Cypherpunk Bitcoin: Exploring the Connection Between the Two

10 MIN READ
Cypherpunk Bitcoin

Cypherpunks were rebels and visionaries who first saw the potential for a peaceful revolution in digital technologies. They detailed the appearance of digital currencies that will give people financial sovereignty and make them independent of any authority that can devalue the currency by creating it out of nothing. Cypherpunk Bitcoin embodies the vision of a digital currency that enables people to keep a lot of cypherpunk values while making transactions, such as privacy, cross-border transactions, and a strong code that stands behind a system for anonymous transactions. Satoshi Nakamoto was heavily inspired by the cypherpunk movement in creating Bitcoin, even referencing other cypherpunks' work in the Bitcoin whitepaper.

The natives of the Yap islands in Micronesia use stone disks called “rai” as their currency. The value and ownership of rai is maintained through a complete oral record of their creation and transfer. If rai ownership disputes arise, the natives use a consensus-based system to solve them. Without having a central authority that enforces the value of rai and that would eventually become so powerful as to oppress them, the Yap people have created a currency that gives them financial sovereignty. Rai stones cannot be created out of thin air and the passage of time does not reduce their value. Bitcoins are digital rai stones, an indestructible currency with a complete record of prior ownership, created thanks to cypherpunks.

Devaluation of Currency Through Inflation

In theory, currencies such as the dollar, yen, and euro have their value based on the production of goods and services of the people using them. For each unit of goods and services the people produce, the central bank should produce a dollar, yen, or euro. In practice, the central bank produces money before people produce goods and services and introduces it into the money supply with little oversight or transparency. These new units of money are essentially counterfeit and are worth the most the first time they’re spent. They dilute the money supply, making all other dollars, yen, and euros worth less.

We feel the effects of that as inflation, the overall rise in the cost of goods and services that eats away at our prosperity. Inflation is an unnatural phenomenon that has been happening all throughout history, and that has a potential to eventually unravel society when people can no longer afford anything, no matter how hard they work. Goods and services should always be getting cheaper because we’re all constantly becoming more and more efficient at producing them. But, no matter how much we toil, the central bank can devalue our work with ease. With digital money, it’s absurdly easy — someone at the bank types in a few digits in a computer and creates billions of units of money, devaluing the fruits of our work before we create them. We do end up owning more money but it is worth less and less.

How Proof of Work Prevents Inflation

The Yap people prevented inflation in a creative way — rai can be mined and their value is determined by the consensus of the people on how much work it took to create and move them. Some rai weigh several tons, requiring heroic efforts by a group of natives to mine, fashion into disks, and transport, increasing their value. In one instance, a huge rai transported by canoe sank to the bottom of the ocean. Nobody can see or touch it, but the Yap people agree that there is a rai down there and so it retains its value, making rai effectively indestructible. If some central authority produced rai stones en masse to gain control over the natives, the Yap people could decide they are worthless, thus preserving the value of their rai without violence.

Bitcoins can also be mined, with their value established mathematically through a principle called “proof of work.” Instead of common consensus, there is mathematical proof that there was work done to mine Bitcoins. If a bank wants to create Bitcoins to spend, it has to put in work to do so rather than conjuring them out of thin air, just like everyone else. First detailed in the early 1990s, the proof-of-work principle was defined to prevent spam and similar low-effort attacks on the integrity of any network.

You experience proof of work as those annoying “check this box to continue” Cloudflare prompts that pop up every once in a while as you’re surfing the internet. You also experience them as CAPTCHAs, which ask you to select boxes with bridges, bikes, or stairs before using a website. They are a literal request for proof of work, demanding that you work to prove that you are a human rather than a robot. With cypherpunk Bitcoin creation, proof of work maintains the integrity of the Bitcoin network and ensures that any attack on Bitcoin’s value bankrupts the attacker.

Earlier Digital Currencies

Digital currencies built on the ideas and concepts proposed by the granddaddy of the cypherpunk movement, David Chaum. In 1981, his seminal paper “Security Without Identification: Transaction Systems to Make Big Brother Obsolete” proposed many concepts that will materialize decades later in digital currencies. While he did not propose proof of work per se, he did propose the idea of leveraging computing power to guarantee privacy in transactions.

