What Is Bit Gold?
Bit gold is a 2005 proposal by Nick Szabo for a financial system that combines different elements of cryptography and mining to accomplish decentralization. These elements include timestamped blocks that are stored in a title registry and are generated using "proof of work" strings. In his post announcing bit gold, Szabo proposed a decentralized proof of work function that could be "securely stored, transferred, and assayed with minimal trust."
Understanding Bit Gold
As described by Szabo in his original proposal, the bit gold system consists of seven steps. It starts with generating a public challenge string using a benchmark function (similar to the mathematical computation puzzle used to earn bitcoin). The user generates a “proof of work” string from the benchmark function, and details relating to the transaction are stored in a title registry (analogous to a blockchain in the consensus system). In Szabo’s system, the last bit of string is responsible for creating the next set of strings. 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 title registry is similar to blockchain in that it offers an immutable record of and order for transactions that have taken place. 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 that make up its network.
Szabo also identified a problem associated with bit gold in his proposal. According to him, innovations in machine architecture could lead to “hidden supply gluts.” This is similar to the problem of selfish mining, in which new blockchains can be created by hiding newly created blocks from the main chain.