The Power of the Permissionless

He devised a new global money system, then logged off and disappeared. Satoshi Nakamoto pseudonymously described himself as a 37-year-old man living in Japan, but to the world he remains entirely anonymous. In a Halloween-day email on October 31, 2008, he released the paper that first described Bitcoin, a cryptocurrency whose genius design gave birth to a new class of money. Three years later, when Bitcoin’s total value had grown to $10 million, Satoshi sent his last email to a fellow developer. “I’ve moved on to other things,” he proclaimed.

Very little is known about Satoshi. This is not for lack of speculation; his elusiveness befits a master of the cryptic world. On Bitcoin forums, he worked collaboratively with protégés whose numbers grew as the enduring value of Bitcoin became apparent. Even to them, he never divulged his identity. The few digital vestiges he left behind merely trace back to anonymous services. A key ingredient in Bitcoin is the use of public and private keys. Instead of creating accounts with usernames and passwords, users hold bitcoins in digital wallets secured by their knowledge of a long and secret code: the private key. The public key, conversely, is shared publicly and used to receive bitcoins from other users. Because both keys are cryptographically self-generated, access to Bitcoin is permissionless. Satoshi holds the keys to the account where many of the first bitcoins were deposited. Today, that account is worth a gargantuan $100 billion. What he intends to do with the money, or ever will, remains a mystery.

In an idiosyncratic twist, seeing movement in Satoshi’s account could crash Bitcoin’s total value, which currently amounts to a whopping $2 trillion. Until the dawn of cryptocurrencies, value was exchanged using fiat currencies, such as the greenback, which are backed and managed by governments. Satoshi belongs to a precocious group who believed this to be problematic. Groundbreakingly, he was the first to propose a functioning alternative in Bitcoin. Instead of concocting a revolutionary manifesto, Satoshi engraved the first Bitcoin block with The Times’ portentous headline: “03/Jan/2009 Chancellor on brink of second bailout for banks”. It was a critique of a centralized actor erroneously interfering in a broken capital market. Given the gravity of his Bitcoin holdings, Satoshi holds the power to swing Bitcoin’s market. He did not want to play this central role. For the dogmatic wing of Bitcoin’s followers, this evasion of centralized regulation was the ultimate feat.

Yet Satoshi himself was acutely aware of the pitfalls in Bitcoin’s ascent as a currency outside of government control. Being unregulated was not something to be proud of. He knew that if Bitcoin’s raison d’être was facilitating illicit purchases of drugs and weapons, it would never become the payment method of choice for buying drinks at a bar. A new alternative to fiat money should not begin its existence with a sentence to the underworld. Consequently, he was despondent when Bitcoin earned its first stint in mainstream media coverage. A technology magazine described its first real-world use case as illicit donations to the sanctioned organization WikiLeaks. While others exulted over Bitcoin’s evasion of the sanctions, Satoshi was unnerved. Bypassing regulation did not square with Bitcoin’s mission to propose a new system for global cash. But convincing Bitcoin’s increasingly anarchist culture of this was “bloody hard,” Satoshi admitted in a post, perhaps in a clandestine nod to his British roots.

Satoshi’s purpose was always to build a viable alternative to a system that governments had monopolized for centuries. Devoid of a central authority controlling the currency, Bitcoin was unshakable in the face of governments. Designed as a distributed network, it had no single point of failure and no way of being shut down by a government. Its stratospheric rise in value also meant governments could not ignore it. And permissionless in nature, it was designed to be eternally resistant to censorship. Ultimately, governments were left with the singular choice of embracing the currency, allowing it to be used as legal tender, and regulating it with newly passed laws. Its triumph was legal adoption, not being a conduit for untraceable payments. In some ways, the lack of a tangible competitor that could be sued or shunned made Bitcoin more palatable to sovereign governments. Therein lies its durable power.

Many have since followed in Satoshi’s footsteps. Permissionless systems have emboldened various industries to creep up on monopolies crafted by governments through legislation. Government validation of these new technologies shows no sign of abating. Examples include stablecoins, which are digital but distinct representations of the US dollar, now accepted as legal tender, and prediction markets, which are tantamount to betting websites where betting on any event, including which word will first be uttered by the CFO on an earnings call, is legal. Building legal businesses in either of these domains would have been unthinkable a few years ago. Governments used to protect their monopolies fervently. Today, permissionless alternatives have cornered them into ceding ground. Satoshi got this notion right, and others have followed suit.

Two and a half centuries before Satoshi’s brief appearance, Adam Smith described the origins of money in a new system later coined capitalism. Smith spoke of the need for money as a means of exchange when humans inevitably specialized in labor. Incidentally, he also chronicled the rise of fiat money: sovereigns would debase coins, reducing their real metal value, to more easily cover their debts to creditors. This primitive process gradually led to the creation of contemporary money, independent of real value and instead dependent on the trust and backing of central governments. Through a few forum posts and cleverly written code, Satoshi proposed an alternative to the money that governments had long monopolized. Satoshi deserves plenty of accolades. His greatest honor is the one he chose for himself: to vanish and leave only the system behind.