Chapter 3

Digital Pioneers—the Stories of Decentralization

Any groundbreaking technology “stands on the shoulders of giants.” This is true for the capital investment, the risks, the failures, and the successes of those who have gone before. In software development, individuals use the libraries and platforms of others to build their own creations: tools built on top of tools built on tools from tools. It is tools all the way down. Somewhere along the way were the ideators: those who had a vision of “what could be” long before anyone else did. They saw the potential for horizontal integration into a countless number of industries. They built the tools that could usurp centralized behemoths that have existed for an eternity. They set out into the unknown. These are their stories.

The Inventor of Blockchain

Long before the Satoshi Nakamotos, the Vitalik Buterins, and the Brian Behlendorfs of the world was a humble professor from Berkeley named David Chaum. Called by some “The Forefather of Cryptocurrencies and the Cyperphunk Movement,” David was the first to set out to research the possibility of designing a computation protocol that could be trusted by mutually distrustful parties. The research of this problem occurred from the late 1970s to the early 1980s. The backdrop of this research was at the University of California, Berkeley, a long-standing key player in cryptographic research and other computer security-related projects. His research occurred at a time when researchers from Berkeley were arrested for trying to get the newly-created and highly valuable Rivest-Shamir-Adleman algorithm smuggled across the US-Mexico border. The military complex was the backdrop of much of the research at the time—of which many “cyberpunks” at Berkeley were not a fan of.

According to Dr. Chaum, “If you can solve the trust problem, you can solve any information security problem.” The dissertation he completed offered up a potential protocol solution to the trust problem, which included every element of a blockchain that Bitcoin has—except proof-of-work. The fact that proof-of-work was not included in Dr. Chaum’s dissertation makes perfectly good sense. The idea of burning up tons of computing time in the early 1980s in order for consensus to be reached within a blockchain protocol would have been considered entirely unreasonable and unfeasible. In addition, his paper “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” was not digitized until much later in time:

“It’s a little bit ironic, I guess, that my concern about digital sovereignty and all made me not sign the copyright of my dissertation over to something called ‘dissertation abstracts’ that, like most theses, would be online and you could find them and order copies. So, I kept the copyright of everything. It just basically lived in the library in paper form. There were only three copies in three different parts of the library system, but never digitized.”

—David Chaum

Dr. Chaum recounted in an interview with Epicenter Podcast how the three copies were nearly constantly checked out for long periods of time. It was a “best-kept secret” in many ways—something Chaum regretted later as his dissertation did not garner the credit it may have received if he had placed the dissertation into online circulation.

Since his dissertation, Dr. Chaum has been credited as the inventor or contributor to research on secure digital cash, cryptographic blind signatures, digital group signatures, trustworthy voting systems, an anonymous credential system, zero-knowledge arguments, and zero-knowledge proofs. He is quite the accomplished researcher. Dr. Chaum believes the “killer app for consumers” is messaging integrated with payments hosted on a blockchain with privacy fully integrated.

“Privacy is tied intimately to human potential.”

—David Chaum

For Dr. Chaum, his current project is to make this killer app a reality through Elixxer. It aims to be the communications layer of the “xx network,” protecting privacy by combining end-to-end encryption with an accelerated mix network that obscures metadata generated by a user’s daily activities. Dr. Chaum is not done as a digital pioneer yet. As he continues to be a leader in the privacy and cryptography space, there is no telling what is around the corner with him.

The Anonymous Creator

Satoshi Nakamoto.

The name evokes a sense of mystery. With a market cap of $300 billion, Bitcoin and its creator to this day remain anonymous. No one knows who created Bitcoin except the creator. This is unprecedented in human history and is part of the draw for many in the Bitcoin community.

In 2008, a website called was launched. This was during a troubled time—the 2008 financial crisis saw the birth of the Occupy Wall Street movement and the creation of groups such as Anonymous. Self-proclaimed libertarian ideologies expanded rapidly during a time when financial freedom was seemingly entirely within the hands of the central banks and their decisions. Over nine million Americans lost their jobs during the crisis and the monetary system that had been steady for so long was now in jeopardy. On September 15, 2008, the 158-year-old Wall Street investment bank Lehman Brothers filed for bankruptcy. Online forums that had fallen silent in the early 2000s centered around the idea of creating a global currency outside of the modern-day banking system roared back to life after the financial crisis.

On October 31, 2008, shortly after the bankruptcy was announced, the white paper for Bitcoin was published to a cryptography mailing. The so-called “Satoshi Nakamato” proclaimed the following: “I’ve developed a new open-source P2P e-cash system called Bitcoin. It’s completely decentralized, with no central server or trusted parties, because everything is based on cryptography proof instead of trust.”

What was the inspiration for this innovation? Whoever Satoshi Nakamoto is was clearly inspired by the problems brought to the forefront in 2008.

