Bitcoin boasts many technical achievements, but none is more interesting to me than they way it was successfully bootstrapped. How did a small group of cypherpunks—activists interested in widespread use of cryptography and digital currency—manage to get an intrinsically valueless token to have a consistently positive price? Hal Finney, a cryptographer and early adopter of bitcoin, put it this way in 2009:
"One immediate problem with any new currency is how to value it. Even ignoring the practical problem that virtually no one will accept it at first, there is still a difficulty in coming up with a reasonable argument in favor of a particular non-zero value for the coins."The bootstrapping of bitcoin seems to have been achieved with some care. William Luther has gone through old bitcoin message boards to show how early adopters, including Finney and bitcon-creator Satoshi Nakamoto, coordinated to 'enter the network' at the same time, thus generating a positive value for worthless bitcoin tokens. A token that is already valuable, perhaps because it is useful for some non-monetary use like jewellery, or because it is directly convertible into an already-existing money, is much easier to launch than one that isn't already valuable. Bitcoin didn't have the benefit of non-monetary usefulness.
By way of Timothy May's Cyphernomicon, I recently discovered that bitcoin wasn't the first attempt by cryptographers to launch an intrinsically worthless digital token into positive-value space. Similar bootstrapping attempts occurred back in a previous era of digital currency experimentation, the mid-1990s.
In 1993 the extropians—a group that believes in the technological possibility of immortality (among other things)—set up an experimental market called the Hawthorne Exchange where individuals could trade units of reputation. There seems to be some crossover between extropians and cypherpunks with the reputations of folks like Timothy May and Nick Szabo, both key contributors to the Cypherpunks electronic mailing list, being listed on the Hawthorne Exchange. Trades were made using the exchange's own native currency called thorne, which had a fixed supply. Not only did the extropians succeed in generating a positive price for twenty or thirty reputation tokens, but by extension the native currency—thornes—was also bootstrapped.
As part of the experiment, people began to sell stuff for thornes, including copies of digital cash papers and old books. They made bets in thornes and even established a U.S. dollar price for the nascent digital currency (it was somewhere between 100 and 1000 thornes per dollar).
The problem with the whole endeavour is that—as Hal Finney would point out not long after it had begun—the tokens were essentially worthless. By convention each unit was supposed to represent a person's reputation, but there was no independent force that could possibly make a token correspond to a reputation:
"It is important to understand that Thornes are not like dollars. Unless HeX shares can be given a grounding other than the whim of their owners, the market will surely collapse, because there is nothing to support it."Finney would be proven right, since the Hawthorne exchange was shut down sometime in 1994.
In their next effort the cypherpunks would bootstrap a set of play currencies that had been created using a toolkit called Magic Money, a digital cash system programmed by the pseudonymous Pr0duct Cypher and made available in February 1994. Here is Pr0duct Cypher in the introduction to the software:
"Now, if you're still awake, comes the fun part: how do you introduce real value into your digicash system? How, for that matter, do you even get people to play with it?From the cypherpunks mailing list we learn that over the course of the next few months four or five unique tokens were created using Magic Money, including Tacky Tokens, GhostMarks, DigiFrancs, and NexusBucks. As in the earlier case of thornes, an attempt was made to sell goods and services in these new currencies. One poster on the Cypherpunk message board offered to pay coders to write software with NexusBucks, and another tried to sell GIF art of tacky tokens.
What makes gold valuable? It has some useful properties: it is a good conductor, is resistant to corrosion and chemicals, etc. But those have only recently become important. Why has gold been valuable for thousands of years? It's pretty, it's shiny, and most importantly, it is scarce.
Digicash is pretty and shiny. People have been talking about it for years, but few have actually used it. You can make your cash more interesting by giving your server a provocative name. Running it through a remailer could give it an 'underground' feel, which would attract people.
Your digicash should be scarce. Don't give it away in large quantities. Get some people to play with your server, passing coins back and forth. Have a contest - the first person who (breaks this code, answers this question, etc.) wins some digital money. Once people start getting interested, your digital money will be in demand. Make sure demand always exceeds supply."
After a flurry of activity, however, interest died off. "It appears that the Magic Money/Tacky Token experiment is not succeeding in producing an informal digital currency," wrote Hal Finney in May 1994. "People have offered services in exchange for this money but have had no takers." In a post entitled Why Digital Cash is Not Being Used, Tim May blamed the failure of Magic Money on the lack of items to buy with tokens and confusion about how to get them and send them. It's worth a read.
No sooner had the Magic Money experiment died when a new new opportunity for bootstrapping digital tokens emerged. David Chaum, an early advocate of privacy, had established a company called Digicash in 1989 to commercialize the use of blind signature technology in electronic currency. In a trial that was first announced in July 1994, Digicash offered the first 10,000 applicants one hundred free cyberbucks, or e$, up to a maximum issue of one million cyberbucks.
