I recently defended a deposition at my adversary’s law firm. Their beautiful office space was littered with works of art and interesting historical images. As I walked down one hallway, I stopped in my tracks and snapped the picture you see above.
What is that picture all about?
That is a photograph of the old ledger room of the Bank of Naples. Many like it have existed, and still exist in electronic form, ever since Fr. Luca Pacioli first systematized the concept of a trusted (double-entry) ledger in the fifteenth century.
I paused to marvel at this picture of the Archivio Storico Banco di Napoli because of its implications for Bitcoin and blockchain.
Why is an old paper ledger room important?
Throughout much of human history, we have kept our records on some sort of ledger. But these historical ledgers have all had a weakness: they require trust. In the past, we trusted our records to the ledger-keepers because we had no other choice. No system had ever been invented to eliminate those trusted third parties. As a consequence, massive “trusted” institutions have arisen to keep our ledgers safe and accurate. If you trust the ledger-keeper, so the thinking goes, you can trust the ledger.
There are two major problems with this trust-based model. First, the institutions that have evolved to keep our ledgers have extracted immense value for the privilege. Walk around your local city and look for a building made with massive walls of marble and stone. The odds are better than even that the occupant of that building works for the government or is a ledger keeper (or both). The money to build it came from a cut of our transactions.
Second, history is replete with abuses by the ledger keepers of the trust that has been placed in them. For proof, one need not look beyond the financial crisis of 2008. Our most venerable trusted third parties stood on the precipice of extinction due to mismanagement of the risks hiding in (and outside of) their own ledgers.
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What does any of this have to do with blockchain?
In October 2008, right in the midst of the financial crisis, Satoshi Nakamoto appeared for the first time pseudonymously on a little-known mailing list read by cryptographers and computer scientists.
Satoshi’s first post dropped a white paper providing a solution to a problem that had plagued computer scientists, mathematicians, cryptographers and others called the Byzantine Generals problem. The problem is this: How do you transmit data for a coordinated attack between a bunch of generals, even through untrusted parties may stand in the middle?
Satoshi’s solution was a system where messages could be signed cryptographically, timestamped on a chain of blocks through proof of work, and provably verified by anyone. There are some other neat twists and tricks in the solution, but that is its essence. If you haven’t read the Satoshi white paper before, now would be a good time. It is one of the foundational documents for the future of finance, and much more. Here it is.
A New Kind of Ledger
Satoshi’s chosen application for this solution to the Byzantine Generals problem was a system for the transmission of messages of value (Bitcoin). But the technology is far more than that. It is a new kind of ledger entirely — a decentralized ledger, which requires no trust of any kind. The applications of this technology are manifold.
Thanks to Satoshi, there is no longer a need for that Naples ledger room in my photo. Or the Depository Trust Clearing Corporation, which maintains the ledger of securities. Or the CLS Bank, which keeps the ledger for much of the world’s foreign exchange clearing. Or the county clerk’s mortgage books for that matter. These and other institutions served a critical function in an era when trusted ledgers were all we had. But that era is gone. For the first time in human history we now have a trustless ledger. This new ledger eliminates settlement risk and removes the need for trusted third parties altogether.
To me, this is why what Satoshi did is revolutionary. It has nothing to do with the price of Bitcoin or the speeches at tropical conferences. All assets will gravitate to this kind of system because it is a better one. Satoshi solved a previously unsolved problem with implications for every trusted ledger in the world. That is what matters most.
Thank you Satoshi, wherever you are.