As much as gold is touted as the perfect store of value, it has its share of flaws. The biggest one is that it’s very heavy, which makes it expensive to transport securely and use in anything other than local commerce. That weight also means that gold is difficult to hide or bequeath, and that anyone with enough manpower, such as a government, can easily seize it. There were other stores of value that didn’t have those flaws, such as dentalia shells used as currency by Native Americans. So, why aren’t we using dentalia shells for transactions? Why is the entire world using fiat and not cryptocurrencies? That and other questions were in the mind of scholars such as Nick Szabo. Who is Nick Szabo? Computer scientist, legal scholar, and cryptographer who envisioned bit gold, a digital currency that inspired Bitcoin. He is also known for publishing many articles on cryptography and decentralization, such as Shelling Out: The Origins of Money and Trusted Third Parties are Security Holes, which can be seen as a direct inspiration for Bitcoin, and even talked about concepts implemented in the Bitcoin whitepaper, but while Project Bitcoin pegged him as the creator of Bitcoin, he denied this claim.
Nick Szabo’s Personal Life
Being a cypherpunk, we know little about who is Nick Szabo. We do know that he was born in 1964 and that in 1989 he graduated from the University of Washington with a degree in computer science and engineering. He made some money from the dot-com bubble and spent it to get a law degree in 2006 from George Washington University, which he used to work in a law firm. That work experience showed him that only large corporations can run a lucrative international business due to legal barriers and transaction costs accidentally or intentionally imposed by governments on international commerce.
Nick got interested in the problem and discovered that governments are needed for international trade and contract enforcement because they regulate three key areas:
- Coin, meaning the issuance and standardization of currency
- Commerce, meaning the enforcement of laws and contracts
- Cryptography, meaning the privacy of transactions and parties in them
We let governments regulate those three areas because we traditionally see them as trusted third parties that can settle nuanced disputes arising from contracts that deal with property rights. But, if people could make smart(er) contracts, that would let individuals do international trade with very few legal barriers, low transaction costs, and without trusting any government. If people could also invent a new currency, one that isn’t prone to inflation and could serve as digital gold, they could transact at their leisure and without government interference. To discover how the free market could do that, Nick produced a total of 408 essays and articles covering those three areas. This article compiles the most interesting ideas I found in Nick’s writing.
Nick Szabo is often hailed as the One True Satoshi, but he humbly shares the credit with others
From Freedom Tokens to Collaboration Coins
Nick was deeply interested in how Native Americans made and used a currency without mining technology, access to mints, or having a centralized government. We can learn a lot about who is Nick Szabo from his 2017 essay “Conflict and collectibles among the Yurok,” where he described a Native American tribe that foraged the coastline between California and Oregon and used tooth-like shells called “dentalia” as money. Those shell tokens were fashioned into bracelets, necklaces, headdresses, and similar accessories that were both worn as decoration to display the wearer’s wealth and used as bundles of money. That was exactly how gold was used by people who mined it — gold was forged into tiny pieces that could be linked together and worn as necklaces, bracelets, and other forms of jewelry, making it much easier to divide, link together, hide, and transport.
Depending on the length, dentalia shells were worth $7.50–150 in 2010s money, prompting the natives to tattoo different lines on their forearms to quickly check their value. The shells lasted for centuries, again just like gold, and represented a family’s entire fortune passed down from generation to generation. A Yurok could use dentalia to buy a fishing or hunting spot from any other native, repay the victim’s family if he killed someone, buy a wife, and settle any dispute or claim, all without having access to a government or needing to sign any kind of contract. Dentalia shells also made it impossible to pay for the little favors, trades, and tasks and thus disincentivized anyone from doing them. They provided the Yurok with extraordinary freedom but also kept them from creating a larger society where they could collaborate and push back European settlers who used smaller denomination coins and grew to eventually overpower them.
