Before Bitcoin Pt.2 — 80s “The Origins of Decentralization”

70s, 80s, 90s, 00s and the people behind the tech

Peter ‘pet3rpan’
14 min readApr 4, 2018

Part Two’s Notes

Before Bitcoin is a series which aims to give you a historical perspective of cryptocurrency’s technology and philosophy. This is Part Two of the series. If you haven’t read Part One, it is highly recommended that you do so in order for you to fully understand (click here)

In Part One, I wrote about the origins of public key cryptography and the story behind it’s creators: Martin Hellman, Whitfield Diffie and Ralph Merkle. Their work would spark the first big wave of public interest into cryptography.

Part of the first wave was a cryptographer known as David Chaum. In Part Two, I will be exploring his continued work on public key cryptography and his research on the need for anonymous communications, payments and decentralised services. His ideas would go on to seed the movement of cypherpunks, the movement that would go on to create TOR, Bit Torrent, Wikileaks and of course: Bitcoin.

What is decentralized? What does it mean and what is it about? Freedom? Lower costs? Middle men? Having evolved into many different shapes and forms, the concept of decentralized has become hard to pin down.

If you Google: decentralized, you will receive many answers but rarely will you come across answers that explore decentralized from first principals and how it came to be in the first place. What problem was decentralized originally trying to solve? Part two looks to answer this…

Continuing on from the 70s

The story of decentralized picks up right after the publication of public key cryptography, beginning with a computer science student called David Chaum. Like Ralph Merkle, he was also from the University of California, Berkeley.

As a graduate student, he recently learnt about cryptography in the late 70s through the paper: “New Directions in Cryptography” (1976). This was Martin Hellman, Whitfield Diffie and Ralph Merkle’s publication on public key cryptography.

Chaum was not alone in his discovery of cryptography. At that time, the San Fransisco Bay Area was becoming the world’s leader in technology through the local presence of Apple, Intel and Hewlett Packard. The money and excitement attracted international tech talent. When the paper: “New Directions in Cryptography” was released, interest in cryptography spread like wild fire amongst the academics, researchers and engineers.

After about a decade of dishing it out between Microsoft and Apple, the 70s personal computing boom was tapering off. Starwars IV had just come out in 1977 and the concept of the internet had started to turn heads worldwide. The world was moving towards a digital future and the tech wasn’t the only thing reflecting it. There was a newly found sense of fascination and romanticism revolving around computers, robotics and technology. Apple’s record breaking IPO of $1.3 billion would later pour fuel onto the impending software boom and set Silicon Valley up for success for the next 30 years.

George Lucas’s brainchild of the 70s
IBM, Apple and Microsoft’s battle of the 70s

Being part of the first new wave of interest into cryptography, Chaum naturally took to it through his natural aptitude for breaking things. While having little about his early life and personal detail online, he shared hints of where his natural curiosity for technology had come from. While others were playing in the Sun, Chaum recounts how he spent most of his childhood breaking locks and playing with safes. He was from a wealthy family and had access to a computer early on. And like many modern day teenagers, he spent his adolescent years staring at a computer screen. But instead of Youtube and Facebook, he spent his time trying to break computer systems and cracking passwords. Being part of the first generation that grew up using computers, technology was natural to him.

But so was his hacker paranoia. Having broke and exploited seemingly ‘secure’ systems, Chaum had likely developed a sense of cynicism about most technologies. Having that instinct as he studied cryptography, he saw an aspect that was of cryptography that was overlooked: Metadata

The traffic analysis problem

While Public key encryption conceptually solved the problem of encrypted messaging, Chaum thought it was only one piece of the puzzle. He knew that encryption did not necessarily mean secure. He saw the unprotected data around protected messages of “who converses with who and when they converse” as a risk to personal privacy. With this information, he knew that people could theoretically be identified and tracked. Completing his graduate studies at the time, he decided to write his research paper on the “traffic analysis” problem:

How do do you keep secret the knowledge of who converses with who and when they converse?

