Digital Gold (7 page)

The WikiLeaks blockade went to the core of some of the concerns that had motivated the original Cypherpunks. Bitcoin, in turn, seemed to have the potential to counteract the problem. Each person on the network controlled his or her coins with his or her private key. There was no central organization that could freeze a person's Bitcoin address or stop coins from being sent from a particular address.

A few days after the WikiLeaks blockade began,
PCWorld
wrote a widely circulated story that noted the obvious utility of Bitcoin in the situation:
“Nobody can stop the Bitcoin system or censor it, short of turning off the entire Internet. If WikiLeaks had requested Bitcoins then they would have received their donations without a second thought.”

It wasn't clear if Bitcoin could actually be used in this particular instance, but whatever the practical possibilities, the blockade was helping elevate the debate around Bitcoin beyond the rather narrow issues of privacy and government money-printing that had been dominant in the early days. Here was a broader philosophical issue that could attract a wider audience, and the forums were full of new members who had been drawn in by the attention. One
new user, a young man in England named Amir Taaki, proposed making Bitcoin donations to WikiLeaks. Amir argued this could raise Bitcoin's profile at the same time that it could help WikiLeaks raise money.

This kicked off a vigorous debate on the forum. A number of programmers worried that the Bitcoin network was not ready for all the traffic—and government scrutiny—that might come if it started to be used for controversial donations.

“It is extraordinarily unwise to make Bitcoin such a highly visible target, at such an early stage in this project. There could be a lot of ‘collateral damage' in the Bitcoin community while you make your principled stand,” one programmer wrote.

Satoshi eventually ended the debate. When someone on the forum wrote, “Bring it on,” Satoshi responded forcefully:

No, don't “bring it on.”

The project needs to grow gradually so the software can be strengthened along the way.

I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage.

This was enough to convince Amir.

“I've done a U-turn on my earlier view and agree. Let's protect and care for Bitcoin until she leaves her nursery onto the economic killing fields.”

This was one of an ever-diminishing number of communications from Satoshi during the fall of 2010. Messages from both Satoshi and Martti had been increasingly rare. In Martti's case, after a year of working on Bitcoin free, he needed a regular source of income. In September, two months after the Slashdot story, he
took a full-time job with a firm that analyzed social-media data. On top of having a full schedule, Martti also saw that he was no longer needed. Gavin and a few others were taking over many of the day-to-day tasks that Martti had previously handled. And the chat channels were crawling with people ready to help out.

Satoshi's gradual fading was less explicit. He still posted occasionally to the forums when there were specific questions, but he never appeared on the chat channel and increasingly shifted to infrequent private communications with Gavin and just a few other developers. In December, Satoshi asked Gavin if he would mind having his e-mail address posted on the Bitcoin website, as a point of contact. After his own name went up, Gavin noticed that Satoshi's e-mail came down.

When the last public forum post came from Satoshi, on December 12, 2010, there was nothing marking it as such. Announcing the latest version of the software, version 0.3.19, the post was markedly different in tone from those early messages, selling the world-beating potential of Bitcoin. The main sentiment now was a warning that Bitcoin was still extremely susceptible to denial-of-service attacks, which overwhelm a system with message traffic.

“There are still more ways to attack than I can count,” Satoshi wrote in the brief note.

This came just days after Hal Finney checked back in for the first time since early 2009. His disease, ALS, had progressed quickly and he was now largely confined to the family living room, in a special setup his family had concocted so that he could continue working on a computer.

Hal made an unassuming return to the community with some relatively dry comments about patterns in the price of Bitcoin and the possibility of using Bitcoin's blockchain as a new kind of database. He was as enthusiastic as ever about the network.

“I'd like to hear some specific criticisms of the code. To me it
looks like an impressive job, although I'd wish for more comments,” he wrote on the forum. “This is some powerful machinery.”

This provoked Satoshi's second-to-last post: “That means a lot coming from you, Hal. Thanks.”

