Cypherpunks Write Code: Nick Szabo, Smart Contracts, and BitGold

Do you know why April 5 is like a funny date in the crypto world? Because it’s the birthday of Satoshi Nakamoto, the Bitcoin creator. And it’s also the birthday of Nick Szabo, the creator of smart contracts and the coin BitGold, a precursor of Bitcoin. A lot of people think this isn’t just a coincidence, not to mention the same initials (SN), and Szabo could be Nakamoto himself. He’s denied it repeatedly, though.

Nick Szabo was born in 1964 in the United States and got a computer science degree from the University of Washington in 1989. He also has a Juris Doctor (law) degree from George Washington University, and an honorary professorship at the Universidad Francisco Marroquín from Guatemala. He can boast about an impressive publication history about computer science, laws, cryptography, and other topics on his personal blog and other media, and that’s it.

We basically know nothing about his private life, just like we don’t know a lot about many other cypherpunks. Of course, Szabo is also a cypherpunk, as he was on the same mailing list visited by Satoshi and other important figures. Only bits and pieces of his personal affairs have dropped down to us.

According to a brief interview with NYT, he’s of Hungarian parents. His libertarian mindset partly comes from his dad, who fought against the Soviet Union in the Hungarian Revolution of 1956. From his blog, we know that he worked for a while with DigiCash, a company founded in 1989 by David Chaum (precursor of cypherpunks). They tried to make a new type of centralized virtual currency, called eCash. Probably, that inspired him to make his own version of digital currency.

Smart Contracts

In 1994, Szabo first defined a smart contract as “a computerized transaction protocol that executes the terms of a contract.” They aimed to simplify transactions or legal contracts between people online, including payment terms, and minimize the need for human middlemen. The code would be the only trusted third party, allowing lower fees in arbitration, fraud risk management, enforcement, and other transaction costs.

Szabo considered the digital cash protocols of the time and POS terminals as rudimentary smart contracts. More about the concept and its potential use cases would be published by Szabo in the following years, laying the foundation for the platforms we know today.

As the years passed, smart contracts expanded beyond digital cash, showcasing their potential to revolutionize commercial transactions. Fast forward to the present, and we witness the integration of smart contracts in numerous industries, from decentralized finance (DeFi) to global supply chains and smart property. Crypto ecosystems like Ethereum and Obyte facilitate the deployment of complex, self-executing agreements, transforming how we engage in online transactions.

Obyte, indeed, went a step beyond by releasing contracts with arbitration. They’re also self-executing smart contracts capable of locking funds until predetermined conditions are met. But there’s an important addition: an independent arbiter from the ArbStore. They’re (human) professionals registered in the platform with their real names and available to solve certain types of disputes in exchange for a fee.

BitGold

Besides the innovation of smart contracts, Szabo also designed a theoretical decentralized virtual currency, called BitGold. The idea was born around 1998, but he didn’t fully describe it until 2005. If we read the proposal, we’ll find some uncanny similarities with Bitcoin and its raison d'être.

“The problem, in a nutshell, is that our money currently depends on trust in a third party for its value (...) It would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. BitGold. My proposal for bit gold is based on computing a string of bits from a string of challenge bits, using functions called variously "client puzzle function," "proof of work function," or "secure benchmark function." The resulting string of bits is the proof of work.”

He also describes how every transaction would be registered in a “chain of digital signatures” securely timestamped and distributed among several servers. He even mentions a “bit gold miner” earning substantial profits from it. However, this idea was never implemented.

Interestingly enough, Szabo asked for someone to help him code BitGold into reality in 2008, just before Bitcoin appeared. Nobody answered publicly, but it’s widely believed that Nakamoto's system was inspired by this precursor, even if it doesn’t appear referenced in the whitepaper.

A “centralized cult”

BitGold wasn’t exactly decentralized, or at least not fully decentralized. The design included a Proof-of-Work (PoW) system, just like Bitcoin, which implies the involvement of miners —a type of middlemen. Nevertheless, it was an important step into a more decentralized future, an initial solution to minimize the dependency on trusted third parties like governments and banks.

Szabo likely knows this, because he’s been very involved in the cryptocurrency world. He’s a usual attendant in crypto events and podcasts, and has been working with at least one more crypto company over the years (Vaurum), as it was mentioned by NYT. He also founded his own crypto startup, and has maintained the same secrecy about himself.

Years ago, he seemed quite pleased with Ethereum, a prominent smart contract network. They even named “Szabo” one of their coin units. Things have changed more recently, though. Unfortunately, Ethereum has evolved to allow centralized censorship and control, as it’s been proven on several occasions. Not to mention items like the Ethereum Recovery Proposal (EPR), which allowed to change and control a supposedly immutable network. It was never approved, but Szabo criticized it heavily while it was being discussed. For these and similar reasons, Szabo now considers Ethereum as a “centralized cult,” as he mentioned on Twitter (X) in 2019.

The pursuit for real decentralization continues. In this vein, we can say that Obyte is an alternative without middlemen, and, therefore, without censorship and external control. We don’t have miners or “validators,” but a Directed Acyclic Graph (DAG) structure and Order Providers (OPs). They’re merely posting waypoints to order transactions but don’t have a lot of power over the network.

Once someone sends a transaction to the DAG, it is registered there forever, without interference of any kind. We’re already moving towards trust-minimization ideals, and we've minimized trust further than other projects. On this path, Obyte is still working to improve the decentralization of its systems and help to achieve the privacy-protected and free world dreamed of by pioneers like Nick Szabo and other cypherpunks.

Featured Vector Image by Garry Killian / Freepik

Nick Szabo Photograph by Swiss Re / YouTube