banking – the monetary concept proposed by the Austrian economist and philosopher Friedrich Hayek, according to which private banks should have the right to issue their own currencies without being tied to a specific state. In such a system, only free market rules determine which currency consumers will use.

Now it is believed that this idea is new (this belief was especially strong before the creation of Bitcoin), however, free banking already existed in the United States and several other countries in the mid-19th century.

Nick Szabo turned his hobbies into a practical direction and worked for some time (in the mid-1990s) as an e-commerce consultant, long before the potential of online commerce became apparent. It is noteworthy that he also worked in a DigiCash startup founded by David Chaum, who developed the world’s first electronic cash eCash for private online payments.

In DigiCash Szabo directly encountered the disadvantages of the Chaum solution. Since the company was centralized, if desired, they could very easily and quickly falsify the cash balances of clients.

Trusted parties are a serious vulnerability [of digital systems]; this problem is probably even more significant than in the case of fiat money.

“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.” Szabo said.

In his opinion, even free banking could suffer from this state of affairs.

“Similarly, private bank note issue, while it had various advantages as well as disadvantages, similarly depended on a trusted third party.”

Sabo already understood that in fact, you need to strive to create a new form of money, excluding intermediaries.

He conducted a thorough analysis of various monetary formats in primitive societies in order to define his ideal. First, the money must be fully protected from accidental loss and theft. Secondly, to exclude the possibility of fraud to impart absolute value. Moreover, this value should be determined with the help of the simplest observations and calculations.

Such money should have the characteristics inherent in precious metals; Szabo sought to create digital money with a rarity property that is not provided by third parties. More precisely, he wanted to create digital gold.

“Precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation. This once provided the money the value of which was largely independent of any trusted third party. Precious metals have problems, however. It’s too costly to assay metals repeatedly for common transactions. Thus a trusted third party (usually associated with a tax collector who accepted the coins as payment) was invoked to stamp a standard amount of the metal into a coin. Transporting large values of metal can be a rather insecure affair, as the British found when transporting gold across a U-boat infested Atlantic to Canada during World War I to support their gold standard. What’s worse, you can’t pay online with metal.

Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold.”

Bit Gold

For the first time, Nick Szabo made a proposal to create Bit Gold in 1998, but publicly he explained his concept only in 2005. The idea of the cryptographer was partially based on previous attempts to create electronic money and combined some past approaches.

To be continued…