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

—Satoshi Nakamato

From white paper to reality, on January 3, 2009, Satoshi Nakamoto revealed thirty thousand lines of code that were the birth of Bitcoin. The codebase for Bitcoin to this day is publicly visible and hosted on GitHub, using Git software to provide codebase management. January 3, 2009, was the day the Bitcoin blockchain network had its first block (“Block 0”) mined. This was done by Hal Finney, an early fan and developer of Bitcoin, working in conjunction with the mysterious and anonymous Satoshi Nakamoto.

The message inserted into Block 0 that is fittingly embedded into Bitcoin’s ledger forever into perpetuity was as follows: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”—a reference to the broken banking system.

Interestingly enough, Hal Finney was one of the few individuals to consistently have message chains with Satoshi. Evidently, Satoshi ignored any questions concerning the identity of who was behind the mask of “Satoshi Nakamoto.”

“I thought I was dealing with a young man of Japanese ancestry who was very smart and sincere. I’ve had the good fortune to know many brilliant people over the course of my life, so I recognize the signs.”

—Hal Finney

A small group of merchants made it possible to purchase items using Bitcoin. Laszlo Hanyecz, widely known as the “Bitcoin Pizza Guy” became the first person to use Bitcoin to purchase goods—two pizzas for ten thousand BTC in May 2010. At the all-time high price for Bitcoin, those pizzas would have been worth $200 million. Despite this tragedy, only when digital pioneers such as Laszlo started utilizing Bitcoin for its intended purpose did Bitcoin eventually achieve the high value it holds today.

Hundreds of developers still build on the Bitcoin blockchain to this day. At the very beginning of Bitcoin, Satoshi Nakamoto had 100 percent control of the code base and was the only person capable of proposing and pushing out actual quality-of-life code changes to Bitcoin’s protocol. Gavin Andresen was one of the few hyperactive developers who worked indirectly with Satoshi Nakamoto on the Bitcoin protocol development. In mid-2010, Satoshi Nakamoto updated and removed his email from the website. This left Gavin Andresen as the only publicly-facing individual whom news organizations, questions, and developers could reach out to.

On April 27, 2011, Gavin Andresen announced he would be attending an emerging technology conference set to be hosted at the CIA headquarters in Langley, Virginia. Four days before Gavin tweeted to the general community concerning this meetup, Satoshi Nakamoto emailed Mike Hearn (a former Google employee and active developer and contributor to Bitcoin) with the following: “I’ve moved on to other things. It’s in good hands with [Andresen] and everyone.” This was Satoshi Nakamoto’s last contact with the Bitcoin project in any capacity. Many speculate Gavin’s contact with the CIA was what pushed Satoshi to completely disappear. Satoshi’s final act was ceding control of the codebase to Gavin, who then shared control with four other well-known developers in the community to carry the torch.

Since Satoshi Nakamoto’s vanishing act, Bitcoin code updates are pushed out by Bitcoin Improvement Proposals (BIPs). Over three hundred BIPs have been proposed, many of which sit in limbo as the community reviews them to make sure they align with the protocol’s original goals as outlined by Satoshi’s white paper. Bitcoin has, to date, over five hundred million transactions. Satoshi’s vision of a decentralized future is steadily being realized. We will only ever be able to imagine who Satoshi is.

“If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry.”

—Satoshi Nakamoto (online forum post)

The Face of Decentralization

Separate from the mysterious intrigue surrounding Satoshi is a young man who was inspired by giants such as Satoshi and Dr. Chaum. Meet Vitalik Buterin, a twenty-six-year-old Russian Canadian college dropout who created the Ethereum blockchain protocol. With over 105,000 software developers building or experimenting on the Ethereum blockchain, Vitalik Buterin may have been the spark that lit the adoption of applications built on blockchain.

Vitalik Buterin was born January 31, 1994, in Kolomna, Russia, to Dmitry Buterin (a computer scientist) and Natalia Ameline. At the age of six, his family immigrated to Canada for better job prospects. In third grade, Vitalik was placed in an accelerated learning path where he focused on math, programming, and economics. He attended a renowned private high school in Toronto called the Abelard School for his high school years. When Vitalik was seventeen, he learned about something called “Bitcoin” from his father. Vitalik wrote it off initially because “it didn’t seem like it had any intrinsic value.” Apparently, Vitalik heard about Bitcoin again, and this time it piqued his interest to investigate a little bit deeper. Vitalik wrote articles for 5 BTC per article. Using this all but worthless Bitcoin (at the time), he was able to interact with the Bitcoin decentralized ledger. His initial interest started with currency, but it eventually shifted to economics and the political implications of what Bitcoin could do.