Proof of work went through several iterations in other cypherpunk papers after Chaum’s before Satoshi Nakamoto defined it in the 2008 Bitcoin whitepaper as a security feature. One of them was Adam Back’s 2002 “Hashcash: A Denial of Service Counter-Measure,” which states in the opening sentence that the motivation for “hashcash” was to:

“throttle systematic abuse of un-metered internet resources such as email, and anonymous remailers”

Anonymous remailers were servers set up and used by cypherpunks to route emails between them, acting much like Tor nodes do today. In fact, the security features of remailers inspired Tor’s security features, in particular the layered encryption that deters an attacker who might want to peel them back to reveal the content. Other cryptocurrencies, such as Monero, were also inspired by remailers and use layered security to maximize privacy.

Another reference in the Bitcoin whitepaper is Dai’s “b-money.” Published in 1998, this simple text document describes what would later become smart contracts. The gradual evolution of cypherpunk ideas and principles culminated in cypherpunk Bitcoin network security principles. In the Bitcoin whitepaper abstract, Satoshi summed up Bitcoin’s security as:

“The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”

That sentence, which sounds like something you might need a PhD to understand, should by now be fairly easy to grok. It means that each transaction is secured using math, encryption in particular, and there is provable work that goes into each transaction, guaranteeing its authenticity. Here are some features of proof of work that Satoshi described and that are currently implemented in Bitcoin.

Bitcoin’s Encryption Removes the Need for Banks

Cypherpunks were the first to recognize the power of easily accessible encryption. The declassification of encryption algorithms, which were prior to that considered munitions, made them usable by the common people using common hardware. Again, Chaum was the visionary who first proposed everyday authentication and encryption using computers, in particular in monetary transactions. That concept will drive the cypherpunk movement’s emphasis on privacy.

Section 1 of the Bitcoin whitepaper takes that idea to the next level, detailing the need for digital transactions over the internet that don’t rely on trusted third parties, such as banks. To minimize fraud, banks encroach on people’s privacy and constantly introduce new restrictions and fees. But, the accessibility of encryption makes trust and the intrusive bank model obsolete.

The implication is that, in a trustless environment, a currency must be built from the ground up to anticipate and prevent fraud, which was the motivation for cypherpunk Bitcoin deployment. Bitcoin safeguards the network through encrypted proof of work, preventing fraud and attacks on the integrity of the network without violence or harming human rights. Everyone’s identity is protected and everyone has the right to transact, which includes attackers on the Bitcoin network.

Bitcoin’s Proof of Work Makes Inflation Impossible

Dai’s paper also proposes a way to create cryptocurrency that would feasibly solve inflation. Each “account keeper” in the cryptocurrency network publishes a request to create money based on network upkeep costs. After bidding and computation, account keepers can create money in accordance with their requests.

In section 4 of the whitepaper, titled “Proof-of-work,” Satoshi states that:

“Once the CPU effort has been expended to make it satisfy the proof-of-work, the block cannot be changed without redoing the work. As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.”

Each miner of Bitcoin invests work into mining Bitcoin, gaining an equivalent share of Bitcoin in return. Anyone who wants to counterfeit Bitcoins to inflate their value would have to redo all the work of all Bitcoin miners. That means an attacker can’t counterfeit a single Bitcoin; the attacker has to gain total control of all Bitcoins and the entire network to subvert the cypherpunk Bitcoin network. That’s called a 51% attack and would require enormous resources that would not give a proportional outcome.

Bitcoin Lets Users and Miners Vote With Their CPUs

Bitcoin’s proof of work feature represents and improves democratic ideals as well, allowing people to vote with their CPUs, as it were. Satoshi Nakamoto writes in the whitepaper that:

“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote.”

Again, attackers are allowed to participate and vote with their computing power. They can attempt to compromise Bitcoin with the 51% attack, if they so choose. Nobody will expend any extra effort to stop them. Their privacy is still protected and they can give up whenever they want. Cypherpunk Bitcoin use is democratic and sets a level playing field where everyone can participate on fair terms, no matter their intentions.

Bitcoin Respects the Privacy of Users

In all papers and writings of cypherpunks and their predecessors, there is an intense emphasis on privacy. The cypherpunk Bitcoin ideal is to realize the part of the Cypherpunk Manifesto that says anonymous transaction systems are central to online privacy. That includes not just transacting money but messages as well. In that way, anonymously sending figures of money becomes the same as sending figures of speech online.