He graduated in 1979, releasing his first major cryptography paper: “Untraceable Electronic Mail, Return Addresses, and Digital Signatures” (While initially released in 1979, it was only later published in 1981).

Citing the Hellman, Diffie and Merkle’s work of “New Directions in Cryptography” (1976), in the paper, Chaum outlines the risk of personal privacy and provides the blueprints of an anonymous mailing protocol using something known as a mix network. His protocol protected the identity of the messengers as well as the time of the message being sent.

How do Mix Networks work?

A mix network is a network made up of nodes that uses public key cryptography to authenticate messages. These nodes send information to each other to ‘mix’ up the original sender’s identity and timing of messages. The of message addresses was important as it could be used to identify the origins of messages. The timing of messages could also be used to identify messages that would correspondingly move within a network.

With a mix network, when you send a message to someone, the encrypted message would first be passed to a node where it would be batched with other messages from other senders. This batch would be then be sent between different nodes. Think of a pin ball full of messages bouncing around different nodes. In the end the message would exit out of the network and end up at the intended address with the original sender hidden. For replies to the messages, it would be sent back to the original address that would be unknown to the sender. Thus the identity of senders and order of messages would stay unknown and prevent the ability to trace and spy on messages.

Video explanation of Mix Networks

While designing the network, he dismissed a solution that used a single message authenticator believing that it was easily compromised, instead he insisted that: “Ideally, each participant is an authority”. The Mix Network protocol would be used to build TOR, the anonymous browser that you can use to buy drugs or hire hitmen (yes, incognito mode is not anonymous). Mixing is also used by Monero to anonymise transactions.

If you want to ‘learn’ more about TOR: Here is an more in-depth guide

Untraceable payments

Understanding the potential risk of unprotected metadata, he also saw financial transactions in the same light. In the increasingly digital world, Chaum believed that e-commerce would play a huge role in the world but so would the traceability of consume payments. He believed that the timing of transactions and goods purchased not only enabled the tracking of people, but allowed for the profiling of individual lifestyles, consumer choices and political leanings.

“The time of payment for every transaction made by an individual can reveal a great deal about the individual’s whereabouts, associations and lifestyle. For example, consider the payments or such things as transportation, hotels restaurants, movies, theatre, lectures, food, pharmaceutical, alcohol, books, periodicals, dues, religious and political contributions.”

In 1980, he patented a digital cash system secured by cryptography which would form the basis of cryptocurrency. Patent 4529870 outlined a protocol that was able to:

  • Conduct financial transactions with an ‘external system’
  • Exchange data with an ‘external system’
  • Contain an ID linking the ownership of data within the ‘external system’
  • Store data relating to interactions with the ‘external system’
  • Secure the stored data through cryptography where it could be accessed using a secret ID known to the owner

Chaum later fleshes out the concepts of anonymous payments in his paper: “Blind Signatures for Untraceable Payments” that was later released in 1982. Similar to the concept of Mix Networks, his proposed payment protocol requirement included the masking of the sender, the amount being sent and also the time of the transaction.

Stumbling onto the concept of Decentralization

Back then as a student, his work was dismissed as political and radical by his peers. Similar to Martin Hellman in the 70s at Stanford, Chaum also faced scrutiny over his work. Upon pursing his doctorate studies, his head teacher told him:

“Don’t work on this, because you can never tell the effects of a new idea on society”.

Ironically, his head teacher would turn out to be right.

Despite the pressure from his peers, Chaum decided to continue his doctoral studies. Revisiting the ideas in his first paper about Mix Networks, he decided to research the concept of trust in computer systems.