Nick Szabo Shelling Out: The Origins of Money
While dentalia shells were not taxed by any government, they were mentally taxing to use, leaving little mental energy for solving abstract problems or growing the society. Other kinds of native token money, such as eggshell beads and glass knives, had the same flaw, which Nick investigated in one of his seminal texts. Nick Szabo Shelling Out: The Origins of Money is a 2002 essay by Nick Szabo that explores how tribal societies used collectibles like shells and beads to exchange goods and settle disputes before government-issued currencies. These collectibles' durability, portability, and scarcity shaped the evolution of money. The article influenced the crypto sector by highlighting ideas like scarcity and trust in relation to money that are key to digital currencies like Bitcoin.
Wampum was a Native American necklace made out of clam beads and used as money even by settlers
In Shelling Out, Nick detailed the mental accounting problem he first brought up in his 1996 essay “The Mental Accounting Barrier to Micropayments,” where he basically said that micropayments allow for better commerce and a richer society, but if they are too small they become a mental burden on the users. He proposed that someone should come up with a reliable, automated, and customizable solution that lets each user define their own trade offers, create their own contracts that could be operated by computers and settled online, and make micropayments with minimal mental burden. That solution would be like accounting software that lets users choose what they want and the software would draft the contract for them, allowing even laymen to create and settle contracts and transactions without fees, middlemen, or extensive financial knowledge.
From Dumb Vending Machines to Smart Contracts
Nick then turned to code to refine the idea of computers doing contract-like interactions, showing us who is Nick Szabo as a computer scientist. While studying law, he noticed that contracts have to spell everything out because they are written in “wet code” that is interpreted by lawyers and judges when there is a dispute. A big problem with those contracts is that they all require a “meeting of the minds” to be valid, meaning that the two contracting parties understood each other’s terms. Different jurisdictions interpret that condition differently, giving big companies that can hire big legal teams to argue the nuances in court an advantage in international commerce contracts over individuals who can’t. Nick then got the idea to simplify and automate contracts by writing them in “dry code,” which is always interpreted the same way no matter which computer is executing it. Those smart(er) contracts would be cheaper and easier to set up and execute, basically working like a vending machine.
Whoever creates the first digital vending machine can expect to make quadrillions
In a typical vending machine, any combination of coins and bills goes in, the machine calculates the amount paid, decides if that is enough for the chosen item, and if so, the chosen item comes out without the customer seeing everything the machine is doing behind the screen. Anyone with money can use a vending machine without the intervention of a trusted third party, such as a government or a lawyer. Nick calls the vending machine a primitive ancestor to smart contracts because it has severe limitations, for instance requiring the customer’s to be near the machine and physical security to keep the items and the money secure. A smart contract could be installed into any physical or digital item, turning it into a vending machine that can be accessed remotely by any party to the contract, with the added ability of customizing the contract to treat some of its users favorably.
Smart Contracts on Steroids Aka. Smart Liens
Smart liens are essentially smart contracts in which two parties agree that one of them has a claim on the other party’s property if some condition from the contract is met. In a modern society with property rights, enforcing a typical lien takes government men with guns, but Nick proposed a cyberpunk solution that sounds straight out of “Johnny Mnemonic.” In his 1994 essay “Smart Liens,” Nick envisioned the existence of private companies called “Protection Agencies” (PA), who are basically mercenaries that would settle contract disputes. Two parties would approach a Protection Agency and ask it to install a smart contract containing a smart lien into a property, for example into a house’s utilities system, so that the lienholder could shut off the water or gas if the other party breached the terms of the lease or the sales contract. A smart lien could also be installed into movable property, such as a car, with sophisticated conditions.
When a bank gives Alice a car loan, a PA would install a smart lien into the car that would let the bank shut it off if Alice doesn’t repay the loan. However, the lien could have a final condition that said “when Alice pays off the loan, as verified by the blockchain record, permanently disable this lien.” Nick suggested that smart liens could be installed in other items and even in pacemakers so that they can be activated by the lienholder. A government could demand that each citizen gets one such pacemaker, which Nick admits is a “disgusting” idea. Here we learn more about who is Nick Szabo because he finds it more palatable that owners of Protection Agencies and government officials could have them installed so that they don’t go rogue or abuse their power. A simple majority vote of customers or citizens or heads of other Protection Agencies should suffice to deactivate the pacemaker of anyone in power, meaning that public officials would literally live or die by popular vote.