In late 2013 on a trip to Israel, Vitalik encountered a blockchain community that was focused on building applications other than currency on top of blockchain technology. In Israel, MasterCoin was attempting the very first protocols that would enable financial contracts and cryptocurrencies issued from a blockchain. Vitalik observed much of what the teams were trying to accomplish with their programming had redundancy and could be replaced by a new programming language as a means for more efficient use case creation.

Over the course of the next couple of months, Vitalik went about creating Solidity, the native smart contract coding language of the Ethereum blockchain. As Vitalik began to innovate this new language, he began to understand that what Satoshi Nakamoto had enabled was a new paradigm. The foundation Satoshi had established led Vitalik to the realization that “you can do a lot more with cryptographic systems if you simultaneously view them as economic systems.”

Can decentralization be the basis for the next generations of phone apps, websites, and services you use? Vitalik believes so. He believes the development of the Ethereum blockchain was part of “creating the floodgate of decentralization.”

“When I came up with Ethereum, my first thought was, ‘Okay, this thing is too good to be true.’ As it turned out, the core Ethereum idea was good—fundamentally, completely sound.”

—Vitalik Buterin

How did Vitalik open the floodgate? What is Ethereum capable of that Bitcoin is not? Bitcoin by design has every transaction verified and processed by every node within the Bitcoin network. With over 10,600 nodes as part of the Bitcoin network, the network is only as fast as the weakest link. If a complex program is run on the Bitcoin protocol, the entire network would grind to a halt until the weakest node computes the problem. Bitcoin avoids this problem using a fee system based on transaction size. This makes highly complex programs impossibly expensive to post to the blockchain ledger. This work around is clever but leaves Bitcoin with the problem of being classified as Turing Incomplete—a lack of guarantee that any given program will be completed.

Vitalik made great progress solving this Bitcoin design flaw within the design of Ethereum by creating a system of “gas” and the Ethereum Virtual Machine (EVM). The EVM is a virtual computer hosted on the distributed ledger—a brilliant concept that allows for everyone to use a globally visible and distributed computer that anyone can access and use if they pay a fee in gas. The entries on a ledger are essentially “blocks of memory” that, just as with a normal computer, can be manipulated to perform decentralized computations, allowing for the creation of decentralized apps, or Dapps, which are outside of the control of any single authority.

What problem is Vitalik trying to solve today? Currently, Ethereum is faced with the problem of scalability. Visa is able to update and manage over 1,700 transactions per second using its centralized servers. That’s quite impressive. PayPal handles about two hundred transactions per second. All of these centralized companies are in stark contrast to the decentralized computation capabilities of Ethereum, which is only able to process twenty-five transactions per second.

This is the most important fundamental problem that remains to be solved by Vitalik and the Ethereum developer community. The faster the network, the more complex the types of Dapps can be hosted and used by everyday people. Scalability also enables users to be able to send cryptocurrency (in this case, Ether) much quicker between each other. Speed is clearly valued in the twenty-first century.

“Scalability is this idea of coming up with a blockchain that can scale much larger than existing chains essentially by processing transactions in parallel. And moving away from this paradigm where every single node on the network has to process every single transaction.”

—Vitalik Buterin

Vitalik, with the help of developers working on the “Casper” chain of Ethereum, have proposed a solution to scalability known as “sharding.” Sharding aims to split the ledger into different pieces (that still remain connected), allowing for different shards of the ledger to be appended and updated by different sets of nodes. This makes the verification system faster by removing the constraint of needing every single node to verify every single transaction of the ledger. Unfortunately, the trade-off the protocol encounters while implementing sharding is that the decentralized network becomes less secure.

At most, a decentralized protocol can only implement two of the following properties to the fullest: decentralization, security, or scalability. This was dubbed by Vitalik as the “scalability problem,” which is a permanent limitation and side effect of blockchain design.

Perhaps harder than the “scalability problem” is trust; Vitalik acknowledges it is the most difficult problem to solve for emerging technologies such as blockchain.

“The main advantage of blockchain technology is supposed to be that it’s more secure, but new technologies are generally hard for people to trust, and this paradox can’t really be avoided.”

—Vitalik Buterin

The Bridge Builder

How do I get my money from cash into cryptocurrency? How do you do it legally? How do you do it quickly? What services are trusted by regulators?

At the inception of cryptocurrency back in 2008, no simple way of trading sovereign currency for cryptocurrency existed. An exchange is what allows people to trade one currency for another (in this case USD for cryptocurrency). In order for an exchange to work, it must have a working relationship with both banks and the government—a monumental task indeed.

Jed McCaleb was the original founder and programmer of the online Bitcoin exchange, Mt. Gox. It was the largest Bitcoin exchange in early 2014, accounting for over 70 percent of all Bitcoin transactions. When McCaleb first started the exchange in early 2010, he didn’t think much of it. He just wanted to have a way to quickly transact with other people. In fact, the name “Mt. Gox” was an old domain name he reused from his earlier days where he had created a Magic: The Gathering card exchange.

