Blockchain: the first 360 years - from Thomas Hobbes to Satoshi Nakamoto

The "Digital Learning Hub" of Luxembourg is a relatively new state-sponsored organization offering training in technology for free (or nearly for free). The target audience are adults, looking to re-skill or up-skill.

Luckily, "blockchain" figured among the broad domains which were selected for these trainings.

The last edition of "Introduction to blockchain" finished recently and got very positive returns from the participants. It improved over previous editions by capturing some historical aspects which were formerly absent from the course material.

In the process of researching for my Master's dissertation, I came to an understanding of the main trade-offs of this technology and of the goals it can best help to achieve. And I realized that shining a historical light on it was tremendously helpful.

Most people, including myself, first heard about "blockchain" when reading about Bitcoin: "blockchain" was the name of the technology powering it. But upon diligent research, I quickly found out that the blockchain architecture had been there for a while before Bitcoin came along.

So I wanted to tell that story. And it turns out that to fully understand what, and why blockchain is, one has to go back in time about 360 years!

Well-being and prosperity

The subtitle of my class (and my ambition) read "Making the world a better place with blockchain" And for that, I thought indispensable to understand the determinants of human well-being and prosperity. To this end, I read several books, such as Jon Elster's widely quoted "The Cement of Society" (1989), which I mentioned several times previously in my posts.

Elster's book contains many profound observations, but one in particular stands out: in order for humans to create and maintain a "society", they have to display "predictable behaviour" and "cooperative behaviour".

Despite its strong ideological bias, I also greatly appreciated the sharp insights of Y.N. Harari's bestseller "Sapiens" (2014). Among the "gems of wisdom" in Harari's book, a few caught my attention:

1. Large scale collaboration is key to the progress of human society.
2. Humans collaborate on the basis of "common myths", which Harari also dubs "intersubjective realities".
3. Money is such a "common myth" and also the best tool humanity invented to facilitate large scale collaboration.

The "collective action" problem

Since M. Olson's seminal "The Logic of Collective Action" (1965) it is widely reckoned that achieving "large scale collaboration" is difficult even when participants have common interests (notably because of "free riding" and its corrosiveness). Sociologists agree that three main mechanisms can, and have been employed, at various levels throughout history, to this end:

1. Recourse to "authority" - moral and religious systems have provided commonly accepted sources of authority for several millennia
2. Coercion - this is the role of laws, institutions and governments
3. Incentives, of various kinds.

Often, a combination of these mechanisms can be employed, as illustrated by the famous "carrot (incentive) and stick (coercion)" approach. I have reflected about these topics in the context of the European project in an older article

Leviathan

In 1651, about 360 years before Hal Finney tweeted "Running bitcoin", English philosopher Thomas Hobbes wrote one of the most important political books in history, "Leviathan". In it he posited that, left in their natural state, humans would be in a state of "war of all against all", and that individual lives would be "solitary, nasty, brutish and short".

He proceeded to assert from there that a strong state and government (a "sovereign") is necessary to maintain peace and make the subjects adhere to the "social contract". He only focuses on the first two of the above mechanisms. The Leviathan is indeed often represented as a giant crowned figure holding in its right hand a sword - symbol of the sovereign's coercive power and in his left hand a sceptre - symbol of authority.
There is no mention of the power of incentives.

In contrast, Swiss philosopher Jean-Jacques Rousseau, writing a century later during the Enlightenment era, and likely aware of Hobbes's work, presents a different view: he posits that, on the contrary, in their natural state, humans are essentially good and tend to live in harmony with nature. I love and often quote Rousseau's famous "La première passion de l'homme est de ne rien faire."

Rousseau's idea of the "social contract" (the title of probably his most famous work) was rather focused on preserving individual freedom and creating a governement based on the "general will" of the people. As ChatGPT expresses it,

"Rousseau envisioned a more participatory and decentralized form of government. He saw the government's role as being guided by the general will, which represents the common good, and he believed that individuals should have a say in shaping the laws that govern them."

^{In conversation with ChatGPT about Hobbes, Rousseau and, later Hume}

Scottish philosopher David Hume lived and wrote at about the same time as Jean-Jacques Rousseau. His "Essays: Moral, Political, and Literary" illustrate his views that humans are not inherently good or bad, but rather their behaviour in a given situation was determined by an interplay of passions and reasons (a central topic for other Enlightment-era philosophers such as Montesquieu)

Closer to us, in 1989, Elster synthesies the ideas of Hobbes, Rousseau, Hume in relationship to the issue analysed by Olson: cooperation and collective action. He observes that people "may also achieve cooperation by decentralized, uncoerced means" and also that

"decentralized solutions are more fundamental than centralized ones, since compliance with central directives is itself a collective action problem".

Decentralized cooperation is mostly based on incentives, whereas centralized collaboration tends to rely on coercion.

Anarchy

At the other end of the field of intellectual exploration, many philosophers and social scientists have looked into the practical conditions allowing stateless cooperation / society. Among these I chose to quote Michael Taylor who, in his 1982 book "Community, Anarchy and Liberty" explores the possibility of large scale collaboration and social order without a "monopoly on violence", i.e. without government / state. He concludes that functional anarchic communities can be built through strong, repeated interactions, between a limited number of people.

