My 2 sats on Satoshi’s new emails.
The relationship between transaction fees and the economic sustainability of mining, as well as the connection between energy and the currency value, are aspects that Satoshi Nakamoto had carefully considered, as revealed by the largest archive of his writings ever published since he vanished from the public eye.
The Testimonies
The context is the British trial featuring the Crypto Open Patent Alliance (COPA) against Craig Wright, where the non-profit organization is attempting to prove in court that the Australian entrepreneur is not Satoshi Nakamoto.
Throughout the hearings, various testimonies have been presented for both sides, and, at the behest of COPA, Adam Back and Martti Malmi have also spoken. The former is the CEO of Blockstream and the inventor of Hashcash - the basis of Proof-of-Work -, the latter is a collaborator of Satoshi from when Bitcoin was taking its first steps, and also the only developer besides Satoshi to work on the second version of the Bitcoin software (Bitcoin 0.2).
In support of the testimonies, email correspondences between Satoshi and Adam Back as well as between Satoshi and Martti Malmi were released. From the six emails between Adam Back and Satoshi revealed in court - all sent between August 2008 and January 2009 - it emerges that the latter had contacted Back to ensure the correct citation of Hashcash in what would become the Bitcoin white paper. They also comment on B-money, one of the attempts to create a digital currency made by cypherpunk Wen Dai in 1998.
However, the most information is obtained from the entire history of conversations between Satoshi and his collaborator Martti Malmi, known also by the pseudonym Sirius. The latter has released over 250 pages of emails - available at this link - and below are the most significant parts.
Bitcoin according to Satoshi
Much of the most interesting content is reported in the first part of the mails, where Satoshi responds to the doubts Martti Malmi expresses about Bitcoin, in addition to giving him directions on the work to be carried out. This is May 2009, seven months after the publication of the white paper and just four months after the actual birth of Bitcoin.
The Fee Market
In writing, Satoshi does not distinguish between classic full-nodes and those that also mine, referring to miners also with the term nodes because at the time a simple laptop was enough to mine. Satoshi explains:
"I do not foresee transaction fees being necessary anytime soon, but if it becomes too burdensome to run a node, it will be possible to run a node that only processes transactions that include a fee. At the moment, such a node would not get anything, because no one includes a fee, but if a sufficient number of nodes did so, users would get a faster confirmation by including a fee. […] The transition, however, is not controlled by some person at the head of the system, but only by individuals reacting to market forces."
In short, Satoshi explains that if in 2009 the demand for block space was so low that transaction fees were not required - and managing a laptop for mining did not imply significant costs - the scenario could change in the future. And the change would not be dictated by "some person at the head of the system" - by a central authority - but by the simple reactions of the individuals involved to market dynamics.
Bitcoin as a Distributed Ledger
A reasoning easily linked to the fact that today Bitcoin is used not only for economic transactions but also as a distributed ledger for arbitrary files:
"Bitcoin is a distributed and secure server for transactions - writes Satoshi. A few lines of code can create a transaction with an additional hash of anything that needs a timestamp. I should add a command to timestamp a file in this way."
Then, if we think that criticisms related to the energy consumption of mining have only arrived in recent years, we are mistaken. Malmi himself tells Satoshi: "The last thing we need is to launch a system whose design involves the consumption of electricity and the emission of carbon dioxide."
“Unfortunately - explains Satoshi - Proof-of-Work is the only solution I have found to make peer-to-peer electronic cash work without a trusted third party. […] PoW is essential for coordinating the network and preventing double spending. If it were to grow to consume a lot of energy, I think it would still be less costly than conventional banking activity it would replace. The cost would be an order of magnitude lower compared to the billions in banking fees people pay for all those brick and mortar buildings, skyscrapers, and unsolicited credit card offers via mail.”
A relationship, that between Bitcoin and energy, which Satoshi had clear could represent the realization of what Henry Ford theorized in the '20s as "energy currency":
"The value of bitcoins - writes Satoshi - would be relative to the electricity consumed to produce them."
Explaining to Malmi the operation of the difficulty adjustment - addressed in this newsletter at stop #3 - Satoshi explains a concept as simple as it is fascinating that testifies to the independence of each individual node from all others. Trying to understand the mechanism of issuing new bitcoins at the time of approval of each new block, Malmi objects that, according to Moore's law, as more efficient hardware is developed, the supply of bitcoins risks increasing due to the increase in computing power available to people.
Satoshi, in introducing perhaps one of the most fascinating mechanisms of the entire protocol, writes very simply:
"Actually, this problem is handled."
There is a moving average that compensates for the total effort employed so that the total output is a constant. As computers become more powerful, the difficulty increases to compensate.
Malmi: "How is the difficulty of each block communicated across the network and how is it agreed upon?"
“It's not communicated. The formula is hard-coded into the program and every node performs the same calculation to know what difficulty is required for the next block. If someone were to deviate from the formula, their block would not be accepted by the majority."
