Understanding Bitcoin: the childhood game that rules the network

Its a childhood classic, “guess what number I’m thinking of”. Its funny to think, but Bitcoin is basically a computerised version of that game.

In the childhood game, you may play with a friend and state that the number is between 1 and 10: in this case each round of the game won’t last long. How could you make the game longer? Easy, by increasing the difficulty to make them guess a number between 1 and 500.

Let’s say ideally you want a game to last for 10 minutes, and you have 5 players. If each player can make 60 guesses per minute, in 10 minutes each person will make 600 guesses, that’s 3000 between the group. Double this number and you know that for the game to last around 10 minutes, your target difficulty is a number between 1 and 6000.

This simple game has advantages, as long as nobody can know what number you might be thinking of, it is impossible to cheat. The only advantage that can be gained is through guessing more quickly than the other players. The more guesses you can make, the more likely you are to win.

In Bitcoin this game is played is to decide who processes the last 10 minutes worth of transactions. The winner creates a block of transactions, adds it to the blockchain, and is rewarded with (currently) 25 Bitcoins.

By playing a game that is impossible to cheat, it prevents attacks against the network, as anybody who wants to maliciously attack the network would need to be able to make over 50% of the guesses.

In Bitcoin terminology, the number being guessed is called a nonce, and guessing is called hashing. A hash rate is basically a guess rate.

Hashing sounds complicated, but it really isn’t, its just a way to turn any information into an unpredictable sequence of letters and numbers.

As an example, I’ll invent a simple hash method that converts any number into a completely different but unpredictable number.

For my method, you prefix the chosen number with 98765 and then divide the number by 4321. You then multiply the 1st-5th by the 6th-10th digits after the decimal point to get a hash.

This is completely made up, so don’t worry if you don’t follow, but it would produce the following demonstration hashes:
45 = 6660386432
(Method: 9876545/4321 = .7081694052 = 70816 * 94052)
100 = 2955753
(Method: 98765100/4321 = .0006942837 = 00069 * 42837)

This would be a disastrous, collision-ridden hash for Bitcoin, which uses a far superior method called SHA-256 – but it demonstrates the principle that you can turn anything into an unpredictable hash that everyone can independently verify for themselves.

With my hash, as with Bitcoin, I can set a difficulty level. Let’s say I require the first 5 digits of the hash to be ‘11111’ (Bitcoin uses zeroes).

With my method the number 74340 would produce a hash of the target difficulty:
74340 = 111110100
(Method: 9876574340/4321 = .9595001158 = 95950 * 01158)

This cannot be cheated, you can’t predict a number which will produce a hash beginning ‘11111’. You (your machine) simply has to keep guessing until finding one that successfully matches. This is where ‘proof of work’ comes from – finding a matching number proves you have done work and once you’ve guessed correctly you can tell everybody your number and they can check it for themselves.

Back to our kids ‘guess the number’ game there is one common problem: cheating. If your friend guesses correctly but you don’t want to relinquish control you can say ‘wrong’. If you pick a number and tell your friend what to guess – they can secure victory on their first guess. This would have disastrous implications for Bitcoin where the reward is the currency itself.

Hashing solves the problem of who is in charge of deciding the number because there is no number, just a difficulty level – everybody just keeps guessing until they find a hash that satisfies it and they get to broadcast their proof and claim their reward.

The Bitcoin network constantly adjusts its own difficulty level so that on average one correct guess is made (hash is found) every 10 minutes.

The processing power that goes into generating these hashes is mind boggling. A group of researchers tried to estimate the number of grains of sand in the world – every grain of every desert and beach. Their estimate was 7.5 x 1018 grains of sand – seven quintillion, five hundred quadrillion.

Currently the Bitcoin network takes just 6 seconds to make as many guesses as their are grains of sand on earth and only one of those guesses is correct every 10 minutes. That’s one hell of a game.

Everything makes sense if David Kleiman was Satoshi Nakamoto. Here’s why

There is so much about Craig Wright’s claim to be Satoshi Nakamoto that does not add up.

It all started back in December when he was ‘outed’. The problem is all the evidence back then pointed to an elaborate fraud, orchestrated by Wright himself.

Why would Craig Wright want people to believe he is Satoshi Nakamoto? Well, he’s under investigation from the Australian Tax authorities who gave his company a $54m tax refund for spending on R&D, spending it looks possible was never was actually spent, since the manufacturer denied ever selling the supercomputer this research was supposed to be carried out on. If he could persuade them he was Satoshi Nakamoto it would certainly help him convince them of his legitimacy, and make it easier to attract additional investment. The motive here is obvious.

David Kleiman was an expert in Computer security. He was paralyzed from the chest down after a motorcycle accident in 1995 and became a reclusive computer forensics obsessive. In late 2010 he was hospitalised where he would remain until discharging himself a few months before his death from MRSA complications in April 2013. He died broke and in squalor.

In December 2015, following the ‘leaked’ documents, Gizomodo ran with the headline “This Australian Says He and His Dead Friend Invented Bitcoin”, and Wired said:

Another leaked email from Wright to computer forensics analyst David Kleiman, a close friend and confidant, just before bitcoin’s January 2009 launch discusses a paper they’d been working on together.

