Cryptic History: The Cypherpunks

Cryptic History: The Cypherpunks

William Smith

November 19, 2018

“[T]he question at once arises whether it would not be equally desirable to do away altogether with the monopoly of government supplying money and to allow private enterprise to supply the public with other media of exchange it may prefer” F.A. Hayek

The sixteen square inches of inked fabric constituting a federal reserve note represents power, not value. It wasn’t always this way. Money proper, as evolved through the intertwining processes of exchange, holds value because of what it represents: all other goods. The Regression Theorem, developed by early 20th century economist Friedrich Wieser and his student Ludwig von Mises, demonstrates this process. Money, when examined historically, derives its value from comparisons to commodity goods. Money is intimately connected to barter. But government has usurped this role, replacing commodity value for the value of violence.

Money is a government service, a service facilitated by graft and perpetuated by surveillance.

First, inflation is theft. When the government artificially increases the supply of money the purchasing power of all money decreases across the board. Real wealth and savings evaporate. Since the creation of the Federal Reserve in 1913, the U.S. Dollar has lost 95 percent of its value. That’s generational wealth simply stolen.

Exchange surveillance is another manifestation of the government money monopoly. As a third party with political interest, any exchange using the government system comes under bureaucratic scrutiny. Again, it wasn’t always this way. The National Banking Acts of 1863 and 1864 taxed private money out of existence. Now, the U.S. Government holds the corner on money and therefore exchange.

The 20th century is dotted with exchange intervention: FDR’s 1933 gold seizure, the War on Drugs, and modern day civil asset forfeiture to name a few. Morality aside, arrested exchanges decrease societal wealth. In economics, this is called deadweight loss: both parties lose out on a mutually beneficial exchange.

These costs ignited opposition, but the revolt had limited tools. Then came the computer age.

The Cypherpunk Movement

Bill Clinton announced the end of “big government” in 1996. He was a little late or perhaps a tad ignorant.

The Cypherpunks, a conglomerative anarchist oozing of tech enthusiasts, hardcore libertarians, radical leftists, and college dropouts were already putting Clinton’s claim into code. Living in communal dwellings in Silicon Valley and elsewhere, the Cypherpunk’s were Spaniards in the New World — coding was their steel.

To be reductionist, the Cypherpunks were Orwellian. They watched with tempered expectations as the internet flowered into being: communication on such scales had obvious drawbacks and demanded a reexamination of privacy. As prominent Cypherpunk Eric Hughes wrote in his Manifesto :

We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do. We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems with digital signatures and with electronic money.

Modern cryptography is indebted, ironically, to the state it seeks to undercut. The surveillance systems that sprung up from 20th century conflicts, namely the unconditionally secure One-Time Pad, were foundational to the Cypherpunks. This technology eked out of government offices in the 1970s and into private hands — it bloomed.

The Cypherpunks were bullish on individual data protection. As the internet grew, so must security. Public and private key encryption, the children of two papers entitled “New Directions in Cryptography” (1976) and “Blind Signatures for Untraceable Payments” (1981), were the most notable steps toward repurposing cryptographic methods for individual data protection.

In math and prose, these papers described what is becoming the new normal for open gateway communication. “New Directions” and “Blind Signatures” identified an evergreen issue: electronic messages sent via a third party system can be and will be compromised. Encryption, furthermore, has real limits: both the key and encrypted message reside in the sendee’s hands. So, how do you send the key without compromising the message or the parties involved?

As with most problems, the answer was waiting in Berkeley, California. Computer scientist David Chaum’s “Blind Signatures” solved the sendee’s problem by masking the signature before the data could be accessed. His cryptographic delivery system ensured that: 1) all parties remained anonymous, 2) messages would be verifiable to both parties and 3) messages would be recorded for public confirmation.

Chaum’s blind signatures went on to be the basis of the eCurrency movement premptying today’s crypto bonanza such as Digicash, Chaum’s own digital currency; Hashcash, an anti-email spamming mechanism; and Egold, an electronic currency backed by gold bullion.

Yet all precursors piddled out. Why? Among other things, the issue of double spending. In digital currencies, double spending occurs when a cryptocurrency is used for two purchases. Without a third party like a bank to oversee transactions, it is possible to both spend and keep ones money. A solution was on the horizon, however.

Nakamoto

Ten years ago this month, an anonymous Cypherpunk named Satoshi Nakamoto sent a white paper to a Cypherpunk email list. His paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” proposed a digital ledger as a solution to double spending. Colloquially called ‘blockchain’ but more accurately termed ‘timechain,’ Nakamoto created what amounts to a decentralized database system as an immutable digital ledger. Anyone using bitcoin can both see and monitor the ledger. Simply put, the blockchain prohibits double spending.

Nakamoto’s design is the realization of Hugh’s Manifesto: electronic money. By integrating Chaum’s blind signatures into a timestamp system, Nakamoto created the world’s first trustless, decentralized, peer-to-peer digital currency.

At present, Bitcoin is the fulfillment of the Cypherpunk movement. With private currencies, the state’s two pronged trident of inflationism and surveillance are dulled considerably. Transactions cannot be infringed on by a third party. Opting out of fiat systems ends inflationism. Money is returning home.