Digital Gold

by Nathaniel Popper

  The first, rather timid thrust in this direction was made by NewLibertyStandard in a post on the new Bitcoin forum:

  What would you buy or sell in exchange for Bitcoins?

  Here’s what I will buy if the price is right.

  Paper bowls, about 10 ounces (295 ml), no more than 50 count factory sealed.

  Plastic cups, about 16 ounces (473 ml), no more than 50 count, factory sealed.

  Paper towels, preferably regular size Bounty Thick and Absorbent, single roll, factory sealed.

  Another user wondered what kind of wild celebration NewLibertyStandard was planning with all that disposable plate ware.

  “Bachelorhood?” NewLibertyStandard wrote back.

  Soon thereafter, NewLibertyStandard began a Swap Variety Shop on his exchange website. Its selection was limited to a few sheets of postage stamps and SpongeBob SquarePants stickers.

  Given this activity, it was not surprising that NewLibertyStandard soon shut down his exchange, while the network stagnated. Indeed, despite the recent innovations, at various points during late 2009 and early 2010 it appeared that the amount of computing power on the network was shrinking.

  In the spring, Martti himself had less time to dedicate to the project after he dropped out of school and took a short-term, entry-level IT job with Siemens. Satoshi also went missing.

  When Martti checked back in with Satoshi, in May 2010, he wrote, “How are you doing? Haven’t seen you around in a while.”

  Satoshi’s response was vague: “I’ve been busy with other things for the last month and a half—I’m glad you have been handling things in my absence.”

  In May a potential new user wrote to the Bitcoin mailing list, inquiring about how to accept Bitcoin for his web-hosting business. Sometime later he wrote again: “Wow, not one response in months. Amazing.”

  Another participant on the list, one of the first skeptics to criticize Bitcoin back in the fall of 2008, now wrote to explain: “Yes—Bitcoin kind of went dead.”

  He recalled the early debates on the cryptography mailing list with Satoshi about Bitcoin: “Long ago, I had an argument with the guy who designed it about scaling. I heard no more of it—of course with no one using it, scaling is not a problem. I do not know if the software is in usable condition, or has been tested for scalability.”

  But the apparent lack of activity in certain parts of the Bitcoin ecosystem obscured the fact that at a slow but steady rate it had been attracting a tiny but increasingly sophisticated core of users who were easy to miss if you didn’t look carefully.

  CHAPTER 4

  April 2010

  Laszlo Hanecz, a Hungarian-born twenty-eight-year-old software architect who lived in Florida, heard about Bitcoin from a programming friend he’d met on Internet relay chat, known as IRC. Assuming it was some scam, Laszlo poked around to figure out who was secretly making money. He soon realized there was an interesting and high-minded experiment going on and decided to explore further.

  He began by buying some coins from NewLibertyStandard and then building software so that the Bitcoin code could run on a Macintosh. But like many good coders, Laszlo approached a new project with a hacker’s mind-set, probing where he might break it, in order to test its robustness. The obvious vulnerability here was the system for creating, or mining, Bitcoins. If a user threw a lot of computing power onto the network, he or she could win a disproportionate amount of the new Bitcoins. Although Satoshi Nakamoto had designed the mining process so that the hash function contest would become harder if computers were winning the mining race more frequently than every ten minutes, those users with the most powerful computers still had a much better chance of winning a majority of the coins.*

  Until now, no one had an incentive to throw lots of computing power into mining, given that Bitcoins were worth essentially nothing. But Laszlo decided to test this vulnerability. He understood that everyone on the network was trying to win the computational race with the central processing unit, or CPU, in his or her computer. But the CPU was also running most of the computer’s other basic systems, so it was not particularly efficient at computing hash functions. The graphics processing unit, or GPU, on the other hand, was custom-designed to do the kind of repetitive problem solving necessary to process images and video—similar to what was needed to win the hash race function.

  Laszlo quickly figured out how to route the mining process through his computer’s GPU. Laszlo’s CPU had been winning, at most, one block of 50 Bitcoins each day, of the approximately 140 blocks that were released daily. Once Laszlo got his GPU card hooked in he began winning one or two blocks an hour, and occasionally more. On May 17 he won twenty-eight blocks; these wins gave him fourteen hundred new coins that day.

