Illustration: Martin Venezky

In November 1, 2008, a man named Satoshi Nakamoto posted a research paper to an obscure cryptography listserv describing his design for a new digital currency that he called bitcoin. None of the lists veterans had heard of him, and what little information could be gleaned was murky and contradictory. In an online profile, he said he lived in Japan. His email address was from a free German service. Google searches for his name turned up no relevant information; it was clearly a pseudonym. But while Nakamoto himself may have been a puzzle, his creation cracked a problem that had stumped cryptographers for decades. The idea of digital moneyconvenient and untraceable, liberated from the oversight of governments and bankshad been a hot topic since the birth of the Internet. Cypherpunks, the 1990s movement of libertarian cryptographers, dedicated themselves to the project. Yet every effort to create virtual cash had foundered. Ecash, an anonymous system launched in the early 1990s by cryptographer David Chaum, failed in part because it depended on the existing infrastructures of government and credit card companies. Other proposals followedbit gold, RPOW, b-moneybut none got off the ground.

One of the core challenges of designing a digital currency involves something called the double-spending problem. If a digital dollar is just information, free from the corporeal strictures of paper and metal, whats to prevent people from copying and pasting it as easily as a chunk of text, spending it as many times as they want? The conventional answer involved using a central clearinghouse to keep a real-time ledger of all transactionsensuring that, if someone spends his last digital dollar, he cant then spend it again. The ledger prevents fraud, but it also requires a trusted third party to administer it.

The Rise and Fall of Bitcoin

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Bitcoin did away with the third party by publicly distributing the ledger, what Nakamoto called the block chain. Users willing to devote CPU power to running a special piece of software would be called miners and would form a network to maintain the block chain collectively. In the process, they would also generate new currency. Transactions would be broadcast to the network, and computers running the software would compete to solve irreversible cryptographic puzzles that contain data from several transactions. The first miner to solve each puzzle would be awarded 50 new bitcoins, and the associated block of transactions would be added to the chain. The difficulty of each puzzle would increase as the number of miners increased, which would keep production to one block of transactions roughly every 10 minutes. In addition, the size of each block bounty would halve every 210,000 blocksfirst from 50 bitcoins to 25, then from 25 to 12.5, and so on. Around the year 2140, the currency would reach its preordained limit of 21 million bitcoins.

When Nakamotos paper came out in 2008, trust in the ability of governments and banks to manage the economy and the money supply was at its nadir. The US government was throwing dollars at Wall Street and the Detroit car companies. The Federal Reserve was introducing quantitative easing, essentially printing money in order to stimulate the economy. The price of gold was rising. Bitcoin required no faith in the politicians or financiers who had wrecked the economyjust in Nakamotos elegant algorithms. Not only did bitcoins public ledger seem to protect against fraud, but the predetermined release of the digital currency kept the bitcoin money supply growing at a predictable rate, immune to printing-press-happy central bankers and Weimar Republic-style hyperinflation.

Bitcoin’s chief proselytizer, Bruce Wagner, at one of the few New York City restaurants that accept the currency.

Photo: Michael Schmelling

Nakamoto himself mined the first 50 bitcoinswhich came to be called the genesis blockon January 3, 2009. For a year or so, his creation remained the province of a tiny group of early adopters. But slowly, word of bitcoin spread beyond the insular world of cryptography. It has won accolades from some of digital currencys greatest minds. Wei Dai, inventor of b-money, calls it very significant; Nick Szabo, who created bit gold, hails bitcoin as a great contribution to the world; and Hal Finney, the eminent cryptographer behind RPOW, says its potentially world-changing. The Electronic Frontier Foundation, an advocate for digital privacy, eventually started accepting donations in the alternative currency.

The small band of early bitcoiners all shared the communitarian spirit of an open source software project. Gavin Andresen, a coder in New England, bought 10,000 bitcoins for $50 and created a site called the Bitcoin Faucet, where he gave them away for the hell of it. Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction, paying 10,000 bitcoins to get two pizzas delivered from Papa Johns. (He sent the bitcoins to a volunteer in England, who then called in a credit card order transatlantically.) A farmer in Massachusetts named David Forster began accepting bitcoins as payment for alpaca socks.

When they werent busy mining, the faithful tried to solve the mystery of the man they called simply Satoshi. On a bitcoin IRC channel, someone noted portentously that in Japanese Satoshi means wise. Someone else wondered whether the name might be a sly portmanteau of four tech companies: SAmsung, TOSHIba, NAKAmichi, and MOTOrola. It seemed doubtful that Nakamoto was even Japanese. His English had the flawless, idiomatic ring of a native speaker.

Perhaps, it was suggested, Nakamoto wasnt one man but a mysterious group with an inscrutable purposea team at Google, maybe, or the National Security Agency. I exchanged some emails with whoever Satoshi supposedly is, says Hanyecz, who was on bitcoins core developer team for a time. I always got the impression it almost wasnt a real person. Id get replies maybe every two weeks, as if someone would check it once in a while. Bitcoin seems awfully well designed for one person to crank out.

Nakamoto revealed little about himself, limiting his online utterances to technical discussion of his source code. On December 5, 2010, after bitcoiners started to call for Wikileaks to accept bitcoin donations, the normally terse and all-business Nakamoto weighed in with uncharacteristic vehemence. No, dont bring it on,’ he wrote in a post to the bitcoin forum. 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.

Then, as unexpectedly as he had appeared, Nakamoto vanished. At 6:22 pm GMT on December 12, seven days after his Wikileaks plea, Nakamoto posted his final message to the bitcoin forum, concerning some minutiae in the latest version of the software. His email responses became more erratic, then stopped altogether. Andresen, who had taken over the role of lead developer, was now apparently one of just a few people with whom he was still communicating. On April 26, Andresen told fellow coders: Satoshi did suggest this morning that I (we) should try to de-emphasize the whole mysterious founder thing when talking publicly about bitcoin. Then Nakamoto stopped replying even to Andresens emails. Bitcoiners wondered plaintively why he had left them. But by then his creation had taken on a life of its own.

Bitcoin 101

How Theyre Made

How Theyre Mined

How Theyre Spent