Bitgold: Meaning, Overview, Differences From Bitcoin

What Is Bit Gold?

Bit gold was one of the earliest attempts at creating a decentralized virtual currency, proposed by blockchain pioneer Nick Szabo in 1998. Although the bit gold project was never implemented, Szabo's attempt is widely considered to be the precursor to Satoshi Nakamoto’s bitcoin protocol. In fact, the bit gold and bitcoin protocols draw such close parallels that people have speculated that Szabo is the anonymous bitcoin creator, Satoshi Nakamoto (although Szabo has denied this claim).

Bit gold combines different elements of cryptography and mining to accomplish decentralization. These elements include time-stamped blocks that are stored in a title registry and are generated using proof-of-work (PoW) strings. Szabo proposed a decentralized PoW function that could be "securely stored, transferred, and assayed with minimal trust."

Understanding Bit Gold

There are many similarities between bitcoin and bit gold, specifically the systems used to process transactions and to secure the decentralized network.

In the bit gold structure, a user must solve a cryptographic puzzle using computing power. All solved puzzles are sent through a Byzantine Fault Tolerant (BFT) peer-to-peer network and then assigned to the public key of the puzzle solver. Details relating to the transaction are stored in a title registry (analogous to a blockchain in the consensus system because it offers an immutable record of and order for transactions that have taken place).

Every solution then becomes a part of the next puzzle, creating a chain that links the most recent puzzle’s solution to the outcome of the following one, thereby validating blocks of transactions. This is similar to the block creation process in bitcoin, where hash addresses are used as headers pointing to the next set of blocks.

The bit gold system proposed by Szabo is non-fungible. This means that different quantities of bit gold should be combined in order to make a single transaction. Instead of a centralized authority controlling its levers, the bit gold functions on a decentralized and distributed system of trust between the individual nodes—or participating computers—that make up its network.

In 2008, a mysterious figure writing under the name Satoshi Nakamoto released a proposal for bitcoin. Nakamoto's true identity is still a secret, though many people have speculated that Nakamoto is Szabo. And although there is some circumstantial evidence, there is no proof that Nakamoto is Szabo. In 2008, before the bitcoin whitepaper was published, Szabo authored a comment on his blog that said he was creating a live version of his hypothetical currency. In 2015, in The New York Times, Nathaniel Popper wrote that "the most convincing evidence pointed to a reclusive American man of Hungarian descent named Nick Szabo."

How Is Bit Gold Different From Bitcoin?

Although bit gold and bitcoin are similar, there are some very clear differences between the two projects.

Szabo envisioned that the difficulty of mining bit gold would vary over time. It would not necessarily get easier or harder, but there would be fluctuations in the amount of bit gold that was able to be created at various different points in time. On the other hand, bitcoin is designed so that it gets harder to mine bitcoin over time. (There is also a finite supply of bitcoins.)

More importantly, bit gold was never intended to be electronic money itself, like bitcoin. Bit gold was created as a reserve currency to back another form of electronic currency. In this way, bit gold was intended to act like physical reserves in the era before fiat currency.

Goals of Bit Gold

Szabo said he created bit gold to address some of the inefficiencies in the traditional financial system. According to Szabo, parties must invest a great deal of trust in order for transactions to take place in the traditional financial system. For example, when a consumer wants to take out a loan, they first must locate a broker. Then, once they've accepted the loan from a financial institution, the institution must trust that that individual will repay the loan as agreed. By the same token, customers of a bank must trust that their money is well-secured and not being embezzled by the bank. 

Unfortunately, transacting through trust-based systems leaves consumers and financial institutions vulnerable to fraud or theft. In fact, the financial system’s legacy of consistent losses (and the huge cost of this fraudulent activity and siloed architecture motivated Szabo to introduce bit gold, a more trustless model for transacting. At the 2015 Bitcoin Investor Conference, Szabo’s presentation honed in on the underlying purpose of bit gold: “software to minimize vulnerabilities of all parties to each other.”