As a hacker, Chaum did not trust central authorities in computer systems as he thought they could be easily hacked. Instead he believed that systems where participants are “authorities” were harder to compromise. Researching the concept of computer systems that establish trust between parties that don’t trust each other, Chaum argues the need for decentralized services in his dissertation: “Computer Systems Established, Maintained and Trusted by Mutually Suspicious Groups” (1982),

“It is not enough that the organisation maintaining a computer system trusts it; many individuals and organisations need to trust a particular computer system…

…There are many other similar applications of computers which involve private sector records related to consumers such as those arising from credit, insurance, health care and employment relationships. Public sector record keeping, in such as areas such as tax, social security, education and military service are quite similar…

…All of these applications involve one group who owns or controls the computer system and who is particularly concerned with reliability in maintaining the operation of the system and with ensuring the survival of the data maintained by the system — they will be called “trustees”. A second group or set of groups are primarily concerned about the confidentiality of the data which relates to them that is available to the system. There may be a third group or set of groups which may overlap with the first and second groups, who are concerned about the correctness of the operation of the system…”

“Computer Systems Established, Maintained and Trusted by Mutually Suspicious Groups” (1982)

Initially led by his concerns towards communications metadata, his idea of Mix Networks was one of the first concept of a decentralized service. His concerns about meta data led him to focus on the need for anonymous payments. While Chaum was focused on personal privacy, after having looked over his work and how he presents the concept of decentralization, I personally don’t think he understood the magnitude and importance of them at that time.

He presented decentralized services as a means of solving certain conflicts of interests between consumers and businesses in certain application aspects. Rather than how it is portrayed in today’s world as a sociopolitical movement, decentralization in his paper was first presented as an economical solution for businesses.

Graduating in 1982, he decided to continue his research on cryptography.

Meanwhile, later that year, TIME magazine named their machineof the year: The Computer. Imagine this… 2022 Cryptocurrency of the year: Bitcoin

TIME Magazine 1982

As the decade continued, his ideas had started to mature and a vision of the future had started to form inside his head. Watching the growth of computing explode faster than anyone had ever predicted, Chaum was worried.

Chaum’s warning to the World in 1985

“Computerisation is robbing individuals of the ability to monitor and control the ways information about them is used. Already, public and private sector organisations acquire extensive personal information and exchange it amongst themselves. Individuals have no way of knowing if this information is inaccurate, outdated, or otherwise inappropriate… New and more serious dangers derive from computerised pattern recognition techniques: even a small group using them and tapping into data gathered in everyday consumer transactions could secretly conduct mass surveillance, inferring individuals’ lifestyles, activities, and associations. The automation of payment and other consumer transactions is expanding these dangers to an unprecedented extent”

“Security without Identification Card Computers to make Big Brother Obsolete” (1985)

Acknowledging Orwell’s dystopian World with the paper’s title, it talks about the dangers of user data that was building up around computing systems. Chaum warned that this continued trend of ‘computerisation’ would render society open to exploitation and mass surveillance. He also argued that “surveillance might significantly chill individual participation and expression in group and public life. The inadequate security and the accumulation of personally identifiable records, moreover, pose national vulnerabilities”.

“Information service providers and other major interests, for example, could retain control over various information and media distribution channels while synergistically consolidating their position with sophisticated marketing techniques that rely on gathering far-reaching information about consumers”

The main body of his paper summarises a decentralized economy based on his previous research into the decentralization of messaging and payments. Despite his ideas being previously fragmented, he then knew the true importance of his ideas surrounding decentralized services. Seeing the future that the World was moving towards, he was acutely aware of the cross roads which lay before society. Chaum understood that the design of the internet’s architecture would have enduring social and political consequences. Projecting the vision of two futures, one built with current technology and one built with decentralized services, he saw that “The two approaches appear to hold quite different answers”.

“Large-scale automated transaction systems are imminent. As the initial choice for their architecture gathers economic and social momentum, it becomes increasingly difficult to reverse. Whichever approach prevails, it will likely have a profound and enduring impact on economic freedom, democracy, and our informational rights.”

So what was decentralization?