From the leaked documents, it seems the tone was that Kleiman and Wright worked on Bitcoin together.

Fast forward to the BBC interview and Wright says that while there were others involved, he [Wright] “was the main part of it”.

If the leak was the result of a genuine hack on Wright, then the documents that were leaked should be considered more accurate than anything Wright is saying now, since everything he is saying now he will be shaped to serve his own self interest.

If the leak was made by Wright, as seems likely, perhaps the change of tone reflects a change in strategy. Maybe ‘sharing’ credit for somebody else’s work feels more acceptable, but you get to a certain point where you’ve sunk so deep into the deceit and you might as well go all the way.

It gets even more interesting, according to the Gizmodo article Wright made contact with some of Kleiman’s business partners in February 2014 to inform them they’d been working on a project together and that Kleiman had mined an enormous amount of Bitcoins, and he requested they check his old computers for wallet files.

Kleiman’s business partner, Patrick Paige, called to ask for more information and was told by Wright that Kleiman was the creator of Bitcoin, before he later backpedaled and said Bitcoin was invented by a group of people which included Kleiman.

At around this same time, on Feb 12th 2014, Kleiman’s then 92 year old father commented on a Techcrunch article about Bitcoin with the message “Please send information pertaining to David Kleiman’s participation in the development of Bitcoin”. Perhaps this was related to something Kleiman had told his father while still alive, or details of Wright’s phone call being passed on by Paige.

There is good reason to believe Kleiman and Wright knew each other well. Wright posted an emotional tribute to Kleiman on YouTube (since removed) upon learning of his death. It is entirely possible that Wright was a trusted friend and confidante of Kleiman’s, and this might have given him access to information that ‘only Satoshi could have known’ that would have been useful when Craig Wright convinced Gavin Andresen of his legitimacy.

What does not make any sense, if Wright is Satoshi, is for him to create a trust to prevent himself being able to access his own Bitcoins until 2020 – and leave this in the trust of a man in Florida.

Such a trust is detailed in the December 2015 leak and includes bizarre stipulations including that if Wright dies, all the Bitcoins would transfer to his wife, minus a deduction to show the “lies and fraud perpetrated by Adam Westwood of the Australian Tax Office against Dr Wright”. It would be interesting to know when the Australian Tax Office began their investigation. The trust is dated 9th June 2011, and values 1.1 million Bitcoins at $100,000 at a time when their actual value was closer to $30 million. The document is just odd and full of inconsistencies.

What seems more likely is that Kleiman possessed the Bitcoins, and Wright is trying to create a retrospective paper trail to enable him to make a legal claim for ownership of them in the event they ever become accessible. Perhaps Kleiman had made provisions that would enable his family to recover his Bitcoins at some future point in the event of his death, and that he had disclosed details of this to Wright.

Everything makes a lot more sense if David Kleiman was Satoshi Nakamoto and confided in Craig Wright. It explains why Wright would possess enough information to convince some people of his authenticity, but has been unable to provide any verifiable proof that he has access to any of Satoshi’s private keys. Craig Wright has gone to an extraordinary level of effort to convince people he is Satoshi Nakamoto. Given that 1.1 million Bitcoins are currently worth around $500m – it’s not hard to imagine why.

If Craig Wright is Satoshi Nakamoto he could easily verify it cryptographically. The fact he has gone to such lengths without providing this proof suggests he simply doesn’t have it. What’s most likely to happen next? Well, if he’s been involved in Bitcoin since the early days he probably has some early coins – so he’ll probably move them as ‘proof’. Not early enough to be linked to Satoshi, but early enough for him to claim they are and make the circus drag on a little longer.

I believe the fact that he has gone to such lengths to link himself to 1.1 million Bitcoins held by Kleiman suggests he genuinely believes David Kleiman possessed that number of Bitcoins, and that he has a chance of being able to claim them for himself. This adds support to the idea that Kleiman, and possibly the also deceased Hal Finney, really were Satoshi Nakamoto.

It is also notable that Kleiman was hospitalised in late 2010. Gavin Andresen became lead developer of Bitcoin in December 2010 and Satoshi then disappeared.

Whatever is happening is fascinating, it’s a plot worthy of Hollywood. Sadly, this is the real world, and I can’t help but feel sadness for the family of David Kleiman who are possibly about to encounter tremendous invasions of their privacy as a consequence of Craig Wright’s actions.

Keiman was a security expert who practised what he preached. All his data was no doubt encrypted and any evidence of his being Satoshi likely died with him. It is possible this mystery will never be solved.

It is also possible that David Kleiman had nothing to do with Bitcoin at all.

I just know that if he was Satoshi, he seemed a modest man who died a pauper while likely sitting on a trove of millions and avoiding the abundance of recognition he deserved. Craig Wright on the other hand is an egotist who fakes having PhDs and drags out a bizarre media circus to reveal himself as Satoshi without providing simple evidence.