  Satoshi knew someone would eventually spot this opportunity as Bitcoin became more successful and was not surprised when Laszlo e-mailed him about his project. But in responding to Laszlo, Satoshi was clearly torn. If one person was taking all the coins, there would be less of an incentive for new people to join in.

  “I don’t mean to sound like a socialist,” Satoshi wrote back. “I don’t care if wealth is concentrated, but for now, we get more growth by giving that money to 100% of the people than giving it to 20%.”

  As a result, Satoshi asked Laszlo to go easy with the “highpowered hashing,” the term coined to refer to the process of plugging an input into a hash function and seeing what it spit out.

  But Satoshi also recognized that having more computing power on the network made the network stronger as long as the people with the power, like Laszlo, wanted to see Bitcoin succeed. Bitcoin’s consensus model, which demanded that any new additions to the blockchain—and any changes to the Bitcoin software—had to be approved by a majority of the computers or nodes on the network, ensured that even if people tried to change the rules, or screw up the blockchain, they could not succeed without support from 50 percent of the other computers on the network. This model did leave the network vulnerable if one person or group captured more than 50 percent of the computing power, in what was referred to as a 51 percent attack. If Bitcoin supporters like Laszlo could add lots of computing power, that would make it harder for a bad guy to build up more than 51 percent of the power. And Laszlo did have the network’s best interest in mind. It became clear on the forums that he was a good-natured guy and more interested in ideas than in personal wealth or success. Indeed, as he mined coins, he was eager to show how Bitcoin could be used in the real world. He posted in the forum asking if anyone would bake or buy him a pizza, delivered to his home in Jacksonville, Florida.

  What I’m aiming for is getting food delivered in exchange for Bitcoins where I don’t have to order or prepare it myself, kind of like ordering a “breakfast platter” at a hotel or something, they just bring you something to eat and you’re happy!

  Having stockpiled about 70,000 Bitcoins by this time, he offered 10,000 for a pizza. For the first few days no one accepted them. After all, what would the person on the other end do with the coins once Laszlo sent them over? But on May 22, 2010, a guy in California offered to call Lazlo’s local Papa John’s. A short while later a deliveryman knocked on the door of Laszlo’s four-bedroom home in suburban Jacksonville bringing two pizzas, fully loaded with toppings.

  Laszlo subsequently found several takers for the deal, which meant that for a few weeks he ate nothing but pizza. His two-year-old daughter was in heaven as he watched his stockpile of Bitcoins dwindle. But he had demonstrated that Bitcoins could be used in the real world. When he posted pictures from one of his feasts Martti Malmi cheered: “Congratulations laszlo, a great milestone reached.”

  LASZLO HAD PROVED that it was possible to pay for real things with Bitcoins, but the technology was still essentially just a volunteer project that relied on the goodwill of users. Perhaps the most notable project set up during these months was the Bitcoin faucet, a site that gave five free Bitcoins to anyone who registered. The project’s creator was Gavin Andresen, a Massachu
setts-based programmer who had spent $50 to get the 10,000 Bitcoins he was giving away, and who would become an almost mythic figure within Bitcoin. He first heard about the technology in May from a small item on the website of InfoWorld. After setting up the faucet, Gavin acknowledged that it sounded silly to give Bitcoins away, particularly because they were not hard to generate. But, Gavin wrote on the forums, “I want the Bitcoin project to succeed, and I think it is more likely to be a success if people can get a handful of coins to try it out. It can be frustrating to wait until your node generates some coins (and that will get more frustrating in the future), and buying Bitcoins is still a little bit clunky.”

  Gavin, a trim forty-four-year-old with the anodyne looks of a suburban soccer dad, had time for the project because he, his two children, and his wife—a geology professor—had recently returned from his wife’s sabbatical in Australia. Gavin had quit his job as a researcher at the University of Massachusetts before they had gone to Australia and he was now trying to figure out what to do next from his home office, just off the family mudroom.

