Digital Gold (32 page)

“I thought I was lucky to have lived through that once—and I can't believe I get to see it again,” he said. “This is just the spot. It feels exactly the same way—it was so hard to explain.”

In the meantime, he said there would be setbacks as governments banned it and banks made it harder to transfer dollars and pesos to Bitcoin companies.

“I'm patient. This takes a decade, or two decades. I'm not going to go home because this takes one more decade.”

From Buenos Aires, Wences flew to Brazil for his first vacation in what seemed like years. Belle and the three children met him
and they stayed at a house near the beach in Rio and caught all the World Cup games they could. But even before the World Cup was over, Wences and the family were up in Utah for the latest exclusive conference held by Allen & Co., this one an even higher-profile event than the one in the spring, drawing Jeff Bezos, Bill Gates, and Rupert Murdoch.

There had been lots of good news for Bitcoin in the weeks since he had been in Argentina.
The United States Marshals Service had auctioned off the 29,655 Bitcoins it had seized from Ross Ulbricht, and the winner was a major venture capitalist, Tim Draper, who was working with the startup that employed Nick Szabo. Once U.S. government officials had sold Bitcoins it would be hard for them to treat Bitcoin as an outlaw currency. The Winklevoss twins, meanwhile, had made their latest regulatory filing for their Bitcoin exchange-traded fund, which was now set to trade on the Nasdaq Stock Exchange under the ticker symbol COIN. The day before the Allen & Co. conference began,
Wences officially announced the $20 million he had raised from Reid Hoffman, Max Levchin, and several other investors, making him the best-funded Bitcoin company in the world, according to publicly released data.

At the Allen & Co. conference, Wences was given one of the speaking slots before Jeff Bezos and Warren Buffett took the stage. Wences gave what was becoming a standard talk, beginning with the history of money, and going on to discuss the potential for Bitcoin to provide financial services to poor people who had long been shut out. He touched on Xapo only briefly, at the end. After Wences came down and took a seat with Belle, Bezos said from the stage that it was the kind of talk that kept him coming to these events.

In the hallway walking to lunch, after the Bezos-Buffett conversation, Wences spotted Bill Gates, who had been notably reticent about Bitcoin. Wences knew that Gates's multibillion-dollar
foundation had been making a big push to get people in the developing world connected financially, and Wences approached him to explain why Bitcoin might help his cause. As soon as Wences broached the topic, Gates's face clouded over, and there was a note of anger in his voice as he told Wences that the foundation would never use an anonymous money to further its cause.

Wences was somewhat taken aback, but this was not the first time he had been challenged by a powerful person. He quickly said that Bitcoin could indeed be used anonymously—but so could cash. And Bitcoin services could easily be set up so that users were not anonymous. He then spoke directly to the work that Gates was doing, and noted that the foundation had been pushing people in poor countries into expensive digital services that came with lots of fees each time they were used. The famous M-Pesa system allowed Kenyans to hold and spend money on their cell phones, but charged a fee each time.

“You are spending billions to make poor people poorer,” Wences said.

Gates didn't just roll over. He vigorously defended the work his foundation had already done, but Gates was less hostile than he had been a few moments earlier, and seemed to evince a certain respect for Wences's chutzpah.

Wences saw the crowd that was watching the conversation, and knew he had to be careful about antagonizing Bill Gates, especially in front of others. But Wences had another point he wanted to make. He knew that back in the early days of the Internet,
Gates had initially bet against the open Internet and built a closed network for Microsoft that was similar to Compuserve and Prodigy—it linked computers to a central server, with news and other information, but not to the broader Internet, as the TCP/IP protocol allowed.

“To me it feels like you are trying to get the whole world connected with something like Compuserve when everyone already
has access to TCP/IP,” he said, and then paused anxiously to see what kind of response he would get. What he heard back from Gates was more than he could have reasonably hoped for.

“You know what? I told the foundation not to touch Bitcoin and that may have been a mistake,” Gates said, amicably. “We are going to call you.”