This exchange set off a discussion among people who had never heard Hal's name before.

“Who is Hal on the forum?” one user wrote. “Satoshi seemed to know of him.”

The question quickly gave way to the bigger mystery: Who is Satoshi?

“Is he a real person? ;-)” a forum user asked.

“Hmm, there are almost no results for Satoshi unrelated to Bitcoin,” another user wrote after some quick research.

This set off the first stages of a hunt for Satoshi that would continue for years. People on the chat channel began debating the available details about Satoshi and their significance. It was noted that Satoshi occasionally used British spellings and words like “bloody.” There was also a fragment from a British news story written into the first block of Bitcoins created by Satoshi's computer.

A Bitcoin user in Japan noted that Satoshi was a common name in Japan, but he argued that Satoshi was unlikely to be Japanese given that Satoshi had never used Japanese words and had always written his name with the family name last, contrary to Japanese tradition.

“Maybe this is a gambit to trick us to think he's not Japanese,” another user wrote.

“I like the pseudonym theory the best. It's so much cooler for someone to have a secret identity than just a boring name,” someone wrote.

“Jesus, this is a great story. I'm amazed the NY Times hasn't picked up on it yet,” another poster chimed in.

In the early days, Martti had never asked Satoshi any personal questions but had assumed that Satoshi Nakamoto was probably not a real name. Martti's access to the Bitcoin websites allowed him to see that Satoshi was joining the sites through a Tor network that obscured his geographic location and IP address.

Gavin had asked Satoshi some personal details in his first e-mail, but Satoshi ignored the questions and Gavin never pressed for more.

One regular forum user asked Satoshi: “Suppose, god forbid, you were no longer able to program or were unavailable due to unknown circumstances. Do you have a procedure in mind to continue Bitcoin in your absence?”

Satoshi didn't answer, but others on the forum noted that because Bitcoin's software was open source, available to all the users, Satoshi's involvement shouldn't matter: “As long as the source code remains open, that is sufficient. If there is a need, and enough interest, the community will provide. Trust in the community :)” one developer wrote.

Satoshi was, in many ways, just as powerless, or powerful, as every other user on the network. All the coins were on the communal blockchain, but only the person with the private key corresponding to each address on the blockchain could use the coins in that address. Satoshi could try to change the software in some way that would give him more control, but doing so wouldn't gain traction unless a majority of the network adopted the changes.

Still, Gavin, who was now perhaps the most central figure in Bitcoin, knew that the platonic ideal of open source software was somewhat more complicated underneath the surface. While anyone could propose changes to the protocol, he and Satoshi were still essentially the only people who could sign off on changes—and this gave them an unusual amount of power in the system. What's more, while Satoshi had written a program designed to
eliminate the need for trust, users of the technology still had to have faith that it would work as intended. On the forum, Gavin wrote: “Trust is Bitcoin's biggest barrier to success. I don't think there is anything we can do to speed up the process of getting people to trust that Bitcoin is solid; it takes time to build trust.”

At this point, though, the primary cause for distrust was not the lack of information about Satoshi. Satoshi's anonymity, if anything, seemed to increase the level of faith in the system. The anonymity suggested that Bitcoin was not created by a person seeking personal fame or success. What's more, Satoshi's absence allowed people to project their own vision onto Bitcoin.

Those who could cause problems, though, were the very people who were making Bitcoin grow. The network was expanding, but the people among its growing ranks would also pose the greatest threat to Bitcoin and the trust it needed.

September 2010

T
he Sony Vaio laptop that was the nerve center of the biggest business in the Bitcoin world in the fall of 2010—Mt. Gox—sat on a square wooden table, under a roof made out of dried palm leaves. An oblong swimming pool was just feet away.