  When he first read about Bitcoin, he had immediately ferreted out Satoshi’s original Bitcoin article, now known as the Bitcoin white paper, as well as the Bitcoin forum, all of which he read in a few hours. The concept appealed to him, in part, for the same political reasons that drew in Martti. After growing up in a liberal West Coast household, Gavin had moved toward libertarianism during his first programming job, swayed by a persistent coworker. These politics gave him a natural interest in a free-market currency like Bitcoin.

  But politics didn’t occupy the center of Gavin’s life and, unlike many libertarians, he didn’t particularly think the gold standard was a great idea. For Gavin, one of the primary attractions of this technology was the conceptual elegance of the decentralized network and the open source software, which was updated and maintained by all of its users instead of one author. Gavin’s programming career thus far had given him an appreciation for decentralized systems that had nothing to do with any suspicion of the government or corporate America. For Gavin, the power of decentralized technology came from the more workaday benefits of software and networks that didn’t rely on a single person or company to keep them running.

  Decentralized systems like the Internet and Wikipedia could harness the expertise of all their users, unlike the AOL network or Encyclopaedia Britannica. Decision making could take longer, but the ultimate decisions would incorporate more information. The participants in decentralized networks also had an incentive to help keep the system up and running. If the original author was away on vacation or asleep when a crisis hit, other users could chip in. As it was frequently put, systems were stronger when there was no single point of failure. These arguments were, to some degree, technological analogues of the political arguments that libertarians made for taking power away from central governments: political power worked better when it was in the hands of lots of people rather than a single political authority. But the advocates for open source software tended to put things in less ideological terms.

  Decentralized technology was a rather natural fit for Gavin, who had little in the way of an ego. Despite going to Princeton, he had been happy serving as something of a journeyman programmer, working on 3-D graphics at one point, and Internet telephony software at another. For Gavin, the jobs had always been about what he found interesting, not what promised the most money or success.

  To start participating in the Bitcoin project, Gavin quickly began e-mailing with Satoshi to suggest his own improvements to the code and, in short order, became the first person other than Satoshi or Martti to officially make a change to the Bitcoin code.

  More valuable than Gavin’s programming chops were his goodwill and integrity, both of which Bitcoin desperately needed at this point to win the trust of new users, given that Satoshi remained a shadowy figure. Satoshi had, of course, designed his software to be open source so that users wouldn’t have to trust him. But people were not showing much willingness to entrust real money to a network that was run by a bunch of anonymous malcontents.

  Gavin attached a real and trustworthy face to the technology. He was one of the first people on the forum to use his real identity, taking the screen name gavinandresen, and he included, on the forum, a small picture of himself in a hiking backpack, giving a slightly dorky but entirely disarming smile. He served on the forums as a sort of good-natured high school teacher, answering, in plain terms, questions that came up. He would also mediate in the political fights that occasionally broke out between those early users with strident political beliefs. Gavin was used to this sort of thing. In Amherst, Massachusetts, he served on the 240-member Town Committee, a grassroots deliberative body that he had been elected to a number of times. Amherst, a college town, was famously liberal and so Gavin had plenty of disagreements over matters of principle. But he had learned to avoid fights and find compromises—something that was about to prove critical to the fledgling Bitcoin community.

  HEADPHONES ON AND an oversize can of MadCroc energy drink by his side, Martti sat at his dorm room desk, giddy. Slashdot, a go-to news site for computer geeks the world over, was going to post an article about Martti’s pet project. Bitcoin, largely ignored over the last year, was on the verge of receiving global attention.

  The campaign to get Bitcoin real press coverage had begun a few weeks earlier, not long after Martti finished his three-month internship at Siemens. A new version of Bitcoin, version 0.3, was being prepared for release by Satoshi, and the regulars on the forum saw a perfect opportunity to get the word out. Martti agreed with a handful of other users that Slashdot would be the best place to do this.

  “Slashdot with its millions of tech-savvy readers would be awesome, perhaps the best imaginable!” Martti wrote on the forum. “I just hope the server can stand getting ‘slashdotted.’”

