Nick Szabo

The Godfather of Bitcoin

The identity of Satoshi Nakamoto, the creator of Bitcoin, remains a mystery and probably will remain so for the foreseeable future. This intrigue may enhance the interest in Bitcoin and perhaps having one person associated with such a masterpiece could diminish the otherworldly quality of Bitcoin. Even though there is a mystery about who Satoshi actually is, there should be no doubt that Nick Szabo is the intellectual godfather of Bitcoin and of cryptocurrency systems in general. Szabo is a polymath who has written insightful and ground-breaking ideas in blog articles about computer science, law, economics & history. Szabo graduated as a Computer Science major at the University of Washington and has a law degree at George Washington University. In the early 1990’s, Szabo worked under David Chaum at DigiCash, an Internet startup that built eCash, one of the first digital cash systems of the Internet era. Szabo was also part of the early cypherpunks movement, a group of activists promoting cryptography and privacy technologies primarily over an email list.

Bitcoin & BitGold

Szabo’s influence on the architectural design of Bitcoin cannot be overstated.  His original BitGold concept that he described in his blog in 2005 was actually based on an idea he had as early as 1998.  The key innovation in BitGold was to create money that didn’t rely on a trusted third party like a government or private bank for its value.  The same foundational principle underpins Bitcoin.  The BitGold system enables users to create unforgeably costly bits using computers online.  This is another foundational concept that describes the Bitcoin system that enables miners to solve proof-of-work puzzles as rewards.    When comparing BitGold concepts to the Bitcoin whitepaper, most of the foundational elements of Bitcoin originated in the BitGold concept.  These elements include the following ideas:  

      1. Each coin is a chain of digital signatures

      2. Transactions are made when an owner of bitcoins use his/her private key to sign a hash of the previous transaction and public key of the new owner and adds that to the end of the coin.

      3. The network serves as a distributed timestamp server

      4. Proof-of-work system creates an unforgeable costliness to each coin.

One major additional improvement Satoshi made to the BitGold paper was to use the longest chain proof-of-work as part of the consensus mechanism.  Szabo originally imagined a Byzantine Quorum system for consensus as described in his 1998 essay: Secure Property Titles with Owner Authority.  The second difference is that Bitcoin automatically adjusts mining difficulty so that the amount of Bitcoin created is predictable.  In the BitGold post, Szabo doesn’t explain a method to produce a predictable supply.  Instead he mentions that by knowing the time and the difficulty to create each bit, commodity dealers could combine them into fungible units for trade.

Szabo On Money

As one of the few pioneers in digital money from the 90’s, Szabo was written extensively on the history of money in his essay Shelling Out: Origins of Money.   He describes money from an evolutionary psychological perspective as a means to keep track of kin and reciprocal altruism.  Szabo describes necklaces and pendants as primitive money called ‘collectibles’ that could be used for wealth transfers and contributed human evolution.  Szabo hypothesizes primitive money was mainly used for infrequent wealth transfers that involved inheritance, marriage, legal judgements and tribute and describes how durable collectibles could become the main form of money for generations.  

In Shelling Out, Szabo asks: “And why did humans, often living on the brink of starvation, spend so much time making and enjoying those necklaces when they could have been doing more hunting and gathering?” and notes: “Compared to modern money, primitive money had a very low velocity – it might be transferred only a handful of times in an average individual’s lifetime. Nevertheless, a durable collectible, what today we would call an heirloom, could persist for many generations and added substantial value at each transfer – often making the transfer even possible at all. Tribes therefore often spent large amounts of time on the seemingly frivolous tasks of manufacturing and exploring for the raw materials of jewelry and other collectibles.”  Specially handcrafted necklaces took time and skill, represented sacrifice and were unforgeably costly.  Therefore, Szabo posits that jewelry’s importance as a store of value and proto-money may have been the evolutionary reason why people enjoy wearing them.  

The concept of unforgeable costliness was crucial to Szabo’s design of BitGold as he highlighted in his blog post Antiques, time, gold, and bit gold and Szabo has done a great amount of research around the topic.  In “A Measure of Sacrifice”, he wrote about the history and importance of the clock and the institutionalization of time-wage rates as a measure of sacrifice that was critical for the economic development of the modern world. Bitcoin’s proof-of-work system and energy expenditure is precisely the measure of sacrifice and unforgeable costliness that makes it a store of value and obtain the qualities of proto-money and collectibles that have been used for intergenerational wealth transfer for thousands of years. 