The founder of Mt. Gox, Jed McCaleb, had moved to Nosara, a Costa Rican beach town, less than two months after starting the exchange. Lonely in their isolated New York estate, he and MiSoon didn't want to spend another winter cooped up with their two small children. In Nosara they found a house near the beach, with a Montessori school for the children, an opportunity for Jed to finally perfect his surfing, and a hut in the backyard where he could work.

But the booming new business was not cooperating with their plans for a quiet tropical life. Just ten days in, he had seen his first day with 1,000 Bitcoins traded and about ten days after that he saw his first day with over 10,000 Bitcoins traded, meaning that over $1,000 changed hands that day. Jed was making 0.5 percent from each side of every trade, a nice reward for something that
required little work. But the flow of money in and out, particularly from PayPal, was causing headaches.

Jed suffered from an issue common in any business that takes credit cards or PayPal. All the traditional payment networks allow customers to dispute charges and can take money back from merchants, like Jed, even after transactions go through. This was one of the issues that Cypherpunks had wanted to address in creating digital cash—owing to the anger about how much power the system of so-called chargebacks gave to the credit card companies of the world. Bitcoin itself did not allow charges to be reversed, but if Jed sold Bitcoins via PayPal to someone who then disputed the PayPal payment, Jed could lose the PayPal money and not be able to get the Bitcoins back. Within a month, Jed acknowledged he was defenseless against this.

“I'm just eating the charge which sucks so please, please don't do this,” he pleaded on the forum.

After this post, the problem got worse, not better. Jed tried to resolve disputes before they escalated, even if it meant losing money, so he didn't have his PayPal account shut down altogether. But one morning he opened up his laptop and found that PayPal had done just that, leaving him without an easy way to get money from customers. Meanwhile, people who had money stuck in Jed's frozen PayPal account complained about the difficulty of getting it back.

“I do this in my spare time for free so don't get all uppity,” Jed wrote to his critics.

This was clearly not what Jed signed up for when he opened Mt. Gox. He had never intended for it to become a full-time job. He was motivated by working on interesting challenges, and Mt. Gox was instead becoming a series of boring and stressful problems. Like many people interested in big challenges and bold solutions,
Jed got bored by the details of seeing those solutions to their end—something that would come back to haunt the community later.

On the hunt for someone who could help relieve him of the burden of work on Mt. Gox, Jed began chatting online with a user named MagicalTux, whom Jed soon came to know as Mark Karpeles. Mark was almost always online because it was one of the only places where he felt comfortable in the world. A chubby twenty-four-year-old, Mark had been raised in France alternately by his mother and grandmother, who didn't get along and continually moved him between schools. At age ten, Mark was sent to a Catholic boarding school in the Champagne region of France—a school he looked back on with fear and anxiety. Even as a youngster, Mark had tremendous difficulty with human interaction, while the logic of the computer had spoken to him naturally. He would ace his math classes—and could assemble and disassemble his calculators—but he struggled with literature and the humanities, and eventually dropped out of school, not long before he was arrested for some of his hacking activities. Since then, he'd had a peripatetic lifestyle, looking for a place where he could feel at home. He first tried Israel, thinking it might help him get closer to his Catholicism, but he soon felt as lonely as ever, and the servers he was running kept getting disrupted by rocket fire from Gaza. Back in France, he got a job as a programmer but soon fell out with his boss. During this period, he would make rather melancholy posts to a generally unread blog in which he discussed his situation.

“To tell the truth, I always felt a sort of emptiness in my existence, somewhat as if I wasn't really in the right place, or as if I was missing something I needed in order to really live, and not just survive,” he wrote in 2006.

Mark finally got a chance to visit Japan, which he had been drawn to since reading a series of Manga comics his mother had
given him. When he arrived the first time and checked into his capsule hotel, the part of him that had always been afraid in France was put to rest by the stoicism and politeness of Japanese culture. It didn't hurt that the girls in Japan seemed to actually respect the fact that he was a programmer.