Indeed, for the behaviour of others to be "predictable" (as Elster pointed out), we need to recall how they behaved in the past, and assign a "reputation" to each person in that community. Hence our ability to memorize other's reputations will likely impose a practical limit to how large a sustainable community can be. Taylor remarks that such stateless, anarchic communities appear in practice to be limited to 150 - 200 individuals.

The Evolution of Cooperation

At about the same time as Taylor's exploration, Robert Axelrod, a political scientist, breaks new ground by applying mathematical tools, namely "game theory" to political sciences. He publishes in 1984 "The Evolution of Cooperation", a seminal book in the field, which I quoted in several past articles. The central insight of Axelrod is that, with a clear set of incentives (the payoff matrix), cooperation can emerge spontaneously among strangers as a consequence of iterated interactions.

Two years later, in 1986, Michael Taylor revisits the topic of anarchy in a new book, "The Possibility of Cooperation", where he applies Axelrod's findings to the matter of "coerced / state-based versus uncoerced / anarchic cooperation".

From this book, I selected two powerful insights:

1. Taylor points out that Hobbes conclusions in his 1651 Leviathan are based on a simplistic modelling of society as a non-iterated prisoner's dilemma
2. He also observes that "states create or aggravate problems of the kind they are supposed to solve and undermine conditions for alternatives to the state to be workable" - thus making themselves ever more necessary.

Crypto-anarchy

It is in the middle of this three and a half centuries-old, fundamental debate about the shape of human society that cryptography, blockchain and crypto assets step.

In 1988, Timothy May publishes "The Crypto Anarchist Manifesto", superficially inspired by the 1848 "Communist Manifesto"

In 1992, Tim May is among those starting the "Cypherpunk" movement.

"Linking" or "chaining" blocks of data

One year prior, in 1991, two scientists, S. Haber and W. Scott Stornetta had published a paper dealing with solutions for securing intellectual property in a world of freely replicable data.

They were looking at securing "prior art" status in the world of intellectual property, and for that they presented two theoretical solutions for time-stamping a digital document in a way that doesn't require that a centralized time-stamping service keeps a record (no need for a third party).

17 years later, Satoshi Nakamoto quotes the paper, picks and implements the first of Haber and Stornetta's solutions, "linking" the data in a "chain of blocks" (a.k.a. blockchain). The most interesting thing about Haber and Stornetta's paper is not that, though, but rather the fact that in those intervening 17 years, there were preciously few implementations of its breakthrough solutions. Haber and Stornetta's "blockchain" was, during all those years, a solution in search of a problem.

That tends to cast a shadow on the enthusiasm of those who, rediscovering blockchain after 2014 thanks to the stunning success of Bitcoin, began claiming that it's "the best thing since sliced bread" and that it's a technology with large applications, that's going to revolutionize everything.

Private, non-state money

The US has a long history with private, non-state money and money-like instruments. One of the most successful such enterprises began in 1996 as E-Gold, a gold-backed financial instrument launched by a doctor from Florida.

E-gold was relatively little known in 1998 when Wei Dai publishes a short essay, called b-money. b-money is a theoretical solution aiming to advance the idea of stateless cooperation - what Tim May had called "crypto anarchy" a decade earlier.

Wei Dai explains that money is an essential tool for collaboration (something Harari echoes in "Sapiens"), and that for a crypto-anarchy to be workable, violence should be impossible because the interacting entities would be anonymous, impossible to link to their true names or physical locations.

It was not the case of Douglas Jackson, the creator of E-Gold, who never thought he was doing something illegal. And yet in 2007 the US authorities forcibly shut down E-Gold and convicted D. Jackson on several counts of "unlicensed money transmission" and "conspiracy to launder monetary instruments".

In its 2014 paper "The Troubling Suppression of Competition from Alternate Monies: The Cases of Liberty Dollar and E-Gold", economist L.H. White quotes Nobel-prize winner Friedriech Hayek who was arguing decades ago in favour of relaxing or abandoning the state monopoly on money creation as a means to fight inflation. L.H. White goes further arguing that competition between government issued money and private money is likely to increase general welfare. And noting that it appears, in light of the events he discusses, that the State simply would not allow its monopoly in money creation to be challenged.

This is par for the course with Michael Taylor's observation that, when faced with the choice, states would rather protect their power and privileges than act in the best interest of their own citizens.

That the state, whose very raison d'être is to protect the citizens, sometimes chooses to protect its own power against its citizens was already a pretty serious accusation.

The dawn of a new era

But the 2007 - 2009 Great Financial Crisis pushed things to a paroxysm of callousness. The state structures proved unable to prevent a spiral of abuses and, despite managing to stop the vicious spiral, turned out to be unable or unwilling to assign responsibility and reform, choosing instead to use its monopoly on money issuance to "buy everyone's silence".

On October 31st, 2008, almost 360 years after Thomas Hobbes' Leviathan, a pseudoymous author going by "Satoshi Nakamoto" published a whitepaper called "Bitcoin: a peer-to-peer electronic cash system", proposing to implement Haber and Stornetta's "block chain" in order to create something approaching Wei Dai's idea of b-money, the essential tool for stateless collaboration.