After Wences got back to California, he received an e-mail from the Gates Foundation, looking to set up a time to talk. Not long after that, Gates made his first public comments praising at least some of the concepts behind Bitcoin, if not the anonymity.

And so Bitcoin and its believers attracted one more person who was willing to give this new technology a look, and remain open to the possibility that the whole thing wasn't, at least, entirely crazy.

Anyone joining the Bitcoin network can generate his or her own Bitcoin address (generally a string of thirty-four letters and numbers), and a corresponding private key (generally a string of sixty-four characters).

As an example, one actual Bitcoin address is:

16R5PtokaUnXXXjQe4Hg5jZrfW69fNpAtF

The private key for this particular address is:

5JJ5rLKjyMmSxhauoa334cdZNCoVEw6oLfMpfL8H1w9pyDoPMf3

Only the person with this private key can sign off on transactions from that address (the address is empty so don't bother trying).

Each Bitcoin address has one and only one private key. The relationship between the private key and the address is determined
by a series of complex math equations, which makes it essentially impossible to work backward from the public Bitcoin address to find the private key.

A Bitcoin user can generate endless numbers of Bitcoin addresses and private keys. There is no cost for doing so. The length of the addresses and the sheer number of potential addresses ensure that it is all but impossible for the same address to be generated twice.

With a private key, a user, let's call her Alice again, can send money from her address without ever sharing the private key with anyone else. Rather than sending out her private key, Alice puts her private key into software on her own computer, along with details of her transaction. Without sending this information to the network, the Bitcoin software on Alice's computer runs the information through a series of complicated math equations that spits out a special code, often referred to as a digital signature. This part of the process can happen even if Alice's computer is offline. It is this digital signature—a unique product of her private key and the transaction taking place—that Alice sends out to the network along with her transaction, much like a signature on a check.

The computers that get Alice's digital signature are unable to work backward to get Alice's private key, thanks to the mathematical innovations involved. But the computers can put Alice's digital signature and her public Bitcoin address into another series of complicated math equations and verify that the digital signature was, indeed, created by the private key corresponding to the public address. Again, these are very sophisticated mathematical
manipulations that happen on both sides of this, on one side to generate the signature and on the other to verify it.

It is necessary for the computers on the network to verify every transaction because there is no central authority to do this work. Once the computers do verify that Alice has the right private key, they then check that Alice's Bitcoin address has the coins she is trying to send. The computers on the network do this by scanning the record of all previous Bitcoin transactions coming to and from the address Alice is using.

Satoshi saw that it would be problematic if each computer on the network recorded every transaction as it arrived. A transaction might reach one computer before it reached another computer on the network, leading to disagreements about the balance in each address. Bitcoin needed to have one definitive record of when each transaction occurred, and Satoshi came up with a clever way to achieve this through the use of a kind of ongoing contest that any member of the network could compete in.

To win the contest, all the computers on the network would compile recent transactions, as they were sent around the network, into long lists, which were referred to generically as blocks. After compiling the transactions into a block, a computer would then run the block through yet another specialized math equation, known as a hash function, which can take any data—the Gettysburg Address or your name—and turn these data into a unique sixty-four-character digest. The computers taking part in the Bitcoin contest are looking for a block that can be put into a hash function known as SHA 256 and generate a sixty-four-character digest with a specific number of zeroes at the beginning. If, for
instance the computers are looking for a digest with five zeroes at the beginning, either of these digests would be a winner:

000006d77563afa1914846b010bd164f395bd34c2102e5e99e0cb9cf173c1d87

Or

000007ac6b77f49380ea90f3544a51ef0bfbfc8304816d1aab73daf77c2099319

Because SHA 256, like other hash functions, is essentially impossible to reverse-engineer, it is impossible to tell what sort of block will lead to a digest with five zeroes at the beginning.