Szabo on Technology

Szabo is not only the godfather of Bitcoin, he can also be considered one of the godfathers of Ethereum for being the first to develop the concept of smart contracts.  He wrote in detail about how a smart contract platform would look like in a series of articles including:

      1. The Idea of Smart Contracts (1997), a short introduction to the concept

      2. Formalizing and Securing Relationships on Public Networks (1997), a white paper that describes the architecture, building blocks and applications for the modern day smart contract blockchain platform 

      3. A Formal Language for Analyzing Contracts (2002), describes a high-level smart contract language and even gave examples for what we consider decentralized finance (DeFi) today.

      4. Smart Contract Glossary (1995) – provides the definition of a Smart Contract as well as lists many other useful concepts to build systems around cryptocurrency protocols such as: 1) Public Key Cryptography and Digital Signatures used to secure and authorize transactions in Bitcoin and cryptocurrencies 2) Secret Sharing, Zero-Knowledge Interactive Proof and Blind Signatures used to create privacy 3) Smart Property to describe software or physical devices with the desired characteristics of ownership embedded into them  4) Securities, Derivatives and Synthetic assets used in decentralized finance (ie. DeFi)  

Szabo discusses a variety of foundational concepts underpinning many of the modern decentralized blockchain networks in:

      1.  Trusted Third Parties are Security Holes (2001) – describes “a security protocol design methodology whereby protocol(s) are designed to minimize these costs and risks of trusted third parties.”

      2. The God Protocols (1999) – describes the concept of a protocol that uses computers to remove the need for trusted intermediaries.

      3. Advances in Distributed Security (2003) – covers numerous concepts that are being applied today in the blockchain space including multi-party computation, secure time-stamping, Byzantine generals problem, byzantine-resilient replication and also mentions its potential applications to create unforgeable transactions and censorship-resistant publishing.

Szabo also discusses the concept of  ‘digital bearer certificates’ and Chaumian digital cash in Contracts with Bearer (1997). Szabo contends he always thought BitGold as a store of value would be paired with some form of Chaumian digital cash as a currency.    Szabo also wrote about securing property rights in Secure Property Titles with Owner Authority (1998) that proposes a secure, distributed title database that protects property rights of both digital forms such as Internet domain names or physical property such as real estate. 

Szabo on Law

Szabo has incorporated legal concepts in his writings about technology likely based on his interest in Smart Contracts.  He went on to obtain his law degree at George Washington University in 2006.  Szabo introduced the idea of wet code vs dry code to distinguish between human interpretation of law compared to computer interpretations of software and the benefits of the latter.  He’s known for advocating ‘Code as Law’ and favored Ethereum Classic over Ethereum based on the decision for a hard fork after the DAO hack.  During and after his law studies he published the following papers on a variety of subjects including:

      1.  Jurisdiction as Property: Franchise Jurisdiction from Henry Iii to James I – explores the development of jurisdictional and procedural law in medieval and renaissance England.

      2. Origins of the Non-Delegation Doctrine – about the delegation of power to the Executive to make domestic laws in the US 

      3.  Elemental Subject Matter – that covers software patent law.  

He’s also written a series of essays to share his thoughts on law, violence, politics and coercion:

      1. Why legal procedure is central to politics – Szabo discusses the idea of local initiations of force and positive rights in legal procedures in response to an initiation of force and how balancing these procedural rights against substantive negative rights is a central problem of politics.

      2. Hampton Sides sheds light on Mancur Olson and Ronald Coase – how the constant violent raids of the nomadic Navajo Indians were the primary cause of the decline of the Anasazi farm-based civilizations and how it supports the Olson theory of roving vs stationary bandits and contradicts anarcho-capitalist ideas that rely on the market-based Coase Theorem. 

      3.  The Coase Theorem is false: contracts depend on tort law & The Coase Theorem in action Szabo describes the importance of tort law for enabling an economy to thrive.

Conclusion

Szabo’s writings are profound and the best resource to understand the philosophy of Bitcoin, money and cryptocurrencies. 

You can follow Nick’s writings in his main blog Unenumerated.

Older writings are here at Nick Szabo’s Essays, Papers, and Concise Tutorials

Another collection is at the Nakamoto Institute.

His published papers are listed at SSRN.