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Authors: Nathaniel Popper

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CHAPTER 9

July 2011

I
n the weeks after Mt. Gox got back online, it was contending with new exchanges that had been started during the busy spring. But for the people who stuck around Bitcoin after the Mt. Gox attack, there was seemingly no end to the bad news.

In July,
the founder of a small Polish Bitcoin exchange, Bitomat, announced that he had accidentally deleted the files where he kept the private keys to the Bitcoin addresses at which his customers' 17,000 Bitcoins were stored. The coins were still visible on the blockchain, but without the private keys, nothing could be done with the coins.

This pointed to a danger that was the flip side of one of Bitcoin's supposed strengths. Satoshi Nakamoto had designed Bitcoin so that each user had complete control over the coins in his or her addresses. Because only the person with the private keys to an address could access the coins assigned to that address, governments could never seize the coins and banks weren't needed to hold them. This design also meant that the coins themselves
weren't stored on any particular computer; if a computer holding a wallet file with the private keys crashed, the coins were still on the blockchain, as long as the owner still had copies of the private keys.

But the design also meant that if a person lost the private keys for a particular address and had no backup, there was nothing anyone could do to access the coins held by that address. People were already taking precautions to guard against this, writing down the private keys on a piece of paper or maintaining backups. But what if the piece of paper was lost, or if the secure document with the keys in the cloud, as in Bitomat's case, was accidentally deleted, along with its backups? Not everyone, it turned out, was good at keeping track of valuable things.

Another incident just days after the Bitomat losses reminded everyone that the companies holding customer Bitcoins had another vulnerability—the integrity of the people running the companies. The losses this time happened to customers of MyBitcoin. The site, which had been around for over a year, provided a simple online wallet and held the private keys for all of its customers, so the customers didn't have to worry about losing keys.

In late July coins started mysteriously disappearing from MyBitcoin wallets.
The founder of the site, a man who called himself Tom Williams, was unresponsive and soon enough all the wallets were frozen. Customers realized that they had no idea who Tom Williams actually was. On the forums, a group of users formed a vigilante online posse to try to hunt down Williams, but after making initial progress they lost the trail. It quickly became clear that Tom Williams, whoever he was, had now disappeared with everyone's Bitcoins and there was nothing anyone could do to get them back. In the days after his disappearance, the price of a Bitcoin fell to $6.

T
HE SCANDALS AND
steadily declining price of Bitcoin over the summer of 2011 drove away most of the crowds that had been drawn in when the price was shooting up a few months earlier. The future for Bitcoin, a technology that relied on maintaining the trust of its users, seemed about as bleak as it had ever been.

But the disappearing crowds were a bit like a receding tide. They exposed what had been left behind and it was not an altogether disheartening scene. Yes, there were fewer people, but most of the serious programmers who had gotten involved in Bitcoin earlier on had stuck around.

For people like Gavin Andresen and Jeff Garzik, the problems at Mt. Gox and MyBitcoin were evidence for why a decentralized financial network like Bitcoin was needed. Both Mt. Gox and MyBitcoin were centralized companies and they failed because of the amount of power and money that had been placed in the hands of their operators. With Mt. Gox, the hacker had needed to get only one password to access the entire system. And because Mark kept tight control over all the code for Mt. Gox, his customers couldn't review the software and chip in with suggestions and improvements of the sort that could have helped avoid the hack. The Bitcoin protocol, on the other hand, had been slowly improved over time by all the people looking at it, and had continued working as intended throughout the various crises.

As the summer went on, it was evident that Bitcoin had not just kept its hold on the experienced programmers—all the excitement in June had actually drawn the attention of many new programmers, who understood the distinction between the Bitcoin protocol and the current crop of Bitcoin companies.

Mike Hearn, the British engineer working in Google's Swiss
offices, had created an e-mail list for Google employees interested in Bitcoin, and through the summer of 2011 it had grown to over a hundred people. On the list, Google employees conversed about the new ideas and potential that were contained within the Bitcoin protocol.