By the time he met Jed online, Mark had lived in Tokyo for more than a year and set up his own web-hosting company that rented out server space. He learned about Bitcoin from a French customer in Peru who wanted an easier way to pay the bills Mark sent him. As Mark dived into Bitcoin in late 2010, he discovered that it had already attracted an unusually cohesive and friendly online community, the sort of social setting in which he could feel comfortable. He would engage in endless chats at all hours about everything from obscure Japanese payments systems to the identity of Satoshi, who Mark was confident was not Japanese.

“I'm a coder and already worked with tons of japanese people here, and the way the code is made is also completely different from anything I ever saw in japan (but not so different from more western stuff),” Mark wrote one night on the chat channel.

Online, Mark had a brash cockiness that he never showed in real life—so brash, in fact, that it was occasionally off-putting. But he lived alone with his cat, Tibanne, and was always available and willing to help out. He volunteered to help Martti Malmi host the Bitcoin website on his servers. And when Martti offered to connect Jed with his European bank, so Mt. Gox could begin accepting euros, Mark helped Jed set up the back end. The work gave Jed confidence in Mark's abilities.

As the price of Bitcoin rose to nearly 30 cents per coin by the end of December 2010—thanks, in no small part, to the attention from WikiLeaks—Jed called a lawyer in New York to ask about the regulatory implications of running a business like Mt. Gox. The lawyer said it was unclear how the government would view
Bitcoin. In the forums, there were lengthy debates about whether Bitcoin would be considered money, which would be subject to bank regulators, or some sort of commodity, which would come under different government oversight. Whatever the outcome, the lawyer told Jed that he would probably have to eventually register as a money-transmission business, which would involve extensive applications and lots of legal bills.

Jed turned to Mark for advice, seeking his thoughts on a four-page document Jed had put together to send to potential investors. The document underscored how far Mt. Gox had risen in its short life. The business was worth $2 million by Jed's estimate: “Mt. Gox is generating revenue with very low running costs and huge potential upside,” the document said. Jed told Mark he was thinking of raising about $200,000, mostly to hire a lawyer to help deal with the regulatory situation.

But as the headaches continued to pile up, Jed got more antsy. In January, a Mt. Gox user named Baron managed to hack into Mt. Gox accounts and steal around $45,000 worth of Bitcoins and another type of digital currency that Jed had been using to transfer money around. When Baron deposited $45,000 back into Mt. Gox to buy more Bitcoins, Jed froze Baron's money. The incident reinforced Jed's belief that Mt. Gox was a prime target for hackers and that he had neither the time nor the security expertise to protect it adequately.

Jed wrote to Mark: “Please keep all this confidential. I don't want to start a panic, and I'm not sure I'll do it yet, but I'm thinking I might try to sell Mt. Gox.”

When Mark picked up the conversation on the Internet relay chat (IRC), Jed asked if Mark would be interested in purchasing the site and made him an offer that was hard to refuse. Mark would not have to pay anything up front. All he would have to give up was 50 percent of the company's revenues for the first six months. Jed would continue to hold 12 percent of the company, but Mark
could have the rest. Jed's fraction of the company was designed to be small enough to protect him from legal liability if Mt. Gox ran into problems in the future.

Jed and Mark were outwardly very different people. Mark was a large, awkward Frenchman, while Jed was a slight, suave American. But both of them were loners who tended to skeptically watch the world from afar and live mostly in their own heads. Each was the only child of a single mother who had given him self-confidence while also making him skeptical about traditional sources of authority—a mixture of traits that made for a good match with Bitcoin at this point.

As the deal between the two men progressed, the strange legal limbo in which Bitcoin existed colored every step. Neither Mark nor Jed used a lawyer. Instead they drew up contracts themselves and sent them back and forth. After they had both signed these contracts, Mark wrote up a less-than-official-looking certificate that said that Jed officially owned forty shares of Mt. Gox, though it did not say how many total shares existed.