Given that SHA 256 and other hash functions always generate the same digest from any particular input, if every computer put the same transactions into their block, every computer would get the same digest out the other end. In order to differentiate their blocks, in the hope of finding a winning block, each computer would be tasked with adding a random number onto the end of the block. Because of the sensitive nature of hash functions, changing the random number at the end of the block from 20 to 22 could potentially change the digest from a digest with one zero to a digest with ten zeroes at the beginning. If one random number didn't lead to a digest with the desired number of zeroes, the computer would try the block with another random number attached to see if that worked. All the computers hoping to win would keep trying out new random numbers—and adding incoming transactions—until one computer found a block that led to a digest with the correct number of zeroes. Because finding an answer involved trying out random numbers, this contest was more a game of luck than a game of skill—but the computer that could run guesses through
the hash function fastest would increase its chances of winning, just as a person with twenty lottery tickets has a better chance of winning than a person with only one.

The number of zeroes required to win the contest was somewhat inconsequential but made it easy to adjust the difficulty of the contest and ensure that new blocks arrived approximately every ten minutes. If computers were winning more often than every ten minutes, the Bitcoin software could adjust and demand that computers find a digest with more zeroes at the beginning. If computers were not winning frequently enough, the software could adjust and allow winners to have less zeroes. As the contest became harder, it required more high-powered computer hardware to win it.

When a computer did find a winning block, it would send the winning block around the network, so that the other computers could verify that the block did indeed generate a digest with the desired number of zeroes at the beginning. The computers would then add the winning block to the blockchain held on all the computers, thus recording the list of transactions included in the block. That block became the official record of all transactions that occurred since the previous winning block. If the winning block left out a few transactions that were included in the blocks created by other computers, those transactions would not be recorded on the blockchain and would be left out for the next round of blocks. In addition to the transactions and the random number, the blocks also included a reference to the previous block and data on the state of the Bitcoin network, so that all this information would also be recorded on the blockchain.

The creative method for arriving at a single, communally agreed upon record of transactions provided a long-sought solution to a
conundrum known as the Byzantine Generals Problem. Before Bitcoin, computer scientists struggled with how to build a reliable network of unrelated people, if some of the people could not be trusted. The method of building a blockchain, with each block coming from just one member of the network, and disagreements being solved by majority rule, solved this problem.

When a computer generated a winning block, it also won a bundle of new coins—50 Bitcoins when the system first began. These coins were created in a clever way. In essence, when computers were generating the list of transactions in a block, they included, in their list of transactions, a transaction granting one of their own Bitcoin addresses 50 Bitcoins out of thin air. When a block won the lottery, and was added to the blockchain, this seemingly fictional transaction was turned into a reality, and the address in question had 50 more Bitcoins attached to it. By making it onto the blockchain the transaction was made real. The transaction that created new Bitcoins would be referred to as the coinbase of each block. If a computer tried to grant itself more than 50 new Bitcoins, the whole block would be rejected by the other computers, even if it generated a digest with the correct number of zeroes.

L
ike Bitcoin, this book was an act of group invention made possible by many wonderful people. Andrew Ross Sorkin brought me into the job that allowed me to start writing about this fascinating topic. Later on he saw that there was a bigger story to be written about Bitcoin and pushed me to write it. I can't thank him enough. My agent, Andrew Wylie, gave me the confidence I needed to take this idea out into the world and find it the right home. At HarperCollins, Tim Duggan immediately understood what I was hoping to do with this book, and Jonathan Jao made sure I did it. Both of them were the kind of editor every young writer dreams of finding. Emily Cunningham was my guide and good fairy through the entire process. I am also grateful for the help I was given by Joanna Pinsker, Stephanie Cooper, and the rest of the staff at HarperCollins.

