LeoFinance

LeoGlossary: Bit Gold

1 comments-0 reblogs
avatar of @leoglossary
51
LeoFinance Badge
5 months ago - 3 minutes read

Bit Gold was one of the first attempts at creating a decentralized digital currency. It was started by Nick Szabo and is believed to be the inspiration for what eventually became Bitcoin. It is also what fueled speculation that Szabo is really Satoshi Nakamoto.

The technical aspects of Bit Gold are similar to Bitcoin. We see the validation of transactions and securing the network the same. They both operate using the Proof-of-Work (PoW) consensus mechanism.

Node operators have to solve a cryptographic puzzle. This requires computational power eventually leading with the ability to create a block. It is then processed through the peer-to-peer network, ultimately leading to hash connecting the blocks together.

This is ultimately how blockchain works.

Double Spend Problem

Where the two projects diverge is with the double spend problem. Szabo was never able to solve this in a decentralized manner. He used a quorum to protect against it, something that could be open to Sybil attacks.

Satoshi solved this by using a quorum of computer, miners, to handle the issue. This moved the responsibility of the ledger to the computing level.

Broken Trust

Bit Gold came out of the premise that the trust in the existing financial system was broken. This was created long before the Great Financial Crisis which is rumored to be the motivation for Satoshi releasing Bitcoin. However, Szabo was working on this problem a decade before that crisis arose.

The key is the fact that the existing money system depends upon the banks as the agents of trust. They are the ones who maintain the ledger. Thus Szabo, probably without knowing, set out to create what became distributed ledger technology (DLT).

This is the foundation for cryptocurrency. With a decentralized network of nodes, a ledger of financial transactions (and other data) is distributed among unrelated entities. They mirror each other providing a financial system outside the control of any individual. Basically what is being replicated is the Eurodollar System except with the exclusion of the banks.

It all comes down to counterparty risk. This is something that the Great Financial Crisis exemplified. At the consumer level, many backs went under although deposits, in most instances, were insured (through FDIC in the US).

When it came to international banking, the GFC was a collateral crisis. Mortgage Backed Securities (MBS) were rated akin to US Treasuries yet revealed themselves to carry much greater risk. As the system broke down, the markets for the securities used as collateral dried up. This caused a bank run, albeit at the bank level and not consumers.

Bit Gold set to eliminate many of these prospects by having the trust in the computational system. Ultimately, blockchain provided this solution.

Legacy

Although Bit Gold did not become the standard Szabo envisioned, it is an important component in the history of decentralized digital currencies. It is highly unlikely we would have Bitcoin without first the innovation of Bit Gold. We can presume that Satoshi (if not Szabo) was well aware of this work. The similarities are simply too close.

Over the last decade, we saw the technology expand. Bitcoin is not the most efficient or feature rich network. In fact, in many ways it is technologically obsolete.

That said, it does perform the function it was designed to do very well. After 14 years, Bitcoin stills allows value to be transferred from one wallet to another in a secure manner and without any financial intermediary.

General:

Posted Using LeoFinance Beta

1