One Google engineer in the company's Mountain View headquarters, Charlie Lee, sent Hearn a check for $3,000 in exchange for a batch of coins. At the same time, Lee wrote to his family with twelve bullet points with reasons for giving it a look, including:

       
•
  
The whole system is distributed and decentralized. It's a peer to peer system. No government can shut it down even if Bitcoins were outlawed.

       
•
  
The system is self sustaining. The miners (i.e. p2p nodes) have incentives to keep mining, which helps secure the whole system. The more the system is secure, the more the users will trust in Bitcoins and use them. And the more people use them, there's more incentives for the miners.

       
•
  
Everything is defined by its source code and it's opened source.

Five or six other Google employees began developing new Bitcoin software to make the network easier to access. Mike and the other Googlers were taking advantage of the company's policy of allowing its employees to spend 20 percent of their working time on non-Google experiments. Mike used this time to develop BitcoinJ, a codebase that made it possible to work Bitcoin into websites. This was a significant step for the virtual currency. Before this, everyone who wanted to use the system had to download the Bitcoin software and a copy of the entire blockchain. That was, by now, a large file, and its size made it all but impossible to use Bitcoin on a phone or anywhere other than a home computer. Mike
was making it possible for people to use Bitcoin without actively participating in the network, something that would open it up to new audiences with less technical expertise.

The work caused some disquiet among Mike's superiors at Google, who feared that his work could earn Google unwanted scrutiny if the government decided it didn't like Bitcoin. But he fought to keep working on it, and won. And not all the higher-ups were so cold to the idea.

The head of Google's payments division, Osama Abedier, called Mike in to get a tutorial on the technology. Mike knew that Google had long struggled with how to build its own digital payments system. The program that Abedier was working on, known as Google Wallet, was not creating a new payment system—instead it was looking to provide a new means of using existing credit cards and bank accounts online. All the fees and restrictions with credit cards and bank accounts still applied to Google Wallet.

Mike gave Abedier a lesson on the basics of a virtual currency that had no central authority and essentially no transaction fees. When Mike finished his presentation, Abedier told him, “I would never admit it outside this room, but this is how payments probably should work.”

The Bitcoin developers who were not at Google generally continued their work with no compensation at all. For Gavin, who had become the lead programmer for the Bitcoin protocol, the work had become a full-time but unpaid job. He was working out of the little office he shared with his wife in their Massachusetts home. His desk chair was next to an old radiator, which rattled in the winter, and a window air-conditioning unit, which rattled in the summer.

The passion that Mike and Gavin had for Bitcoin had little to do with where the technology stood in the summer of 2011. After all, it was still hard to actually buy much with Bitcoins. In August,
when someone came up with a list of brick-and-mortar institutions that accepted Bitcoin, there were all of five entries. The programmers were also acutely aware of flaws in the Bitcoin software that would need to be fixed if the system were to grow.

But none of this distracted the programmers from their vision of what the Bitcoin software could do in the future. Some programmers were focused on the idea of micropayments, tiny online payments that are not possible with credit cards because of the minimum fees necessary for a credit card transaction.

Others were interested in the idea of immigrants sending money across international borders without using Western Union. Some imagined the sorts of smart contracts that Satoshi had described, which would allow people to sell a house without using expensive mortgage title companies and escrow services. Yet others had a more abstract idea of a future universal currency, as science fiction had promised.

I
N ADDITION TO
the coders, Bitcoin had kept its hold on many of the believers who were more interested in the ideals behind the virtual currency than the price. Over the summer, this crowd got a showcase on
The Bitcoin Show
, the web-only television show created by Bruce Wagner, a New Yorker whose enthusiasm compensated for his lack of experience producing television and his lack of knowledge about computer programming. Early in the summer, Wagner had begun planning for what he was calling the Bitcoin Conference & World Expo NYC 2011. He was not shy about his ambitions for the event, which he scheduled for late August:

I know for sure attendees are flying in from every continent. Some on private jets.