This book is, at its core, the story of several people who opened up their lives to me. I have to thank, most of all, Wences Casares, Barry Silbert, Bobby Lee, Charlie Shrem, Roger Ver, Martti Malmi, Gavin Andresen, and Tyler and Cameron Winklevoss.
But the story wouldn't have come together without the time and cooperation of Fran, Hal, and Jason Finney; Dan Morehead; Patrick Murck; Erik Voorhees; Jesse Powell; Mark Karpeles; Mike Hearn; Naval Ravikant; Jed McCaleb; MiSoon Burzlaff; Nick Szabo; Reid Hoffman; Eric O'Brien; Federico Murrone; Charlie Lee; Amir Taaki; Jamileh Taaki; Alex Rampell; Emmauel Abiodun; Nicolas Cary; David Marcus; Jorge Restrelli; Bill Tanona; Pete Briger; Jamie Dimon; Max Neukirchen; Andy Dresner; Paul Walker; Marty Chavez; Alexander Kuzmin; Nicole Navas; Lyn Ulbricht; Josh Dratel; John Collins; Jennifer Shasky Calvery; Sebastian Serrano; Chris Larsen; Chris Dixon; Balaji Srinivasan; Marc Andreessen; Kim Milosevic; Brian Armstrong; Fred Ehrsam; John O'Brien; Belle Casares; Patrick Strateman; Yifu Guo; Marcie Braden; Alex Waters; Brian Klein; Nejc Kodric; Paul Chou; Jeff Garzik; Adam Back; Laszlo Hanecz; Leon Li; Gil Lauria; Monica Long; Michael Keferl; Daniel Kelman; Jack Smith; Tim Swanson; Rui Ma; Jack Wang; Ling Kang; Huang Xiaoyu; Kathleen Lee; Ayaka Ver; Alex Likhtenstein; Jeremy Allaire; Matt Cohler; Larry Lenihan; Fred Wilson; Michael Goldstein; Phil Zimmerman; Yin Shih; Perry Metzger; Tony Gallipi; Bruce Wagner; and Justin Myers. I also was lucky to be writing about a topic that had already been covered by smart journalists, academics, and filmmakers like Nicholas Mross, Joshua Davis, Kevin Roose, Eileen Ormsby, Izabella Kaminska, Felix Salmon, Andy Greenberg, Sergio Demian Lerner, Sarah Meikeljohn, Nicolas Christin, Susan Athey, Adrianne Jeffries, and Andrea Chang.

This book immensely benefited from my first readers, some of whom are also my best friends: Teddy Wayne, Peter Eavis, Lev Moscow, Mark Suppes, David Segal, Benny Gorlick, Alex Morcos, and Ben Davenport. My friends Danielle and Alex Mindlin, and Gal Beckerman and Deborah Kolben gave me lots of good advice
and listened to my griping. Mirta Kupferminc and her family graciously put me up while I did my work in Argentina.

I'm lucky to work for the
New York Times
and DealBook, where the exceptional staff make it exciting to go to the office each day. In my time at the paper, Arthur Sulzberger Jr., Jill Abramson, and Dean Baquet have kept the paper dedicated to the ideals that made it a place I wanted to work for from the time I became a journalist. Several wonderful editors helped me develop my ideas and put up with my absence while I developed them into a book. They include Jeffrey Cane, Dean Murphy, Vera Titunik, David Gillen, and Peter Lattman, who brought me into my very first Bitcoin story. My colleagues Charles Duhigg, Jim Stewart, Ron Lieber, Barry Meier, and David Gelles shared wisdom that made it a bit easier to navigate the book-writing process for the first time. I am also forever indebted to the editors and journalists who gave me a shot at various points in my career and helped me grow. The list begins with J.J. Goldberg and extends to Ami Eden, Alana Newhouse, John Palattella, Geraldine Baum, Davan Maharaj, Tom Petruno, and Larry Ingrassia, among others.

This book was, in the end, possible only because of my family: Lewis, Sally, and Miriam Popper; Juliana, Robbie, Florence, and Beatrice Dapice; and my broader family, the Strauss clan, with special thanks to Jona, Martin, and Alanna, who helped care for my family when I could not. My son, August, put up with too little time with his father and gave me an incentive to finish. My beloved wife, Elissa, did everything that no one else could do for me, and more, allowing me to accomplish things that would be impossible without her.