Smart contracts and smart liens would be published on the blockchain, which combined with encryption would guarantee their integrity and solve trust problems, but he admits that they wouldn’t be designed for VISA-like speed. Anyone who wants to use smart contracts and smart liens would have to accept the slow speed or he might as well go back to using VISA and PayPal. Nick notes that there is no magic solution for poor performance, meaning that anyone offering vague solutions that boil down to relying on trusted third parties, for instance “intelligent agents” or AI, should be ignored.
How a Government Regulates Commerce During Emergencies
A vending machine is a trusted third party that performs a local commercial transaction between the seller and the buyer of the items in the machine, but it has limited control of the situation. The transaction is simple, cheap, and doesn’t collect any personal information of the customer, representing a dumbed down version of a contract that is drafted, executed, and terminated on the spot. There is little risk of loss for either party to the transaction. The customer can only lose the bills and coins he put in, and the seller can only lose the stocked items and the money inside the machine. If the owner of the vending machine starts price gouging customers, they can go to a competitor. The problem arises when that trusted third party is a government, which doesn’t have any free-market competitors and is entitled to limit commerce even during disasters.
In his 2005 essay “Emergency Economics,” Nick detailed the problem with relying on a government to regulate commerce during natural disasters, such as hurricane Katrina. He didn’t mention the details, but from my research the situation was ten times worse than Mad Max. In areas struck by Katrina, the government regulation of commerce collapsed, allowing people there to charge whatever they wanted for supplies. However, price gouging laws discouraged anyone from supplying the area at an increased price that compensated for the higher risk of delivery. In other words, the best the government could do is isolate the disaster zone from normal commerce and let people stuck there survive the chaos with almost no resources the best they could. Those who huddled down in well-stocked, fortified buildings and shot anyone on sight had the best chances of surviving unscathed.
Horror movies pale in comparison to the aftermath of hurricane Katrina
Price gouging laws are an example of a transaction cost created explicitly to discourage the free market from operating in a disaster zone. There is no explanation for why those laws exist other than “it’s wrong to earn too much money on people’s misfortune during a disaster.” In California, that is as little as 10% over the non-disaster price and is triggered as soon as the state of emergency is declared, such as during forest fires, with the government able to extend it indefinitely. Therefore, relying on a trusted third party that regulates commerce is fine as long as it doesn’t become entrenched to the point it can outright ban commerce, but reliance on them is still a major security issue.
The Problem With Trusted Third Parties
In his 2001 essay “Trusted Third Parties are Security Holes,” we see more of who is Nick Szabo as he goes over the flaws of what he calls “trust hubs,” such as banks, governments, and other authorities that serve as certificate issuers and auditors. Once established, they get more and more complicated and costly to use because of the sheer number of lawyers, judges, and other professionals who rely on them staying complicated to make a living. Anyone who wanted to create a free market alternative to one of those trust hubs could easily say “we’ll just create a smart solution to keep it simple.” That smart solution would have to rely on a trusted third party, which would cause the same problem while being less efficient than whatever the government is already doing.
In Nick’s opinion, all trusted third parties, whether banks, Verisign, or some novel authority used for cryptocurrencies, are by design necessary but insecure, and the word “trusted” should always be read as “vulnerable.” Any protocol that deals with e-commerce has to involve trusted third parties and account for their security risks from the start while informing the users of the potential risks and vulnerabilities. In his 2000 essay “Designing Trusted Services with Group Controls,” Nick talks about how all attacks related to trusted third parties always come from insiders, not outsiders, and that splitting control over multiple parties can allow for better analysis of potential security vulnerabilities.
From Flammable to Cryptographically Secure Property Titles
The Yurok had no writing system and so couldn’t keep track of who owns what aka. property titles. Anyone with enough manpower could take their property from them, which is what all Native American tribes did to each other and what the European settlers did to them as well. Nick details the history of property titles in his 1998 essay “Secure Property Titles with Owner Authority,” writing that even in societies that did record who owned what, the very first thing a tyrannical government would do is burn all those records down to seize people’s property, most often land and real estate.