“Mt. Gox was just kind of on a lark almost just because I wanted to learn more about the, like how Bitcoin works and this is just a good way to learn about the system. So it wasn’t like it was ever intended to be like this massive business or anything like this.”

—Jed McCaleb

Jed originally designed the exchange to use PayPal as an on-ramp from fiat to crypto. This lasted four months, until PayPal banned Mt. Gox (and McCaleb) for life because of charge-back fraud from a variety of accounts interacting with Mt. Gox. Because of the rapid growth of Mt. Gox from zero users to a couple of thousand, an overwhelmed Jed sold Mt. Gox to Mark Karpeles, a French entrepreneur, for an insignificant amount. This sale turned Mt. Gox into a Japanese exchange—the beginning of the end of the largest Bitcoin exchange.

Months after the sale, Mt. Gox had a flash crash occur that saw the price of Bitcoin on the exchange drop from seventeen dollars to a couple of cents in a matter of seconds. The exploit “compromised a user account” and stole twenty-five thousand Bitcoin from customers on the exchange, which was worth $8.5 million at the time. A string of breaches, regulatory problems, and US government run-ins impacted Mt. Gox from 2011 to 2013. A $75 million lawsuit with CoinLab, a partner with Mt. Gox, worried customers because of the allegation that Mt. Gox “willfully failed to perform its obligations.” Five million dollars were taken by the US government because Mt. Gox operated “without a license to transmit money.” Customers suffered from withdrawal problems, causing justified panic as people began to exit the exchange.

In early February 2014, Karpeles revealed a hacker had slowly been draining the exchange of Bitcoin using an undiscovered exploit. Over 740,000 Bitcoin had been stolen from users over time (roughly $14.8 billion at Bitcoin’s all time high). On February 28, 2014, Mt. Gox filed for bankruptcy. Over 24,750 claims worth $432 million were approved on May 25, 2016. This concluded Mt. Gox and what was once the largest Bitcoin exchange.

With this utter collapse, many had questions about what a successful exchange would look like. What would bring people to an exchange in the long term? How do you survive all the problems an exchange incurs?

An exchange ultimately needed to be extremely secure, easy to use, fully compliant with the law, and communicative with customers. This is where Brian Armstrong, founder of Coinbase, entered the picture.

“At Coinbase, our first priority is to ensure that we operate the most secure and compliant digital currency exchange in the world.”

—Brian Armstrong

Valued at over $8 billion as of 2018, Coinbase was created in 2012 in the wake of Mt. Gox. Brian Armstrong had learned early on that the key to long term success for an exchange would be built upon working directly with regulators. Coinbase applied for a money transmitter license in 2013 (unlike Mt. Gox). Ramping up the number of employees quickly, Coinbase has over a thousand employees today. Hiring elite software engineers, Coinbase, “through a combination of luck and skill” (according to Brian), managed to front run many of the best hackers circling a variety of crypto exchanges.

“When I was thinking about starting Coinbase, a few people told me I was crazy to try creating a custodial crypto wallet and exchange. The best hackers in the world were trying to break into crypto exchanges, and Mt. Gox along with many others had suffered breaches. . . . Coinbase managed to weather the barrage of attacks, and created many novel methods of [private] key storage”

—Brian Armstrong

With a clean user interface, excellent customer support, and a variety of initiatives in the space, Brian Armstrong has turned Coinbase from a small exchange into an industry titan. Coinbase has done over $2 billion in volume traded in a single day, and has over twenty-eight cryptocurrencies available for purchase, sale, and transfer. Coinbase has undeniably played a key role in allowing for the adoption of cryptocurrency by opening the channel of exchange between sovereign currencies and cryptocurrencies with legally compliant and safe procedures for investors.

Brian, as with many of the pioneers of the decentralized movement, is a firm believer that cryptocurrency and blockchain will soon be embedded in society.

“I think it’s going to end up a lot like the internet. Some countries try to regulate the internet—Bitcoin will be very much like that. It will be legal, and there will be some countries with currency control.”

—Brian Armstrong

There are countless stories of those who have contributed to blockchain in the last decade. Their stories are numerous, but David Chaum, Satoshi Nakamoto, Vitalik Buterin, and Brian Armstrong were the integral players along the way who enabled the technology, development, and adoption of decentralized ledger technology. They were the ideators, the ones who saw and took a risk on a future no one else envisioned. Without them, we would not have landed on the proverbial moon. Many cryptocurrencies have blown up, imploded, copied, recycled, raised money, and fallen away into obscurity.

Regardless, everyone learning about this technology domain is a pioneer. You are a pioneer. And as blockchain emerges into the public eye, we must never forget the stories told and untold that have made blockchain and cryptocurrency possible.

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