Read the first part of this story here: Nick Szabo Was on The Verge of Developing Bitcoin – Part 1

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.

The first property of Bit Gold was the algorithm Proof-Of-Work, a cryptographic technique involved by Dr. Adam Back in the Hashcash project. PoW provided the uniqueness and value of monetary units since it required computer calculations, that is, the cost of real resources.

PoW in the Bit Gold system consisted in hashing a candidate string, a random number, and obtaining a so-called hash – at first glance, a random sequence of numbers. The only way to find out what the hash will look like is to create it because otherwise it can neither be calculated nor foreseen.

As in Hashcash, the Bit Gold protocol did not accept all hashes as valid. Instead, the correct hash had to start with a predetermined number of zeros. The unpredictable nature of hashing implied trial and error. The correct hash, in turn, proved that its creator carried out the calculations, and became the next candidate line. Thus, Bit Gold would represent a chain of PoW-hashes, and a new candidate line would always exist.

The finder of the correct hash became its owner, as well as the one who mines gold. To establish online ownership of Bit Gold there was a digital registry: the implementation of another Friedrich Hayek idea. In this registry, the correct hashes were awarded to the open cryptographic keys of those who created them.

This register allowed transferring hashes to other people: the original owner would simply have to sign the transaction with a cryptographic signature.

The so-called property club, which is a server that tracks the transfer of ownership of hashes from one public key to another, should have maintained the operation of the registry in the Bit Gold network. This solution resembles the replicated database in the concept of Wei Dai b-money. Both Szabo and Dai were not only active participants in the electronic distribution of encryption channels but also conducted private correspondence about these things.

However, Szabo decided to abandon the Wei Dai Proof-Of-Stake and implement a quorum system to solve the problem of the Byzantine Generals. Like onboard computer security systems in airplanes, if one of the computers (a minority) fails, the system will continue to function as a whole. Only in case of failure of most computers, the system will be in a difficult situation. It is important that inspections of this kind do not require courts and police, supported by a state monopoly on violence. All this is based on a voluntary basis.

Of course, the Bit Gold network was not completely invulnerable. For example, it was potentially subject to a Sybil attack (a hacker attack method when thieves surround a victim and try to feed it with false information). Nevertheless, Szabo believed that the decision was a working one. Even in the case of the collision of most servers to sabotage the network, an honest minority could run a separate competing chain. Users, according to Szabo, would opt for honest servers.

“If the rules are violated by the superior party, then the honest losers can create a newly reformed group while maintaining the correct registry data. Netizens who want to preserve the order of things that existed before the sabotage will be able to check which group played by the rules and easily join it.”

(A modern example is Ethereum Classic, which is the original Ethereum chain that refused to liquidate The DAO’s smart contract).

Inflation

The next problem that Szabo faced was inflation. With the development of computer technology, the generation of correct hashes would get easier with time. This means that the hashes themselves could not act as money since the properties of rarity would decrease and abundance would kill the value.

The cryptographer found a solution to the problem. After generating the correct hash, the person who found it should attach a timestamp to it, ideally with different servers, to minimize trust in one particular.

The timestamp made it possible to determine how difficult the product of a valid hash was: the older hash would be much more difficult to generate than a new one. The market was supposed to determine the value of each hash based on the date it was created. A valid hash from 2018 should have been an order of magnitude less than a hash from 2008.

The solution to this problem immediately put a new problem: “bits from different time periods, be it a difference in seconds or weeks, are not interchangeable”.

Interchangeability – the idea that each currency unit is equal to another such unit is extremely important for money. The seller wants to receive payments without worrying about the date of creation of money.

Nick Szabo solved this problem too. He proposed a kind of a second layer, an add-on over the main Bit Gold protocol, where “banks” would combine hashes from different periods into identical “packets” of value. For example, the 2018 package would contain more hashes than the 2008 package, but they should have the same value.

These packages were then to be divided into a specific number of units. As a result, the “banks” could issue them by analogy with the private and anonymous Chaum’s eCash.

“Competing banks issue digital bank notes redeemable in solution bits whose market values add up to the face value of the banknote (i.e. they create bundles of standard value)”, – explained Szabo.

Bit Gold was developed as the basis for free banking in the digital age, something like a gold standard.

Bitcoin

In the 2000s, Szabo decided to get a law degree in order to understand the existing legislation and contract law, which he sought to replace or recreate in an improved format in the digital space. He also began to describe his ideas in the authoritative blog Unenumerated , which discussed computer science, law, politics, biology, history, and other topics.

This blog is named “Unenumerated” for a variety of reasons, including:

The Ninth Amendment to the United States Constitution, which states the most basic (but most ignored) law of the United States, namely that our civil rights, which should be enforced by the courts, are so vast and varied that they cannot be enumerated, and

The list of topics of this blog, which is so vast and varied that it cannot be enumerated.”

In 2008, 10 years after he first presented his initiative in private, Szabo wrote about Bit Gold on his blog; only then he wanted to do the first real implementation.

“Bit Gold would have helped a demonstration, an experimental market (where trusted third parties are replaced by an integrated security system). Does anyone help me to write the code?” – he asked in the comments section on his blog.

If someone answered, it is not publicly. Bit Gold in the format of Szabo was never implemented.

Nevertheless, it was Bit Gold that inspired Satoshi Nakamoto, who published the white paper of Bitcoin that same year.

“Bitcoin is an implementation of Wei Dai’s b-money proposal on Cypherpunks in 1998 and Nick Szabo’s Bitgold proposal” – wrote the creator of Bitcoin in 2010 on Bitcointalk.org forum.

In Bit Gold, it’s really easy to see a bitcoin draft. In addition to a publicly available database containing proprietary information and public-key cryptography, the PoW hash chain is very similar to the Bitcoin blockchain. In addition, even the names of the projects are not very different.

It is noteworthy that Bit Gold was not mentioned in the white paper of Bitcoin, unlike Hashcash and b-money. Some have considered this to be another proof that Szabo is Satoshi Nakamoto. Who else would try to hide the origin of Bitcoin in this way, they thought.

It is worth noting that Bitcoin was still somewhat different from Bit Gold. In particular, the Szabo concept assumed some degree of trust with third parties – servers and timestamps. Bitcoin became the first system to solve this problem completely, making Proof-Of-Work at the same time a reward system and a mechanism for achieving consensus: the chain with the highest hash rate that is considered as the correct version of the story.

“Instead of my automated market to account for the fact that the difficulty of puzzles can often radically change based on hardware improvements and cryptographic breakthroughs (i.e. discovering algorithms that can solve proofs-of-work faster), and the unpredictability of demand, Nakamoto designed a Byzantine-agreed algorithm adjusting the difficulty of puzzles. I can’t decide whether this aspect of Bitcoin is more feature or more bug, but it does make it simpler.” – Szabo acknowledged in 2011.

In addition, a completely different monetary policy was laid down in the Bitcoin protocol – a fixed issue of coins that do not depend on the growth of the hash rate. With the increasing complexity of calculations, the search for coins becomes more difficult.

Read the first part of this story here: Nick Szabo Was on The Verge of Developing Bitcoin – Part 1