Author: Cashu Developer
Source: https://blog.cashu.space/and-in-all-beginnings-indwells-a-magic/
- A 3D Cashu Nut in the Universe -
In the 1990s, the old and new worlds were alternating, at first slowly, but then suddenly accelerated; technicians, social activists, policymakers, and even philosophers all realized that as the Internet grew - and the time we spent in the online world increased every day - the ability of governments and corporations to build the ultimate panopticon (panopticon) would become one of the greatest threats to modern society. Of course, they were right.
As more and more electronic devices and the Internet penetrate our lives, from homes to offices, from making phone calls to sending love letters, to news, product orders and payment data, our dependence on the electronic intermediaries that provide these services also grows. Our private lives begin to leave traces, no matter where we go or what we do.
The privacy advocates of the 1990s knew what was coming. The famous cryptographer David Chaum was no exception. Chaum was a world-renowned scientist who made pioneering contributions to cryptography. His most famous contribution was the conception of electronic cash, called "eCash". David Chaum knew that more and more of our lives were taking place on the Internet, so one day our commerce would be completely digitized. Coupled with his genius in cryptography, he invented an electronic payment system that allowed users to shop online without sacrificing their privacy. For a society that still relied heavily on physical cash for most transactions, the need for privacy in personal transactions was neither radical nor unfamiliar.
- An old version of the eCash wallet, developed by David Chaum's DigiCash company. You can see that the balance is made up of a sum of individual coins, with each coin's denomination being a power of 2. -
Chaumian eCash works the same way as an ATM, except that it dispenses electronic cash instead of paper bills. Users log into their Internet bank account and press the withdrawal button; instead of getting paper bills, they get some electronic data with the same properties as paper bills: it is a bearer asset representing monetary value that can be privately and securely transferred from one person to another (i.e., payment).
eCash is stored in a wallet software that runs on the user's own computer; when the user wants to buy something online, they can simply send eCash directly to the merchant, just like taking cash out of their wallet and handing it to the store clerk when shopping. The merchant then takes the eCash they received and deposits it into their own bank account.
The whole concept was like this. Everyone loved the idea. In fact, people loved it so much that Microsoft, Citibank, Credit Suisse, Deutsche Bank, Mastercard, and other big companies all wanted to get in on it. Remember, this was still in the early 1990s. Credit cards hadn't yet become ubiquitous, and online payment systems were non-existent.
The future should have run on Chaumian eCash. But history did not unfold that way. Where did eCash go?
An interesting record comes from an article by a former employee of Chaum's company, "How DigiCash Blew Everything" (archive); and then there is a piece on eCash in Aaron Van Wirdum's "The Genesis Files" series (original, Chinese translation). While the reasons for DigiCash's failure are not entirely clear, most explanations point to David Chaum's inability to strike reasonable deals with these companies. In hindsight, this seems to be a missed opportunity for the ages, as many financial institutions showed interest in privacy-preserving technologies, with Microsoft even offering to pre-install the DigiCash wallet in Windows 95.
David Chaum could have ushered in a new era of electronic currency and privacy. But he failed. Instead, the big corporate giants of the financial industry, who once thought financial privacy on the Internet would become the norm, collectively lost interest in the technology and opted for the suboptimal choice: plain, transparent ledger bookkeeping, i.e., Excel spreadsheets without any cryptographic protection for users.
In the end, what we got was not the magical Internet currency, but credit cards, PayPal, and Internet banking, using ledger technologies that may be older than writing.
The Arrival of Bitcoin
While David Chaum's company struggled to take root, cryptographers around the world were deeply inspired by the concept of electronic cash. Chaum's invention of "blind signatures" opened over 20 years of research on optimizing electronic currency. A simple Google Scholar search shows over 5,700 academic research papers related to "eCash".
Up to this point, we haven't mentioned the biggest problem with the electronic cash systems that Chaum's eCash and its successors envisioned. That is, they all relied on trusting a centralized entity to act properly and prevent inflation.
The problem with traditional currencies can be summed up as a trust issue, which is necessary for them to function. You have to trust the central bank not to devalue the currency, but the history of fiat money is full of stories of that trust being betrayed.
— Satoshi Nakamoto, 2009 (source)
Satoshi Nakamoto invented Bitcoin, the first fully decentralized (not dependent on any centralized entity) peer-to-peer electronic currency. Through the Bitcoin (capitalized "B") network, Nakamoto also invented the bitcoin (lowercase "b") as the currency. Since this new virtual currency cannot be tied to external things, it needs its own unit of account.
Bitcoin differs significantly from previous eCash designs in that previous eCash designs were intentionally designed to be integrated with an existing currency (e.g. the US dollar) and existing financial networks (e.g. the banking system). Bitcoin does not need or want these things.
The Second Revival of eCash
Bit has established itself as the native digital currency of the internet. Bit is truly decentralized, and its usage is also completely autonomous: users can manage their own private keys without needing to interact with third parties to use the network. However, the past decade has proven that maintaining Bit's core principle - decentralization - comes at a cost. This cost is the constant trade-off between increasing throughput, fees, and decentralization. Inevitably, these factors must be balanced, and the Bit network has consistently chosen decentralization, as it should.
In reality, this trade-off means that today, the vast majority of small Bit payments covering daily shopping needs (such as buying a cup of coffee) are handled by third-party intermediaries (the so-called "custodial systems"). Custodial wallets hold users' funds, allowing them to offload the burden of running the infrastructure and paying fees by trusting a third party.
It is worth noting that for those seeking to store wealth, Bit has performed quite well, and relatively large amounts of wealth rarely need to be moved. However, when you want to buy a newspaper, subscribe to a service, donate to an organization, or even buy a cup of coffee, (data shows) the vast majority of users still prefer custodial wallets over sending small amounts of funds via on-chain transactions, let alone running their own Lightning node.
There are two issues here. The first is very obvious: if you trust a third party to hold your funds, they could potentially abscond with the money. Custodial systems carry this risk. But the second issue, which can be argued to be even more severe in many cases, is related to privacy. Today, all custodial systems work in the same way as an old-fashioned Excel spreadsheet - a simple, transparent ledger recording every user's activity.
But. Doesn't this sound familiar? It's exactly the same as David Chuam's prediction, except that it's not the fiat banking system. And then, didn't he propose a solution for that?
Now, let's answer a simple question: if we were to develop an eCash system for this new internet currency, what would that system look like? What would a Bit-based eCash system look like?
- The new eCash wallets for Bit and fiat -
What if merchants, social media protocols, online music and video services, commercial banks, and all other financial services could be built on Bit, providing secure and private payment methods that can replace the old account model?
What if a user of a custodial wallet, a VPN service, or a payroll system could withdraw their digitized bearer tokens to their own phone and directly send them to their friends, without being tracked by those service providers?
What if these service providers didn't need to store sensitive user data, ensuring it's not vulnerable to hackers and other threats (which could destroy user data, or even worse: leak some of users' most sensitive information to the world)?
It would be like a network: many independent local services connected through the internet currency.
- The network of eCash mints; all connected through the Bit Lightning network -
Help us build this world, restoring privacy to our most intimate online behaviors. Help us design a secure system that robustly protects user rights. Help us ensure eCash technology remains free and open-source, so that everyone in the world can equally access and control this system.
Join us!
Learn more at cashu.space.