This will be HUGE. No, definitely not just another Bitcoin meetup.

Major global press—tv, magazines, and newspapers, have confirmed that they will be here.

On the forums there were questions about whether anyone would show up. But the list of people promising to attend grew as the date approached.

Roger Ver flew to New York from Tokyo for the conference and shared a hotel room with Jesse Powell, who came in from Sacramento. Jed McCaleb flew up from Costa Rica. Mark Karpeles, consistent with his reputation, decided to stay in Tokyo, despite the fact that Mt. Gox was the major sponsor of the event. Charlie Lee, the Google engineer who had purchased $3,000 of Bitcoin from Mike Hearn, flew in from California. Gavin Andresen came down to New York in a MegaBus that left from a mall near his house in Massachusetts. Gavin was not the conference-going type, but the bus ticket was cheap and he couldn't resist the opportunity to meet all the people he had been interacting with online for the last year.

The conference was a rather apt representation of Bitcoin itself, with its odd mixture of chaos, community, snake oil, innovation, high-mindedness, and enthusiasm. While Wagner had initially suggested that the whole event would be held in the rather run-down OnlyOneTv studios, he ended up getting space at the Roosevelt Hotel in midtown Manhattan. The room was the smallest one on offer, a floor above the main conference center, with low foam-board ceilings. The handful of exhibitors, who had paid $130 to attend, were given card tables to set up their wares, just inside the narrow entrance to the room.

Wagner had promised three days of events, but in the end there were only three talks, taking up less than two hours, and they got started almost four hours late. Still, once everyone was in the
room, there were almost a hundred people, and they buzzed with a childlike excitement at seeing these characters whom they'd known only as online avatars before. The event began with all those in the room introducing themselves, both by their screen name and by their actual name.

The first speaker was Gavin, who lived up to his folksy reputation. He recounted how he had learned about Bitcoin, and explained why he believed Satoshi had chosen to put him in charge.

“You can call me an idiot and yeah, whatever,” he said, with a grin. “I know I'm not perfect so I tend not to rush into things rashly. Because I screw up quite regularly, my virtue is that I will listen to you if you tell me I'm screwing up.”

He gave a wish list of things he wanted to work on—focusing on security and stability—and expressed his desire to see Bitcoin become “really boring” as it became more useful.

After two other, more technical speeches, the event was closed with a brief talk by Wagner, clad in a striped black dress shirt and a striped black sport coat. He seemed to twitch with eagerness.

“I'm just so so excited and honored to be here—to witness this. I love you all. It's just so freaking awesome. Right?” he said.

He had promised in the run-up to the event that he would
“be making a HUGE HUGE HUGE announcement at the Conference. One you're all gonna be VERY excited about . . . when you hear it.”

He built it up by first announcing that there would be another Bitcoin conference in New York in October 2012. Then he said there was going to be a Bitcoin conference in Amsterdam in June 2012. Finally he got to the conference he was planning in Pattaya, Thailand, only six months away.

“If that's not enough,” he said, there would also be the first-ever Bitcoin cruise in Brazil.

The audience sat silent, with more than a few arched eyebrows,
as if to ask—“Was that really it?” But Wagner did not pick up on the skepticism.

The crowd, though, had not come for Wagner. The attendees had come for each other. And as the brief planned portion of the conference concluded—after a big group picture—the conversation continued all evening and all night, moving to the Hudson Eatery, one of three restaurants that Wagner had convinced to take Bitcoin.

There, Roger Ver, the Tokyo entrepreneur, talked with the Google engineer, Charlie Lee, who described the computers that he had in his garage, mining Bitcoins. They were noisy, blowing out heat, and had begun to annoy Lee's wife. Roger offered to house the computers at Memory Dealers' offices in Silicon Valley.

BOOK: Digital Gold
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