Jed didn't labor over the deal because, even with all the growth Mt. Gox had experienced, the business still had fewer than three thousand customers, and was on track to bring in only around $100,000 in revenue for the year.

Mark took ownership of Mt. Gox using the corporation that also held his web-hosting business, Tibanne Ltd.—named after his orange-and-white tabby cat.

By the time Mark and Jed finished their deal, the price of Bitcoin had shot above $1, attracting a new wave of media attention. It also attracted another big hacking attack. At this point, of the 21 million Bitcoins that would ever be released, one-fourth were now out in the world, worth around $5 million at the $1 exchange rate. What's more, the number of daily transactions was creeping steadily upward.

The cause of this surge was due, in no small part, to the rise of another business that was to pose an even graver test to the foundation of trust that Bitcoin was trying to build.

T
HE POSSIBILITIES FOR
using Bitcoin in the real world had not progressed much since NewLibertyStandard's offer of SpongeBob SquarePants stickers. Mark Karpeles was still taking Bitcoin for his web-hosting services and a farmer in Massachusetts was selling alpaca socks. But the range of products available for Bitcoin expanded in a dramatic way a few days before the price of Bitcoin shot from around 50 cents to above $1 for the first time, when an unassuming post on the Bitcoin forum heralded the next wave of Bitcoin commerce.

“Has anyone seen Silk Road yet? It's kind of like an anonymous amazon.com. I don't think they have heroin on there, but they are selling other stuff.”

The posting was made by someone who went by the screenname altoid. In real life, he was Ross Ulbricht, a 6-foot-2 surfer-cum-scientist who had been planning Silk Road for months when he put his innocent-sounding post on the forum.

For Ross, a fun-loving, well-educated twenty-six-year-old, the creation of Silk Road had
begun in earnest in July 2010 when he had sold a cheap house in Pennsylvania that he'd acquired while he was a graduate student there. With the $30,000 from the sale,
Ross rented a cabin about an hour from his home in Austin, Texas. He also purchased petri dishes, humidifiers, and thermometers, along with peat, verm, gypsum, and a copy of
The Construction and Operation of Clandestine Drug Laboratories
, by Jack B. Nimble.

The psychedelic mushroom lab he set up in the cabin was not created with the intent of enabling Ross to become a petty drug
dealer. He had much grander visions of his life than that. From the time he sold the house in Pennsylvania,
he knew he wanted to set up a new kind of online market, where people could buy all the things that aren't available on ordinary online markets.

This unusual and dangerous business concept was the product of the idiosyncratic mixture of influences that had shaped Ross's mind. His parents had been hippies of sorts, taking him on vacations to Costa Rica, where his father taught him to surf.
His curiosity about and penchant for the outdoors had later helped turn him into a seeker, looking for ways to free his mind and achieve oneness through Eastern philosophy and designer drugs. Ross came from Texas, and his search for freedom led him to some of the thinkers on the border between libertarian thought and anarchism—the same philosophers who had influenced many of the Cypherpunks—and he came to believe that the ultimate hurdle to personal freedom was government.
At Penn State, he had the unique distinction of being a member of both the campus libertarians and the West African drumming ensemble. He would describe his ideological awakening in spiritual terms.

“Everywhere I looked I saw the State, and the horrible withering effects it had on the human spirit,” Ross would say. “It was horribly depressing. Like waking from a restless dream to find yourself in a cage with no way out.”

In Austin, Ross did not tell anyone about the new marketplace he was working on, but he did give some indication of what he was after on his LinkedIn page, where he wrote, in broad terms, that he was “creating an economic simulation to give people a firsthand experience of what it would be like to live in a world without the systemic use of force.”

Initially, he called the project Underground Brokers, but soon enough he settled on a more enticing name: Silk Road. The mushrooms growing in the cabin were going to be just the first
product, so something would be available for purchase when the site opened—and
he soon had big black trash bags full of them.