Nick’s idea for indestructible titles is that there are different online groups, called “property clubs,” that keep encrypted records of who owns what digital property. The main advantages of those groups would be that they are easy to join and cheap to leave, unlike with governments that make it hard to become a citizen and expensive to transfer property and leave. Anyone who joined a property group could see their rules and observe if they follow them. If they don’t, it would be easy to leave them and join another property group until finding one that is honest and doesn’t abuse its power. The property titles would also be easy to copy and verify by other property groups, which is in essence how a blockchain works, except that Nick adds an interesting twist by suggesting that ownership can expire if the owner doesn’t transfer it to himself from time to time.
Nick Szabo Bit Gold, The Oldest Bitcoin Idea?
Nick talked about a digital currency that doesn’t rely on trusted third parties in his 2005 essay “Bit Gold.” It would be lightweight, keep its value like gold, and rely on proof of work, an equation that is easy to do one way but very difficult to reverse. But, he says that all currency ever used had security problems that lead to theft, which includes inflation. Nick Szabo bit gold is a protocol for a decentralized digital currency first mentioned in 1998 in a private mailing list, and although it was never implemented it is widely regarded as a precursor to Bitcoin, given that it aimed to create a trustless monetary system by using cryptographic puzzles, proof-of-work, and a decentralized ledger, same as Bitcoin.
The three differences between bit gold and Bitcoin are:
- Bit gold would be timestamped
- The ownership of bit gold would be recorded in property clubs
- The value of bit gold would always be equal to the cost of mining it
Those three would prevent users from mining a lot of bit gold and crashing its price and governments from seizing it. In 2011, Nick wrote “Bitcoin, what took ye so long?” where he writes about trust and the nature of money. He admits there that Satoshi’s design makes more sense and is simpler than his ideas, but that hindsight is always 20/20 and that Bitcoin’s design was not as obvious as people think and that Bitcoin was about an unpopular goal.
Is Nick Szabo Satoshi? Project Bitcoin Says He Is
After Bitcoin’s success, people have tried to reveal the identity of its creator. In 2014, Aston University did a linguistic analysis dubbed “Project Bitcoin” that found Nick’s writing style closely matched Satoshi’s. Bitcoin also bears a striking similarity to bit gold, but Nick’s philosophy regarding the ideal cryptocurrency does not match Satoshi’s. Is Nick Szabo Satoshi? Probably not, and he has denied it himself, but he remains one of the strongest candidates because his writing style matches the Bitcoin whitepaper, and he has the technical expertise, cryptographic background, and strong views on decentralization that align with Satoshi’s ideology. Additionally, his work on bit gold, a digital currency concept from 1998 that closely resembles Bitcoin’s design, makes it possible that Szabo was a part of the group that worked on Bitcoin or at least inspired it.
PlasBit’s Role in the Evolution of Cryptocurrencies
We’re not going back to dentalia or gold any time soon because we have better options for commerce, contracts, and inheritance. Fiat still has its problems, such as governments printing too much of it and causing inflation, but it is accessible and convenient. Cryptocurrencies are in their infancy and we have a lot of work ahead of us to make them as accessible and convenient as fiat, but they are steadily evolving thanks to scholars such as Nick Szabo. Bitcoin, while not being the perfect cryptocurrency, represents the best work of the best coin, commerce, and cryptography scholars in the past 40 years.
A big part in the evolution of money is the existence of platforms such as PlasBit. While many in the crypto industry are there for the profit, which is fine, PlasBit is interested in talking about topics such as creating an indestructible currency that is secured by math rather than armed men and trusted third parties. The dentalia shells weren’t good enough and neither was physical gold, but there must be a cryptocurrency, something close to Bitcoin, that can give the next generation a better chance at living a carefree, fulfilled life regardless of what any government thinks of it. I don’t know what that form of money might look like, but I’m feeling that bit gold was the first version of it, that Bitcoin is the second, and that we’re on the verge of finding out the next and that it’s going to be glorious.