  A small crew went back and forth about the right language to submit to the Slashdot editors. Satoshi got his hackles up when someone suggested Bitcoin be sold as “outside the reach of any government.”

  “I am definitely not making any such taunt or assertion,” Satoshi wrote.

  He quickly apologized for being a wet blanket: “Writing a description for this thing for general audiences is bloody hard. There’s nothing to relate it to.”

  After Martti suggested his own changes, the final version made the more modest assertion that “the community is hopeful the currency will remain outside the reach of any government.”

  When the item went online, shortly after midnight in Helsinki, it wasn’t anything more than the single paragraph the Bitcoin team had submitted.

  “How’s this for a disruptive technology?” it began. “Bitcoin is a peer-to-peer, network-based digital currency with no central bank, and no transaction fees.”

  Despite the modesty of the item, the Internet chat channel that Martti had established for the Bitcoin community quickly lit up. NewLibertyStandard wrote: “FRONT PAGE!!!”

  Regulars like Laszlo made a point of being on the Bitcoin chat channel, to answer questions and serve as a tour guide of sorts for any newbies who checked in after reading the story. In his dorm room, Martti posted a message on Facebook: “If I was a smoker, I would have smoked two packs already.”

  Martti watched as the counters, which tracked the number of users on the forum and the chat channel, ticked steadily upward. Messages crowded his forum in-box; and the Bitcoin website, running on servers that could not handle more than one hundred viewers at a time, began to slow. Within an hour, the limit was reached and the whole site went down. Martti scrambled to scale up the site’s capacity with the company that rented him space. But this, and the derogatory comments that showed up under the Slashdot item, did not dampen his enthusiasm. This was what he’d been waiting for for months.

  CHAPTER 5

  July 12, 2010

  When he awoke late, the morning after the Slashdot posting, Martti Malmi saw that the attention was not a hit-and-run phenomen
on. People weren’t just taking a look at the site and moving on. They were also downloading and running the Bitcoin software. The number of downloads would jump from around three thousand in June to over twenty thousand in July. The day after the Slashdot piece appeared, Gavin Andresen’s Bitcoin faucet gave away 5,000 Bitcoins and was running empty. As he begged for donations, he marveled at the strength of the network:

  Over the last two days of Bitcoin being “slashdotted” I haven’t heard of ANY problems with Bitcoin transactions getting lost, or of the network crashing due to the load, or any problem at all with the core functionality.

  But while the Bitcoin software itself was working well, new users quickly ran up against the limitations of the Bitcoin ecosystem. Those who immediately wanted to acquire more Bitcoins than were available from Gavin’s faucet were left with only a few meager options, one of them a creaky, unreliable service that Martti had set up a few months earlier.

  Jed McCaleb was one of the people who encountered this weakness. A native of Arkansas, Jed had been raised by his single mother, who made a living as a journalist. From a young age, Jed had been something of a math and science prodigy, and this allowed him to make it to Berkeley for college. Jed, though, had trouble sticking with things, and he soon dropped out of Berkeley and moved to New York. There he and a partner set up what became one of the main successors to Napster. His software, eDonkey, made it possible for individuals to trade large files like movies and it proved so successful that the Recording Industry Association of America sued Jed and his business partner. They eventually paid $30 million to settle the case and shut eDonkey down, but they also earned a few million along the way.

  Despite being a soft-spoken introvert, Jed had a cool way about him that helped him make friends and girlfriends. When one of his romantic flings ended up pregnant, he and the woman, MiSoon, decided somewhat spontaneously to keep the baby and make a go of it. They used some of Jed’s earnings to buy an estate with a pool an hour or so north of New York City, just as they were expecting a second baby. In the sprawling, mostly empty house, Jed threw himself into an online game he had created called The Far Wilds, which had attracted only a few aficionados. He spent endless hours in a first-floor bedroom, which he had turned into a den. Books about neuroscience and artificial intelligence piled up around him—as did old food, attracting bugs that MiSoon initially tried to get rid of, but later came to accept as one of the side effects of Jed’s brilliant mind.