One of the most fundamental beliefs Chaum had was the right to personal privacy. With the World becoming evermore interconnected, he saw the need to protect his personal data. He saw cryptography as a means of doing so.

If you think about it cryptography is essentially the practice of protecting information against individuals that didn’t have permission to access it. Cryptography is a digital law enforced by the laws of mathematics, a force beyond the central control. No one is above it.

And when individuals are empowered to control and protect their data using cryptography, only then, true personal privacy can be realised.

Chaum saw decentralized services as means of protecting privacy. Enabled and secured using cryptography, it is something outside of central control. Hence this is why decentralized systems are trusted. He could believe in maths. He did not trust governments and companies.

Sounds like a nutcase right?…

Edward Snowden’s NSA leaks in 2013 Headline news outlets
Screenshot of leaked CIA’s Documents on the US Surveillance program: PRISM
Leaked CIA’s Slides on how their own software worked! I wonder if they have a CIA confluence wiki…
Meta data being abused once again in 2017
Facebook’s billion dollar business built on metadata
Metadata captured by Facebook

Wow was David Chaum a time traveller?

No. He was no a time traveller, he just had an exceptionally clear in his vision of the future. He was right, wasn’t he?

…Well yes kinda of. While while it does seems that way, we haven’t gone down the route of decentralization. No system is ever perfect and I wonder if we would be dealing with problems of the same magnitude if the world did follow the heed of Chaum’s advice. Nonetheless, history has so far pointed towards the need for decentralized services.

After 30~ years after his paper, the world did indeed build itself around centralised services. With 2.2+ billion users on facebook, the world’s data was protected by good will. Good will did not hold up. Good will and the promise of Facebook had little power against the CIA and government. The lack of cryptographic ownership led to the abuse of data by Cambridge Analytica…

So is it too late?

While the Internet might have taken a wrong turn, nothing points to the fact that things are too late to change. That’s what history is full of: Evolutions in culture, technology and society. The world will always be moving, the question is just: Where?

If you didn’t understand the references shown in the images above, feel free to Google: 2013 Snowden US Surveillance Leaks & Facebook Cambridge Analytica

After the 80s

Chaum spent the rest of the decade researching cryptography and by 1988, he had moved to the Netherlands, starting his own research group. And after a decade of research, he would finally act on his vision of a decentralized world. He would found his company Digicash in 1990 and create ‘ecash’, the world’s first digital cash system. Gaining worldwide attention, many cryptographers interned and worked for Digicash including Hal Finney, Nick Szabo and Eric Hughes, one of the founders of cypherpunks, a movement that will be explored in the next part of this series. Digicash would experience highs and lows, rejecting a $180 million acquisition from Microsoft, only to declare bankruptcy a while later.

If you want to read more about Digicash: Read this. I personally found the story of the company tragic but yet comedic in a dark humour sort of way.

Digicash ‘98

By the end of the 80s, he had become one of the most well regarded cryptographers in the world.

Chaum was one of the people who knew where the World was going. He understood things that others didn’t. Deciding to focus on building a company, he would leave behind seeds that would ultimately bloom into the 90s cypherpunk movement.

This movement would go on to stand for the liberty, and fight against the governmental injustices of the 90s. Do you remember what the head teacher said to Chaum back when he was still a student at Berkeley?

“Don’t work on this, because you can never tell the effects of a new idea on society”.

David Chaum enjoying himself

Next part — Part Three:

The series is intended to provide an historical perspective on cryptocurrency. If you missed Part One, click here.

Part three will be looking into the birth of the cypherpunks and their 90s skirmish with the government. The movement of the cypherpunks would be responsible for the creation of TOR, Bit torrent, Wikileaks and Bitcoin.

This piece was made legible by the one and only heroes: Tom Terrado, David Lim and Luke Schoen. Big thanks to these guys for picking up the broken pieces.

If you learnt something while reading this, have feedback or have any other questions, comment below! Any response would help me learn and write better pieces in the future.

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