The World Before Bitcoin
It's September 15, 2008. Lehman Brothers, a 158-year-old investment bank holding $639 billion in assets, has just filed the largest corporate bankruptcy in American history.1 Over the next eighteen months, 8.7 million Americans will lose their jobs, 3.8 million homes will go into foreclosure, and roughly $16.4 trillion in household net worth (retirement accounts, home equity, college savings) will evaporate.2 Your neighbor's 401(k) statement shows a number that looks like a typo.
Banks that were "too big to fail" are failing. The Federal Reserve begins a rescue whose commitments will exceed $16 trillion, larger than the entire annual output of the U.S. economy.3 The money is not coming from taxes. It is being created.
In living rooms around the world, people ask the same question: "How did we let a handful of institutions gamble with the entire economy, and why are we paying for it?"
Five weeks later, someone publishes an answer.
That someone was writing under a pseudonym, Satoshi Nakamoto, but the ideas were not new. They were the culmination of decades of work by a loosely connected group of cryptographers, computer scientists, and privacy advocates known as the cypherpunks.
Do not picture rebels. Picture engineers who had identified a design flaw: powerful institutions will abuse any tool of control given to them, so any freedoms worth keeping in the digital age would have to be built into the code rather than asked for as a favor. As Eric Hughes put it in the 1993 Cypherpunk's Manifesto: "Cypherpunks write code."4
By the late 1990s, several of them were trying to answer the same narrow question: how do you build digital cash that doesn't require a bank? Each attempt solved part of the puzzle. None of them solved all of it.
| Project | Year | Creator | What It Solved | What It Left Unsolved |
|---|---|---|---|---|
| DigiCash | 1989 | David Chaum | Anonymous digital payments, using "blind signatures" to hide who paid whom | A trusted company still had to issue and redeem the money. When that company went bankrupt in 1998, so did the currency. |
| Hashcash | 1997 | Adam Back | Proof-of-work: a way to make the sender prove they'd done real computational effort, not just spam the network for free | Not money. Just a stamp. But Satoshi would cite it by name in the Bitcoin whitepaper a decade later.5 |
| b-money | 1998 | Wei Dai | A proposal for decentralized digital currency on a shared ledger | Never implemented. And it still had no answer for the double-spending problem without a trusted referee. |
| bit gold | 1998 | Nick Szabo | Proof-of-work chained through time, digital objects with verifiable scarcity | Reconciling who owned what still required a trusted "Property Club." Centralized at the seam. |
| RPOW | 2004 | Hal Finney | Reusable proof-of-work: the first system where computational effort could be transferred from one person to another | Relied on a single trusted server to prevent double-spending. Finney himself knew that was the weakness. |
The last row stands apart for one reason: its creator was about to become Bitcoin's first user. Five years after building RPOW, Hal Finney would become the first person on earth to run Satoshi's new software, and one day after that, he would receive the first Bitcoin transaction ever sent. The people who built the failed predecessors became Bitcoin's first users, which is a strong hint that they hadn't been wrong about the problem. They had just been missing one piece.
Every attempt in the table failed for the same reason: they still needed somebody (a company, a server, a trusted party) to prevent cheating. How do you stop a person from spending the same digital coin twice? You need a ledger. And whoever keeps the ledger is, by definition, a central authority.
That was the wall. Twenty years of brilliant minds hit it and bounced off.
The components existed: distributed networks, proof-of-work, public-key cryptography, timestamped chains. What did not exist was an assembly that could work without a single trusted party.
How do you create money that works without a middleman? For forty years, the answer was you can't. Every serious attempt ran into the same wall: somebody had to keep the ledger, and whoever kept the ledger became the single point of failure: the company that went bankrupt, the server that got shut down, the authority that could change the rules.
Five weeks after Lehman Brothers fell, and fifteen years after Hughes wrote the manifesto, that answer was about to change.
Sources: ¹ "Lehman Brothers Holdings Inc. Files for Chapter 11 Bankruptcy," Reuters, September 15, 2008. · ² Federal Reserve, Financial Accounts of the United States (household net worth, 2007–2009); U.S. Bureau of Labor Statistics (employment data, 2008–2010); RealtyTrac, 2010 Year-End Foreclosure Market Report. · ³ U.S. Government Accountability Office, Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696 (July 2011). gao.gov/products/gao-11-696. · ⁴ Eric Hughes, A Cypherpunk's Manifesto, March 9, 1993. activism.net/cypherpunk/manifesto.html. · ⁵ Adam Back, "Hashcash: A Denial of Service Counter-Measure," 2002. hashcash.org/papers/hashcash.pdf. Cited as reference [6] in the Bitcoin whitepaper. · ⁶ Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking, Wiley (2018), Ch. 9.