Section 10 of the Bitcoin whitepaper details the privacy safeguards inherent in Bitcoin. Instead of gathering personal information of all involved parties, the Bitcoin network keeps identities separate from transactions. Satoshi compares the publicly accessible information related to Bitcoin transactions as:

“similar to the level of information released by stock exchanges, where the time and size of individual trades, the "tape", is made public, but without telling who the parties were.”

It is possible that an attacker can figure out identities of wealthy Bitcoin users by diligently tracking and cross-referencing their transaction details. Still, people who send Bitcoin to each other can easily use new wallet addresses to protect their identities from being compromised.

Bitcoin Is Decentralized and Cross-border

A Cypherpunk’s Manifesto laments the existence of laws on cryptography but recognizes that government reach is limited, stating, “Even laws against cryptography reach only so far as a nation's border and the arm of its violence.” That implies cypherpunks realized encryption is a way to promote privacy globally and set a new standard of online anonymity.

Governments introduce nuanced regulations in an attempt to micromanage their currency, with banks following suit and deploying a slew of obscure rules that we don’t know exist until we violate them. Corporations do it too, with Adobe providing us with a hilarious example from June 2024 when it encroached on the privacy and sanity of its users. Laws and improvised corporate rules isolate people and restrict them from freely transacting with one another. There are no such nonsensical laws and rules with Bitcoin.

With Bitcoin, the code is the law. Whatever way Bitcoin is coded is how it applies to all, whether they live in the West or the East. Bitcoin transactions are global and there is no centralized authority that restricts who can send Bitcoin to whom. In addition, the lack of the central point of failure means Bitcoin cannot be regulated or banned by the government. However, governments can control how people convert Bitcoins into regular currencies.

cypherpunk bitcoin

Hashing Implementation in Bitcoin

Cryptography, which previously required bulky hardware and arcane software, was suddenly in the public eye thanks to cypherpunks clamoring for it. That led to optimization and mass production of encryption hardware, such as making specialized encryption chips, and streamlining of encryption software to the point it became widely accessible, which led to hashing as proof of work.

Satoshi’s idea of proof of work for Bitcoin was to leverage the ability of computers to, well, compute. Humans have trouble multiplying two numbers in real time, which is why they have to rely on banks to do the transactions for them, but computers excel at mathematical operations. By creating a computationally expensive currency, Satoshi discovered an entirely new security feature for financial transactions: hashing.

You can understand hashing as scrambling. The same way scrambling eggs irreversibly mixes yolks and egg whites, hashing takes a sequence of characters and mixes them in a way that is practically irreversible. However, the process is repeatable and the same sizes of yolks and egg white produce the exact same mix; changing a tiny bit of one or the other produces a different pattern of scrambling.

In Bitcoin’s case, hashing uses the SHA-256 hash algorithm developed by the National Security Agency in 2001. It has two advantages over similar hashing algorithms:

  • robust resistance to collision attacks
  • wide adoption

Combined, those two advantages make SHA-256 compatible with various software and hardware while providing strong security for the users.

It’s important to note that, as of 2024, SHA-256 hashing is computationally expensive to reverse using conventional hardware but it is not completely impossible, it would just take somewhere in the range of 10 to the 57th power years. In the future, we could witness the appearance of quantum computing, which could make easy work of Bitcoin’s security, cracking SHA-256 in a matter of minutes. Until then, hashing as implemented in Bitcoin is presumed to be safe.

Privacy of Bitcoin vs Monero

Cypherpunks advocated for privacy but not secrecy. The difference is that the former is optional while the latter is mandatory; people need privacy but tyrants need secrecy. The idea of sending digital money privately, which was previously unthinkable, suddenly became possible with Bitcoin, which allowed its users to reveal their identities if they so choose.

Another fascinating privacy-centric cryptocurrency is Monero (XMR). Launched in 2014, it has garnered attention due to its emphasis on privacy. Monero takes the cypherpunk concept of remailers to the next level and provides extraordinary protections for the identities of senders and receivers in any transaction. Instead of using public wallet addresses, like Bitcoin does, Monero uses disposable addresses to route transactions. The Monero blockchain does contain a record of all transactions but they too are encrypted. Only people who send Monero to each other have the secret view key that reveals who sent Monero to whom.

Sadly, Monero’s privacy features garnered too much government attention. In September 2020, the IRS offered a bounty of up to $625,000 to anyone who can develop a prototype for tracking Monero transactions. Allegedly, one such tool has already been developed by CipherTrace, a blockchain analysis company, and is currently in use by the DHS to trace transactions. In addition, in April 2024 the Monero network experienced a “black marble” hack attack that spammed the network with low-fee transactions. More on that in a future article that will thoroughly analyze Monero.