Despite the fact that these tokens were intrinsically worthless—they had neither commodity value nor could they be redeemed into U.S. dollars—people soon began to transact with them. On its website, DigiCash listed around 100 shops that accepted cyberbucks, including those that sold postcards and various types of information services. Zooko Wilcox-Hearn, who recently founded the anonymous cryptocurrency Zcash, offered to sell his PGP software for cyberbucks. A coding contest by the omnipresent Hal Finney offered cyberbucks as a prize and Adam Back, a cryptographer who is currently involved in administrating bitcoin, sold "export-prohibited" cryptographic t-shirts for a price of e$250. In the same way that a pizza was the first good to be bought with bitcoin, Back's t-shirts may have been the first to be bought with cyberbucks:
i guess those t-shirts were the first pizza. digicash coins however are defunct- their SPOF failure is why B-money/bitgold/Bitcoin were p2p. pic.twitter.com/uJ2GIR3HU1— Adam Back (@adam3us) October 24, 2017
To Digicash's surprise, several primitive financial markets emerged to trade cyberbucks for genuine currency. On the Ecash Exchange Market, which was hosted on the website of company called Firecloud Solutions, a price of around five cents per e$1 was established (see image below), effectively valuing the entire market capitalization of cyberbucks at $50,000.
|Source: A Common Currency System for Spontaneous Transactions on Public Networks|
For those with long memories, the above Ecash market looks very similar to New Liberty Standard's bitcoin-to-paypal market, the first bitcoin exchange that was established in 2009.
The cyberbuck trial did not last. While there was plenty of discussion about the topic in 1995, there are only a few mentions of cyberbucks on the Cypherpunk mailing list in 1996, but almost nothing in 1997. When I asked Zooko if he still had cyberbucks, he told me he had long since lost his. Who knows? They might still be worth a lot as collector's items.
Like cyberbucks and the other mid-90s experiments, bitcoin began as a mere play thing among a small coalition of technologists interested in privacy. Why did bitcoin get successfully boostrapped while the others failed? How did one form of monopoly money spread over the entire globe while the others were never used by anyone other than a small band of cypherpunks?
One answer is luck. Perhaps nothing more than a fortuitous flap of a butterfly's wings in Brazil set the whole thing off. Another is experience. After three failed efforts to bootstrap electronic tokens, perhaps the cypherpunk community had developed a better understanding of what not to do to get the ball rolling. Hal Finney for one participated in all four digital currency experiments.
The technology was different as well. Because it utilized David Chaum's patented blind signature protocol, Magic Money was technically illegal, and thus unlikely to spread to more timid adopters. As for cyberbucks, once the trial was over the server running the software would have to be shut off, at which point there would be no way to verify cyberbuck transactions. Knowledge of this imminent shutdown would have handicapped the ability of cyberbucks to propagate beyond the core group of hobbyists. Bitcoin, on the other hand, used a decentralized (and unpatented) method of verifying transactions, so the threat of winding up the system was less salient.
I'm not sure these technical factors were as important as the different macroeconomic environments in which the various digital currencies were issued. Cyberbucks, Magic Money, and thorne all appeared when the global economy was humming along and interest rates were high. Owning these zero-yielding tokens meant that users had to make a large sacrifice. In 2009, interest rates around the world had fallen to near zero, so holding a digital currency like bitcoin did not involve forgoing much in the way of interest income.
If usage of an intrinsically worthless token is to spread beyond an inner clique of hobbyists, a whole army of dreamers and speculators has to be encouraged to jump onto the bandwagon. What better pool to recruit from than the ranks of unemployed and underemployed in the wake of the 2008 financial crisis? This pool of downtrodden simply didn't exist in the humming 1990s. Folks back then had no need for a bubble asset to get them ahead—they enjoyed full-time jobs and plenty of opportunity.
Perhaps we were all a bit innocent in the 1990s and didn't understand how much our privacy could be invaded by governments and corporations. Magic Money and cyberbucks, which promised protection from these threats, arrived too early. When bitcoin was finally introduced, it may be that we had all become a bit wiser and thus more willing to endure the hassles of switching some of our wealth into cludgy digital currency.
Lastly, people weren't upset with the finance establishment back when thornes, Magic Money, and cyberbucks were being introduced to the world. While recessions had hit in the early 1980s and 90s, they weren't accompanied with large-scale financial meltdowns. But in 2009, the credit crisis and bailouts were just in the rear-view mirror. Many were furious with banksters, and justifiably so. Turning to bitcoin was a protest vote.