Smart Contracts

Another privacy-enhancing feature made possible by Bitcoin is smart contracts. First deployed by Ethereum, smart contracts represent a way for two parties to anonymously contract with each other and have the contract terms enforced by the crypto network. The Ethereum whitepaper, published in 2014, states the need to create decentralized escrow and contract services, with Ethereum being the currency in which users pay the fee for smart contract activation and execution.

So far, Bitcoin is not capable of smart contracts but there are Bitcoin Improvement Proposals that include the concept of smart contracts. They can allow funds to be sent to a wallet and released only after a certain time has elapsed or when a certain block is created on the blockchain. Ethereum smart contracts are much more complex and provide more functions, which leads to high transaction fees and numerous vulnerabilities when deployed by the average user.

The Fundamental Human Right to Privacy

All of the above privacy features stem from the need to have one’s free will protected in cyberspace. Not only is data of all kinds gathered about our activities, but that is done with a nonchalant attitude and by automated systems that also work offline. As detailed in the 2012 The New York Times article “How Companies Learn Your Secrets,” shopping centers do statistical analysis of our shopping habits to discover our secrets. In that article, you can read how Target discovered that women who buy particular items, such as lotion, are most likely pregnant and can be targeted with baby product ads. Target was actually able to know the woman is pregnant even when she herself didn’t know it.

Companies are doing nothing to protect the common people or their rights online. In fact, they put themselves as censors and arbiters of correctness without any reason and without anyone asking or wanting them to do so. For example, if you try to edit a photo of a US dollar in Photoshop, the application will show an error:

“This application does not support the editing of banknote images.”

The hilarious part is that there is no blanket law against editing banknote images; that restriction is entirely Adobe’s doing. There is a law on representing USD banknotes, but its restrictions are simple and can be found on the Central Bank Counterfeit Deterrence Group (CBCDG) website:

  • the banknote must be either smaller than 75% or larger than 150% of the real banknote
  • the banknote must be one-sided
  • all materials used to create the copy are destroyed or deleted after the copy is made

In June 2024, Adobe also changed its terms of service to give itself the right to view and analyze the content users generated in its programs, including Photoshop, with indications that is to train Adobe’s machine learning model. After user backlash, Adobe walked back on some terms. The problem was that users couldn’t even uninstall Adobe programs without accepting the updated terms of service.

Plasbit’s Dedication to Privacy

In the environment of oppressive surveillance, where companies such as Adobe create walled gardens and milk the captive audience dry, every company that protects and respects user privacy is invaluable. Plasbit represents one such company that cherishes your privacy and strives to give you the freedom to transact with whomever you wish.

We at PlasBit believe that privacy is not a privilege but a fundamental human right without which there is no civilization. Cypherpunks were the first to elaborate on ideas that were on everyone’s mind but nobody else dared say them. They were the ones who popularized the idea of trustless digital systems that are invulnerable to manipulation or intrusion as the basis of our digital existence. Their vision was that of a global digital society unified by the shared ideal of financial sovereignty and total freedom of transacting.

Plasbit has set as its core tenet the idea of respecting user privacy and promoting digital anonymity. We urge you to do the best you can to safeguard all your information, including that related to your shopping habits, from analysis and abuse. We believe you have the right to decide where and how you provide private details about yourself. We will never be a part of the corporate surveillance network that shares and bids for user data.

Bitcoin as a New Paradigm of Transacting

It is mind-boggling that government-backed currencies, such as dollar, yen, and euro, don’t have half the features that rai disks or Bitcoin have. But, you can see that is intentional — governments and banks aren’t interested in creating strong currencies unless they can wield them to micromanage the population. We the people should be able to vote with our money, to rest assured it will retain its purchasing power, and to have our transactions completely anonymous. Bitcoin is a currency that does all those, which is why governments and banks try to subvert and control it; Bitcoin reveals their indifference to human rights.

No matter what happens to Bitcoin, it is a cypherpunk experiment that has proven itself a roaring success. Bitcoin has provided us all with invaluable insights into the financial market of the 21st century, especially as a new paradigm of transacting that is entirely run by its users. Governments all over the world are already announcing their digital currencies, dubbed CBDC, as an attempt to supplant Bitcoin. Let’s hope at least one CBDC has the features the Yap people figured out for rai in the Stone Age.

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